Prospectus Supplement dated March 19, 2001 (to Prospectus dated March 19, 2001)
$161,593,000 (APPROXIMATE)
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2001-NC1
ASSET BACKED PASS-THROUGH CERTIFICATES
ACE SECURITIES CORP.
DEPOSITOR
LITTON LOAN SERVICING LP
SERVICER
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS
PROSPECTUS SUPPLEMENT.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
OFFERED CERTIFICATES The trust created for the Series 2001-NC1
certificates will hold a pool of one- to four-family
residential first lien mortgage loans which will be
divided into two loan groups. The trust will issue five
classes of Offered Certificates. You can find a list of
these classes, together with their initial certificate
principal balances and pass-through rates, in the table
below. Credit enhancement for all of the Offered
Certificates will be provided in the form of subordination
and overcollateralization.
INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE(1) RATE(2)
- ------------------------- ------------------------------ -----------------------
A-1...................... $101,622,000 LIBOR + 0.235%
A-2...................... $ 37,483,000 LIBOR + 0.290%
M-1...................... $ 13,327,000 LIBOR + 0.640%
M-2...................... $ 5,830,000 LIBOR + 1.200%
B........................ $ 3,331,000 LIBOR + 2.500%
- ----------------
(1) Approximate.
(2) The pass-through rate on each class of Offered Certificates is based on
one-month LIBOR plus the applicable spread shown above, subject to the Net
WAC Pass-Through Rate as described in this prospectus supplement under
"Description of the Certificates--Glossary."
The certificates offered by this prospectus supplement will be purchased by
Deutsche Bank Alex. Brown Inc. from the Depositor, and are being offered by
Deutsche Bank Alex. Brown Inc. from time to time for sale to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of these certificates will
be approximately 100% of their initial Certificate Principal Balance before
deducting expenses.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
DEUTSCHE BANC ALEX. BROWN
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
--------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Ace Securities Corp.'s principal offices are located at 6707 Fairview Road,
Suite D, Charlotte, North Carolina 28210 and its phone number is 704-365-0569.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF PROSPECTUS SUPPLEMENT.......................................................................................S-3
RISK FACTORS...........................................................................................................S-8
USE OF PROCEEDS.......................................................................................................S-13
THE MORTGAGE POOL.....................................................................................................S-13
YIELD ON THE CERTIFICATES.............................................................................................S-34
DESCRIPTION OF THE CERTIFICATES.......................................................................................S-45
THE ORIGINATOR........................................................................................................S-63
POOLING AND SERVICING AGREEMENT.......................................................................................S-65
FEDERAL INCOME TAX CONSEQUENCES.......................................................................................S-72
METHOD OF DISTRIBUTION................................................................................................S-74
SECONDARY MARKET......................................................................................................S-74
LEGAL OPINIONS........................................................................................................S-75
RATINGS...............................................................................................................S-75
LEGAL INVESTMENT......................................................................................................S-75
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS.............................................................................S-76
ANNEX I................................................................................................................I-1
S-2
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND THE TERMS OF THE OFFERED CERTIFICATES,
CAREFULLY READ THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE ENTIRE ACCOMPANYING
PROSPECTUS.
Title of Series.............................ACE Securities Corp. Home Equity Loan Trust, Series 2001-NC1 Asset
Backed Pass-Through Certificates.
Cut-off Date................................March 1, 2001.
Closing Date................................On or about March 22, 2001.
Depositor...................................Ace Securities Corp., a Delaware corporation. SEE "THE DEPOSITOR" IN
THE PROSPECTUS.
Originator..................................New Century Mortgage Corporation, a California corporation. SEE "THE
ORIGINATOR" IN THIS PROSPECTUS SUPPLEMENT.
Servicer....................................Litton Loan Servicing LP, a Delaware limited partnership. Any obligation
specified to be performed by the master servicer in the prospectus is an
obligation to be performed by the servicer with respect to the mortgage
loans. SEE "POOLING AND SERVICING AGREEMENT--THE SERVICER" IN THIS
PROSPECTUS SUPPLEMENT.
Trustee.....................................U.S. Bank National Association, a national banking association, will be
the trustee of the trust. SEE "POOLING AND SERVICING AGREEMENT--THE
TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT.
Trust Administrator.........................Bankers Trust Company of California, N.A., a national banking
association, will perform certain administrative functions on behalf of the
Trustee and will act as the initial paying agent and certificate registrar.
See "Pooling and Servicing Agreement--Trust Administrator" in this
prospectus supplement.
Distribution Dates..........................Distributions on the Offered Certificates will be made on the 25th day of
each month, or, if that day is not a business day, on the next succeeding
business day, beginning in April 2001.
Offered Certificates........................Only the certificates listed on the cover of this prospectus supplement
are being offered by this prospectus supplement. Each class of Offered
Certificates will have the initial certificate principal balance and pass-
through rate set forth or described in the table appearing on the cover of
this prospectus supplement.
S-3
THE TRUST
The Depositor will establish a trust with respect to the certificates under the
pooling and servicing agreement dated as of the Cut-off Date among the
Depositor, the Servicer, the Trust Administrator and the Trustee. There are nine
classes of certificates representing the trust. SEE "DESCRIPTION OF THE
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and principal on the Offered
Certificates will be made only from payments received in connection with the
mortgage loans.
THE MORTGAGE LOANS
References to percentages of the mortgage loans under this section are
calculated based on the aggregate principal balance of the mortgage loans as of
the Cut-off Date.
The trust will contain approximately 1,134 conventional, one- to four-family,
adjustable-rate mortgage loans secured by first liens on residential real
properties.
For purposes of calculating principal distributions on the Class A Certificates,
as described under "Description of the Certificates--Principal Distributions on
the Offered Certificates" in this prospectus supplement, and for purposes of
calculating the allocation of certain interest shortfalls to the Class A
Certificates, as described under "Description of the Certificates--Interest
Distributions on the Offered Certificates" in this prospectus supplement, the
mortgage loans have been divided into two subpools, designated as the "Group I
Mortgage Loans" and the "Group II Mortgage Loans." The Group I Mortgage Loans
consist of those mortgage loans with principal balances that conform to Fannie
Mae and Freddie Mac guidelines, and the Group II Mortgage Loans consist of those
mortgage loans with principal balances that do not conform to Fannie Mae and
Freddie Mac guidelines. Information about the characteristics of the mortgage
loans in each such group is described under "The Mortgage Pool" in this
prospectus supplement. The Class A-1 Certificates represent interests in the
Group I Mortgage Loans, and the Class A-2 Certificates represent interests in
the Group II Mortgage Loans. The Class M-1 Certificates, the Class M-2
Certificates and the Class B Certificates (collectively, the "Mezzanine
Certificates") represent interests in all of the mortgage loans.
The mortgage loans have an aggregate principal balance of approximately
$166,593,502 as of the Cut- off Date. The mortgage loans have original terms to
maturity of not greater than 30 years and the following characteristics as of
the Cut-off Date:
Range of mortgage rates: 7.35% to 15.25%.
Weighted average mortgage rate : 10.52%.
Range of gross margins: 4.50% to 9.75%.
Weighted averaged gross margin: 6.35%.
Range of minimum mortgage rates: 7.35% to 15.25%.
Weighted average minimum
mortgage rate: 10.52%.
Range of maximum mortgage rates: 14.35% to 22.25%.
Weighed average maximum
mortgage rate: 17.52%.
Weighed average remaining term
to stated maturity: 29 years and 10
months.
Range of principal balances: $18,742 to
$599,761.
Average principal balance: $146,908.
Range of current loan-to-value
ratios: 12.50% to 91.39%.
Weighted average current loan-to-
value ratio: 77.07%.
Weighted average next adjustment
date: March 2003.
The mortgage rate on each mortgage loan will adjust semi-annually on each
adjustment date to equal the sum
S-4
of six-month LIBOR and the related gross margin, subject to periodic and
lifetime limitations, as described under "The Mortgage Pool" in this prospectus
supplement. SEE ALSO "THE MORTGAGE POOL--THE INDEX" IN THIS PROSPECTUS
SUPPLEMENT.
The first adjustment date on the mortgage loans will occur only after an initial
period of approximately two years or three years, as more fully described under
"The Mortgage Pool" in this prospectus supplement.
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
OFFERED CERTIFICATES. The Class A-1 Certificates, the Class A-2 Certificates
(together, the "Class A Certificates"), the Class M-1 Certificates, the Class
M-2 Certificates and the Class B Certificates are the only classes of
certificates offered by this prospectus supplement. The Offered Certificates
will have the characteristics shown in the table on the cover of this prospectus
supplement and as described in this prospectus supplement.
The pass-through rate on each class of Offered Certificates is variable and will
be calculated for each Distribution Date as described under "Description of the
Certificates--Pass- Through Rate" in this prospectus supplement. The
pass-through rate on each class of Offered Certificates is a rate per annum
based on one-month LIBOR plus an applicable spread, subject to a rate cap
calculated based on the weighted average mortgage rate, less the servicing fee
and the administration fee. The initial spread relating to the Class A-1
Certificates is 0.235% per annum. The initial spread relating to the Class A-2
Certificates is 0.290% per annum. The initial spread relating to the Class M-1
Certificates is 0.640% per annum. The initial spread relating to the Class M-2
Certificates is 1.200% per annum. The initial spread relating to the Class B
Certificates is 2.500% per annum. Each spread is subject to increase as more
fully described under "Description of the Certificates--Pass- Through Rates" in
this prospectus supplement.
The Offered Certificates will be sold by the Depositor to Deutsche Bank Alex.
Brown Inc. (the "Underwriter") on the Closing Date.
The Offered Certificates will initially be represented by one or more global
certificates registered in the name of a nominee of the Depository Trust Company
in the United States, or Clearstream and the Euroclear System (each, as defined
herein), in Europe in minimum denominations of $25,000 and integral multiples of
$1.00 in excess of the minimum denominations. SEE "DESCRIPTION OF THE
CERTIFICATES --REGISTRATION OF THE OFFERED CERTIFICATES" IN THIS PROSPECTUS
SUPPLEMENT.
CLASS X AND CLASS N CERTIFICATES. The Class X and Class N Certificates
(collectively, the "Class X/N Certificates") are not offered by this prospectus
supplement. The Class X/N Certificates will represent the right to receive
principal and interest on the mortgage loans remaining after payment of all
amounts due on the Offered Certificates on each Distribution Date. The Class X/N
Certificates initially evidence an interest of approximately 3.00% in the trust.
The Class X/N Certificates will also be entitled to all prepayment charges
received on the mortgage loans. The Class X/N Certificates will be purchased by
the Underwriter, which has informed the Depositor that it intends to sell the
Class X/N Certificates to an affiliate of the Servicer.
CLASS R CERTIFICATES. The Class R Certificates and the Class R-III Certificates
(together, the "Residual Certificates") are not offered by this prospectus
supplement and are the classes of certificates representing the residual
interests in the trust. The Residual Certificates will be purchased by the
Underwriter, which has informed the Depositor that it intends to sell these
certificates to an affiliate of the Servicer.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of subordination and overcollateralization, each as
described in this section and under "Description of the Certificates--Credit
Enhancement" and "--Overcollateralization Provisions" in this prospectus
supplement.
SUBORDINATION. The rights of the holders of the Mezzanine Certificates and the
Class X/N Certificates to receive distributions will be subordinated, to the
extent
S-5
described in this prospectus supplement, to the rights of the holders of the
Class A Certificates.
In addition, to the extent described under "Description of the
Certificates--Allocation of Losses; Subordination" in this prospectus
supplement,
o the rights of the holders of the Class M-2 Certificates, the Class B
Certificates and the Class X/N Certificates will be subordinated to the rights
of the holders of the Class M-1 Certificates;
o the rights of the holders of the Class B Certificates and the Class X/N
Certificates will be subordinated to the rights of the holders of the Class M-2
Certificates; and
o the rights of the holders of the Class X/N Certificates will be subordinated
to the rights of the holders of the Class B Certificates.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
the more senior certificates protection against realized losses on the mortgage
loans, as described under "Description of the Certificates--Allocation of
Losses; Subordination" in this prospectus supplement.
OVERCOLLATERALIZATION. The aggregate principal balance of the mortgage loans as
of the Cut-off Date will exceed the aggregate certificate principal balance of
the Class A Certificates and the Mezzanine Certificates on the Closing Date by
approximately $5,000,502, which will be allocated to the Class X/N Certificates.
This amount represents approximately 3.00% of the aggregate principal balance of
the mortgage loans as of the Cut-off Date, and is the initial amount of
overcollateralization required to be provided by the mortgage pool under the
pooling and servicing agreement. SEE "DESCRIPTION OF THE CERTIFICATES
- --OVERCOLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT.
ALLOCATION OF LOSSES. If, on any Distribution Date, there is not sufficient
excess interest or overcollateralization (allocable to the Class X/N
Certificates) to absorb realized losses on the mortgage loans as described under
"Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement, then realized losses on the mortgage loans will be
allocated to the Class B Certificates, the Class M-2 Certificates and the Class
M- 1 Certificates, in that order. The pooling and servicing agreement does not
permit the allocation of realized losses on the mortgage loans to the Class A
Certificates; however, investors in the Class A Certificates should realize that
under certain loss scenarios, there will not be enough principal and interest on
the mortgage loans to pay the Class A Certificates all interest and principal
amounts to which these certificates are then entitled. SEE "DESCRIPTION OF THE
CERTIFICATES --ALLOCATION OF LOSSES; SUBORDINATION" IN THIS PROSPECTUS
SUPPLEMENT.
Once realized losses are allocated to the Mezzanine Certificates, their
certificate principal balances will be permanently reduced by the amount so
allocated. However, the amount of any realized losses allocated to the Mezzanine
Certificates may be paid with interest to the holders of these certificates
according to the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
P&I ADVANCES
The Servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, subject to the limitations described under
"Description of the Certificates--P&I Advances" in this prospectus supplement.
The Servicer is entitled to be reimbursed for these advances, and therefore
these advances are not a form of credit enhancement. SEE "DESCRIPTION OF THE
CERTIFICATES--P&I ADVANCES" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF
THE SECURITIES--ADVANCES IN RESPECT OF DELINQUENCIES" IN THE PROSPECTUS.
OPTIONAL TERMINATION
At its option, the Servicer may purchase all of the mortgage loans in both loan
groups, together with any properties in respect of the mortgage loans acquired
on behalf of the trust, and thereby effect termination and early retirement of
the certificates, after the aggregate principal balance of the mortgage loans in
both loan groups (and properties acquired in respect of the mortgage loans),
remaining in the trust has been reduced to less than 10% of the aggregate
principal balance of the mortgage loans in both loan groups as of the Cut-off
Date. SEE "POOLING AND SERVICING
S-6
AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE
SECURITIES-- TERMINATION" IN THE PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
Multiple elections will be made to treat designated portions of the trust as
real estate mortgage investment conduits for federal income tax purposes.
SEE"MATERIAL FEDERAL INCOME TAX CONSIDERATIONS--REMICS--CHARACTERIZATION OF
INVESTMENTS IN REMIC SECURITIES" IN THE PROSPECTUS.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax Consequences" in
this prospectus supplement and "Material Federal Income Tax Considerations" in
the prospectus.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive the following ratings from Fitch, Inc. ("Fitch") and
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"):
OFFERED
CERTIFICATES FITCH S&P
------------ ----- ---
Class A-1 AAA AAA
Class A-2 AAA AAA
Class M-1 AA AA
Class M-2 A A
Class B BBB BBB
A security rating does not address the frequency of prepayments on the mortgage
loans or the corresponding effect on yield to investors. SEE "YIELD ON THE
CERTIFICATES" AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "YIELD
CONSIDERATIONS" IN THE PROSPECTUS.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), for so long as they are rated not lower than
the second highest rating category by one or more nationally recognized
statistical rating organizations and therefore, will be legal investments for
those entities to the extent provided in SMMEA and applicable state laws. The
Class M-2 Certificates and the Class B Certificates will not constitute
"mortgage related securities" for purposes of SMMEA. SEE "LEGAL INVESTMENT" IN
THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
It is expected that the Offered Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") so long as certain conditions are met. A fiduciary of an employee
benefit plan must determine that the purchase of a certificate is consistent
with its fiduciary duties under applicable law and does not result in a
nonexempt prohibited transaction under applicable law. SEE "CONSIDERATIONS FOR
BENEFIT PLAN INVESTORS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
S-7
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE CERTIFICATES.
YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" IN THE PROSPECTUS.
THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC
The Originator's underwriting standards are intended to assess the value of
the mortgaged property and to evaluate the adequacy of the property as
collateral for the mortgage loan. The Originator considers, among other things,
a mortgagor's credit history, repayment ability and debt service-to- income
ratio, as well as the type and use of the mortgaged property. The Originator
provides loans primarily to borrowers who do not qualify for loans conforming to
Fannie Mae and Freddie Mac guidelines. The Originator's underwriting standards
do not prohibit a mortgagor from obtaining (at the time of origination of the
Originator's first lien), additional financing which is subordinate to such
first lien, which subordinate financing would reduce the equity the mortgagor
would otherwise have in the related mortgaged property as indicated in the
Originator's loan-to-value ratio determination for the Originator's first lien.
As a result of the Originator's underwriting standards, the mortgage loans
in the mortgage pool are likely to experience rates of delinquency, foreclosure
and bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. SEE "THE
ORIGINATOR--UNDERWRITING STANDARDS OF THE ORIGINATOR AND REPRESENTATIONS
CONCERNING THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT.
MORTGAGE LOANS WITH HIGH LOAN-TO-VALUE RATIOS LEAVE THE RELATED BORROWER WITH
LITTLE OR NO EQUITY IN THE RELATED MORTGAGED PROPERTY
Approximately 27.21% of the Group I Mortgage Loans and approximately 33.07%
of the Group II Mortgage Loans, in each case, by aggregate principal balance of
the related loan group as of the Cut-off Date, had a loan-to-value ratio at
origination in excess of 80%. No mortgage loan in the mortgage pool will be
covered by a primary mortgage insurance policy. No Group I Mortgage Loan had a
loan-to-value ratio exceeding 91.43% at origination and no Group II Mortgage
Loan had a loan-to-value ratio exceeding 90.00% at origination. Mortgage loans
with higher loan-to-value ratios may present a greater risk of loss. In
addition, an overall decline in the residential real estate market, a rise in
interest rates over a period of time and the condition of a mortgaged property,
as well as other factors, may have the effect of reducing the value of the
mortgaged property from the appraised value at the time the mortgage loan was
originated. If there is a reduction in value of the mortgaged property, the
loan-to-value ratio may increase over what it was at the time the mortgage loan
was originated. Such an increase may reduce the likelihood of liquidation or
other proceeds being sufficient to satisfy the mortgage loan, and any losses to
the extent not covered by the credit enhancement may affect the yield to
maturity of your certificates. There can be no assurance that the value of a
mortgaged property estimated in any appraisal or review is equal to the actual
value of that mortgaged property at the time of that appraisal or review.
Investors should note that the values of the mortgaged properties may be
insufficient to cover the outstanding principal balance of the mortgage loans.
There can be no assurance that the loan-to-value ratio of any mortgage loan
determined at any time after origination will be less than or equal to its
loan-to-value ratio at origination.
S-8
CERTAIN MORTGAGE LOANS MAY BE DELINQUENT AS OF THE CUT-OFF DATE, WHICH MAY
PRESENT A GREATER RISK OF LOSS RELATING TO SUCH MORTGAGE LOANS
Approximately 4.59% of the Group I Mortgage Loans and approximately 10.35%
of the Group II Mortgage Loans, in each case, by aggregate principal balance of
the related loan group as of the Cut-off Date, were delinquent in their monthly
payments as of February 28, 2001. However, investors should realize that
approximately 92.56% of the Group I Mortgage Loans and approximately 96.91% of
the Group II Mortgage Loans, in each case, by aggregate principal balance of the
related loan group as of the Cut-off Date, have a first payment date occurring
on or after February 1, 2001 and therefore, such mortgage loans could not have
been delinquent with respect to any monthly payment due on or before February
28, 2001.
THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF CALIFORNIA, WHICH MAY
PRESENT A GREATER RISK OF LOSS RELATING TO THESE MORTGAGE LOANS
Approximately 38.51% of the Group I Mortgage Loans and approximately 72.02%
of the Group II Mortgage Loans, in each case, by aggregate principal balance of
the related loan group as of the Cut-off Date, are secured by mortgaged
properties located in the State of California. The aggregate principal balance
of Group I Mortgage Loans in the California zip code with the largest amount of
such mortgage loans, by aggregate principal balance of the Group I Mortgage
Loans as of the Cut-off Date, was approximately $1,111,429 and the aggregate
principal balance of Group II Mortgage Loans in the California zip code with the
largest amount of such mortgage loans, by aggregate principal balance of the
Group II Mortgage Loans as of the Cut-off Date, was approximately $1,162,064. If
the California residential real estate market should experience an overall
decline in property values after the dates of origination of the mortgage loans,
the rates of delinquencies, foreclosures, bankruptcies and losses on the
mortgage loans may increase over historical levels of comparable type loans, and
may increase substantially. In addition, properties located in California may be
more susceptible than homes located in other parts of the country to certain
types of uninsured hazards, such as earthquakes, as well as floods, mudslides
and other natural disasters.
THE MEZZANINE CERTIFICATES WILL BE MORE SENSITIVE TO LOSSES ON THE MORTGAGE
LOANS THAN THE CLASS A CERTIFICATES BECAUSE THEY ARE SUBORDINATE TO THE CLASS A
CERTIFICATES
The weighted average lives of, and the yields to maturity on, the Class M-1
Certificates, the Class M-2 Certificates and the Class B Certificates will be
progressively more sensitive, in that order, to the rate and timing of mortgagor
defaults and the severity of ensuing losses on the mortgage loans. If the actual
rate and severity of losses on the mortgage loans is higher than those assumed
by an investor in these certificates, the actual yield to maturity of these
certificates may be lower than the yield anticipated by the holder based on such
assumption. The timing of losses on the mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized losses on the mortgage loans, to the
extent they exceed the amount of excess interest and overcollateralization
following distributions of principal on the related Distribution Date, will
reduce the certificate principal balance of the Mezzanine Certificate then
outstanding with the lowest payment priority. As a result of such reductions,
less interest will accrue on such class of Mezzanine Certificates than would be
the case. Once a realized loss is allocated to a Mezzanine Certificate, no
amounts will be distributable with respect to such written down amount. However,
the amount of any realized losses allocated to the Mezzanine Certificates may be
paid to the holders of the Mezzanine Certificates together with accrued interest
on such amount according to the priorities set forth under "Description of the
Certificates --Overcollateralization Provisions" in this prospectus supplement.
THE MEZZANINE CERTIFICATES WILL GENERALLY NOT BE ENTITLED TO RECEIVE PRINCIPAL
PAYMENTS UNTIL APRIL 2004 WHICH MAY RESULT IN A GREATER RISK OF LOSS RELATING TO
THESE CERTIFICATES
Unless the certificate principal balance of the Class A Certificates has
been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until at least April 2004 or a later date as provided in
this prospectus supplement or during any period in which delinquencies on the
mortgage loans exceed the levels set forth under "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus
S-9
supplement. As a result, the weighted average lives of these certificates will
be longer than would be the case if distributions of principal were allocated
among all of the certificates at the same time. As a result of the longer
weighted average lives of these certificates, the holders of these certificates
have a greater risk of suffering a loss on their investments. Further, because
such certificates might not receive any principal if the delinquency levels set
forth under "Description of the Certificates--Principal Distributions on the
Offered Certificates" in this prospectus supplement are exceeded, it is possible
for such certificates to receive no principal distributions on a particular
Distribution Date even if no losses have occurred on the mortgage pool.
YOUR CERTIFICATES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST FUND AND NOT
OF ANY OTHER PARTY
The Offered Certificates will not represent an interest in or obligation of
the Depositor, the Servicer, the Originator, the Trustee, the Trust
Administrator or any of their respective affiliates. Neither the certificates
nor the underlying mortgage loans will be guaranteed or insured by any
governmental agency or instrumentality, or by the Depositor, the Servicer, the
Originator, the Trustee, the Trust Administrator or any of their respective
affiliates. Proceeds of the assets included in the trust will be the sole source
of payments on the Offered Certificates, and there will be no recourse to the
Depositor, the Servicer, the Originator, the Trustee, the Trust Administrator or
any other entity in the event that these proceeds are insufficient or otherwise
unavailable to make all payments provided for under the Offered Certificates.
THE DIFFERENCE BETWEEN THE PASS-THROUGH RATES ON THE OFFERED CERTIFICATES AND
THE MORTGAGE RATES ON THE MORTGAGE LOANS MAY RESULT IN INTEREST SHORTFALLS ON
THE OFFERED CERTIFICATES
The yield to maturity on the Offered Certificates may be affected by the
resetting of the mortgage rates on the mortgage loans on their related
adjustment dates. In addition, because the mortgage rate for each mortgage loan
is based on six-month LIBOR plus a fixed percentage amount, such rate could be
higher than prevailing market interest rates, and this may result in an increase
in the rate of prepayments on the mortgage loans after their adjustments.
Finally, the mortgage rates on the mortgage loans are based on six-month LIBOR
(and the mortgage loans, by aggregate principal balance of the mortgage loans as
of the Cut-off Date, will not have their mortgage rates adjusted for two or
three years from the dates of their origination), while the pass-through rates
on the Offered Certificates are based on one-month LIBOR. Consequently, the
application to such certificates of the rate cap, which is equal to the weighted
average coupon on the mortgage loans after payment of certain fees, could
adversely affect the yield to maturity on such Certificates. In addition, the
rate cap will decrease if mortgage loans with relatively high mortgage rates
prepay at a faster rate than mortgage loans with relatively low mortgage rates.
IF THE PASS-THROUGH RATES ON THE CLASS A CERTIFICATES OR THE MEZZANINE
CERTIFICATES ARE LIMITED FOR ANY DISTRIBUTION DATE, THE RESULTING BASIS RISK
SHORTFALLS MAY BE RECOVERED BY THE HOLDERS OF THESE CERTIFICATES ON THE SAME
DISTRIBUTION DATE OR ON FUTURE DISTRIBUTION DATES ON A SUBORDINATED BASIS TO THE
EXTENT THAT ON SUCH DISTRIBUTION DATE OR FUTURE DISTRIBUTION DATES THERE ARE
AVAILABLE FUNDS REMAINING AFTER CERTAIN OTHER DISTRIBUTIONS ON THE OFFERED
CERTIFICATES AND THE PAYMENT OF CERTAIN FEES AND EXPENSES OF THE TRUST. SEE
"YIELD ON THE CERTIFICATES--SPECIAL YIELD CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE PRIORITY OF PAYMENT ON SUCH
CERTIFICATES
The rate and timing of distributions allocable to principal on the Offered
Certificates will depend, in general, on the rate and timing of principal
payments (including prepayments and collections upon defaults, liquidations and
repurchases) on the mortgage loans and the allocation thereof to pay principal
on such certificates as described in "Description of the Certificates--Principal
Distributions on the Offered Certificates" in this prospectus supplement. As is
the case with mortgage pass-through certificates generally, the Offered
Certificates are subject to substantial inherent cash-flow uncertainties because
the mortgage loans may be prepaid at any time. However, with respect to
approximately 90.91% of the mortgage loans, by aggregate principal balance of
the mortgage loans as of the Cut-off Date, a prepayment may subject the related
mortgagor to a prepayment charge. A prepayment charge may or may not act as a
deterrent to prepayment of the related mortgage loan. SEE "THE MORTGAGE POOL" IN
THIS PROSPECTUS SUPPLEMENT.
S-10
Generally, when prevailing interest rates are increasing, prepayment rates
on mortgage loans tend to decrease; a decrease in the prepayment rates on the
mortgage loans will result in a reduced rate of return of principal to investors
in the Offered Certificates at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing interest rates
are declining, prepayment rates on mortgage loans tend to increase; an increase
in the prepayment rates on the mortgage loans will result in a greater rate of
return of principal to investors in the Offered Certificates at a time when
reinvestment at comparable yields may not be possible.
Distributions of principal will be made to the holders of the Mezzanine
Certificates according to the priorities described in this prospectus
supplement. The timing of commencement of principal distributions and the
weighted average life of each such class of certificates will be affected by the
rates of prepayment on the mortgage loans experienced both before and after the
commencement of principal distributions on such class. For further information
regarding the effect of principal prepayments on the weighted average lives of
the Offered Certificates, see "Yield on the Certificates" in this prospectus
supplement, including the table entitled "Percent of Initial Certificate
Principal Balance Outstanding at the Specified Percentages of CPR."
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on the Offered Certificates will depend on:
o the applicable pass-through rate thereon from time to time;
o the applicable purchase price;
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) and the
allocation thereof to reduce the certificate principal balance of such
certificates; and
o the rate, timing and severity of realized losses on the mortgage loans;
adjustments to the mortgage rates on the mortgage loans, the amount of
excess interest generated by the mortgage loans and the allocation to
the Offered Certificates of some types of interest shortfalls.
In general, if the Offered Certificates are purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if the Offered Certificates
are purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
The proceeds to the Depositor from the sale of the Offered Certificates
were determined based on a number of assumptions, including a prepayment
assumption of 28% of the Constant Prepayment Rate model as described in this
prospectus supplement under "Yield on the Certificates" and weighted average
lives corresponding thereto. No representation is made that the mortgage loans
will prepay at such rate or at any other rate. The yield assumptions for the
Offered Certificates will vary as determined at the time of sale.
THE YIELD TO MATURITY ON THE MEZZANINE CERTIFICATES WILL BE PARTICULARLY
SENSITIVE TO THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS
The multiple class structure of the Mezzanine Certificates causes the yield
of such classes to be particularly sensitive to changes in the rates of
prepayment of the mortgage loans. Because distributions of principal will be
made to the holders of such certificates according to the priorities described
in this prospectus supplement, the yield to maturity on such classes of
certificates will be sensitive to the rates of prepayment on the mortgage loans
experienced both before and after the commencement of principal distributions on
such classes. The yield to maturity on such classes of certificates will also be
extremely sensitive to losses due to defaults on the mortgage loans (and the
timing thereof), to the extent these losses are not covered by excess cashflow
otherwise payable to the Class X/N Certificates or to a class of Mezzanine
Certificates with a lower payment priority. Furthermore, as described in this
prospectus
S-11
supplement, the timing of receipt of principal and interest by the Mezzanine
Certificates may be adversely affected by losses even if these classes of
certificates do not ultimately bear such loss.
VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE LOANS
AND YOUR CERTIFICATES
Applicable state laws regulate interest rates and other charges, require
certain disclosure, and require licensing of the Originator. In addition, other
state laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the mortgage
loans.
The mortgage loans are also subject to federal laws, including
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require disclosures to the borrowers regarding the
terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Originator
to damages and administrative enforcement.
NC Capital Corporation ("NC Capital"), an affiliate of the Originator, will
represent that as of the Closing Date, each mortgage loan originated by the
Originator is in compliance with applicable federal and state laws and
regulations. In the event of a breach of this representation, the Originator
will be obligated to cure the breach or repurchase or replace the affected
mortgage loan in the manner described in the prospectus.
THE TRANSFER OF SERVICING MAY RESULT IN HIGHER DELINQUENCIES AND DEFAULTS WHICH
MAY ADVERSELY AFFECT THE YIELD ON YOUR CERTIFICATES
The Servicer will be the servicer under the pooling and servicing
agreement. However, the Originator has serviced the mortgage loans since
origination or acquisition by the Originator. Although the transfer of servicing
is expected to be completed on March 30, 2001, all transfers of servicing
involve the risk of disruption in collections due to data input errors,
misapplied or misdirected payments, system incompatibilities and other reasons.
As a result, the rate of delinquencies and defaults are likely to increase at
least for a period of time. There can be no assurance as to the extent or
duration of any disruptions associated with the transfer of servicing or as to
the resulting effects on the yield on your certificates.
THE FINANCIAL CONDITION OF THE ORIGINATOR MAY ADVERSELY AFFECT THE PERFORMANCE
OF THE CERTIFICATES
The Originator's origination, servicing and securitization activities
require substantial amounts of capital and continuing access to sources of
financing. At present, the Originator's operating uses of cash continue to
exceed its operating sources of cash. The Originator has $40 million in
subordinated debt outstanding, the maturity date of which has been extended from
June 2000 to June 2002. The Originator and its affiliates do not currently have
a source of funds to repay the debt in the event of default or upon its
maturity. The Originator has a committed warehouse line of credit led by U.S.
Bank National Association with an expiration date of May 2001. The Originator or
its affiliates also have in place various aggregation and residual financing
facilities that expire at various times between the Closing Date and November
2001. For additional information regarding the credit facilities see the Annual
Report on Form 10-K for the year ended December 31, 1999 and the quarterly
report on Form 10-Q for the quarter ended December 31, 2000,
S-12
in each case filed by New Century Financial Corporation and hereby incorporated
by reference in this prospectus supplement. Although the Originator expects to
renew or replace the facilities prior to their expiration, there can be no
assurances that such will be the case. If any of the Originator's warehouse,
aggregation or residual financing facilities are not renewed or replaced, or the
terms of any renewals or replacements are less favorable, it would have a
material adverse impact on the Originator's results of operations. In this
event, there can be no assurances that the Originator will be able to repurchase
mortgage loans that have missing or defective documentation or that breach any
representation or warranty.
THE LIQUIDITY OF YOUR CERTIFICATES MAY BE LIMITED.
The Underwriter has no obligation to make a secondary market in the classes
of Offered Certificates. There is therefore no assurance that a secondary market
will develop or, if it develops, that it will continue. Consequently, you may
not be able to sell your certificates readily or at prices that will enable you
to realize your desired yield. The market values of the certificates are likely
to fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary markets for 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.
THE CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT REGARDING PAYMENTS
ON THE OFFERED CERTIFICATES WILL HAVE THE MEANINGS ASSIGNED TO THEM UNDER
"DESCRIPTION OF THE CERTIFICATES--GLOSSARY."
USE OF PROCEEDS
Deutsche Bank AG New York Branch (the "Mortgage Loan Seller"), will sell
the mortgage loans to the Depositor and the Depositor will convey the mortgage
loans to the trust fund in exchange for and concurrently with the delivery of
the certificates. Net proceeds from the sale of the Offered Certificates will be
applied by the Depositor to the purchase of the mortgage loans from the Mortgage
Loan Seller. Such net proceeds, together with the cash proceeds from the sale of
the Class X/N Certificates and the Residual Certificates, will represent the
purchase price to be paid by the Depositor to the Mortgage Loan Seller for the
mortgage loans. The mortgage loans were previously purchased by the Mortgage
Loan Seller either directly or indirectly from the Originator.
THE MORTGAGE POOL
GENERAL
The pool of mortgage loans (the "Mortgage Pool") will consist of
approximately 1,134 conventional, one- to four- family, adjustable-rate mortgage
loans (the "Mortgage Loans") secured by first liens on residential real
properties (the "Mortgaged Properties") and having an aggregate principal
balance as of the Cut-off Date of approximately $166,593,502 after application
of scheduled payments due on or before the Cut-off Date whether or not received
and subject to a permitted variance of plus or minus 5%. The Mortgage Loans have
original terms to maturity of not greater than 30 years.
The Mortgage Loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on residential
properties. The Mortgaged Properties consist of attached, detached or
semi-detached, one- to four-family dwelling units, townhouses, individual
condominium units, individual units in planned unit developments and
manufactured housing.
For purposes of calculating principal distributions on the Class A
Certificates, as described under "Description of the Certificates--Principal
Distributions on the Offered Certificates" in this prospectus supplement, and
for purposes of calculating the allocation of certain interest shortfalls to the
Class A Certificates, as described under "Description of the
Certificates--Interest Distributions on the Offered Certificates" in this
prospectus supplement, the Mortgage
S-13
Loans have been divided into two subpools, designated as the "Group I Mortgage
Loans" and the "Group II Mortgage Loans." The Group I Mortgage Loans consist of
those Mortgage Loans with principal balances that conform to Fannie Mae and
Freddie Mac guidelines, and the Group II Mortgage Loans consist of those
Mortgage Loans with principal balances that do not conform to Fannie Mae and
Freddie Mac guidelines. Information about the characteristics of the Mortgage
Loans in each such group is described under "--The Group I Mortgage Loans" and
"--The Group I Mortgage Loans" below. The Class A-1 Certificates represent
interests in the Group I Mortgage Loans, and the Class A-2 Certificates
represent interests in the Group II Mortgage Loans. The Mezzanine Certificates
represent interests in all of the Mortgage Loans.
References to percentages of the Mortgage Loans, unless otherwise noted,
are calculated based on the aggregate principal balance of the Group I Mortgage
Loans or the Group II Mortgage Loans, as applicable, as of the Cut-off Date.
The mortgage rate (the "Mortgage Rate") on each Mortgage Loan is the per
annum rate of interest specified in the related mortgage note. Each Mortgage
Loan provides for semi-annual adjustment to its Mortgage Rate; provided,
however, that in the case of approximately 72.63% and approximately 27.37% of
the Group I Mortgage Loans and approximately 82.87% and approximately 17.13% of
the Group II Mortgage Loans, the first adjustment will not occur until after an
initial period of approximately two years and three years, respectively, from
the date of origination of those Mortgage Loans (each such Mortgage Loan, a
"Delayed First Adjustment Mortgage Loan"). In connection with each Mortgage Rate
adjustment, the Mortgage Loans have corresponding adjustments to their monthly
payment amount, in each case on each applicable adjustment date (each such date,
an "Adjustment Date"). On each Adjustment Date, the Mortgage Rate on each
Mortgage Loan will be adjusted to equal the sum, rounded to the nearest multiple
of 0.125%, of the Index (as described below) and a fixed percentage amount (the
"Gross Margin") for that Mortgage Loan specified in the related mortgage note.
The Mortgage Rate on each Mortgage Loan, however, including each Delayed First
Adjustment Mortgage Loan, will generally not increase or decrease by more than
the periodic rate cap (the "Periodic Rate Cap") specified in the related
mortgage note, which is a percentage ranging from 1.00% to 1.50% per annum, in
the case of the Group I Mortgage Loans and ranging from 1.00% to 1.50% per
annum, in the case of the Group II Mortgage Loans, on any related Adjustment
Date and will not exceed a specified maximum mortgage rate (the "Maximum
Mortgage Rate") over the life of the mortgage loan or be less than a specified
minimum mortgage rate (the "Minimum Mortgage Rate") over the life of the
Mortgage Loan. Effective with the first monthly payment due on each Mortgage
Loan after each related Adjustment Date, the monthly payment amount will be
adjusted to an amount that will fully amortize the outstanding principal balance
of the related Mortgage Loan over its remaining term and pay interest at the
Mortgage Rate as so adjusted. Due to the application of the Periodic Rate Caps
and the Maximum Mortgage Rates, the Mortgage Rate on each Mortgage Loan, as
adjusted on any related Adjustment Date, may be less than the sum of the Index,
calculated as described in this prospectus supplement, and the related Gross
Margin. See "--The Index" in this prospectus supplement. None of the Mortgage
Loans permits the related mortgagor to convert the adjustable mortgage rate
thereon to a fixed Mortgage Rate.
The Mortgage Loans have scheduled monthly payments due on the first day of
the month (with respect to each Mortgage Loan, the "Due Date"). Each Mortgage
Loan will contain a customary "due-on-sale" clause which provides that the
Mortgage Loan must be repaid at the time of a sale of the related Mortgaged
Property or assumed by a creditworthy purchaser of the related Mortgaged
Property.
Approximately 92.04% of the Group I Mortgage Loans and approximately 87.84%
of the Group II Mortgage Loans provide for payment by the mortgagor of a
prepayment charge (a "Prepayment Charge") in limited circumstances on certain
prepayments as provided in the related mortgage note. Generally, each such
Mortgage Loan provides for payment of a Prepayment Charge on certain partial
prepayments and all prepayments in full made within a specified period not in
excess of five years from the date of origination of the Mortgage Loan, as
provided in the related mortgage note. The amount of the Prepayment Charge is as
provided in the related mortgage note, but, in most cases, is equal to six
month's interest on any amounts prepaid in excess of 20% of the original
principal balance of the related Mortgage Loan in any 12 month period, as
permitted by law. The holders of the Class X/N Certificates will be entitled to
all Prepayment Charges received on the Mortgage Loans, and these amounts will
not be available for distribution on the other classes of certificates. Under
the limited instances described under the terms of the pooling and servicing
agreement, the Servicer may waive the payment of any otherwise applicable
Prepayment Charge. Investors should conduct their own analysis of the effect, if
any, that the Prepayment Charges, and decisions by the Servicer with
S-14
respect to the waiver of the Prepayment Charges, may have on the prepayment
performance of the Mortgage Loans. The Depositor makes no representation as to
the effect that the Prepayment Charges, and decisions by the Servicer with
respect to the waiver of the Prepayment Charges, may have on the prepayment
performance of the Mortgage Loans.
None of the Mortgage Loans are buydown mortgage loans.
THE GROUP I MORTGAGE LOANS
The Group I Mortgage Loans consist of approximately 1,007 Mortgage Loans
and have an aggregate principal balance as of the Cut-off Date of approximately
$121,628,463.
The average principal balance of the Group I Mortgage Loans at origination
was approximately $120,856. No Group I Mortgage Loan had a principal balance at
origination greater than approximately $338,400 or less than approximately
$18,750. The average principal balance of the Group I Mortgage Loans as of the
Cut-off Date was approximately $120,783. No Group I Mortgage Loan had a
principal balance as of the Cut-off Date greater than approximately $338,234 or
less than approximately $18,742.
The Group I Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 7.74% per annum to approximately 15.25% per annum,
and the weighted average Mortgage Rate was approximately 10.65% per annum. As of
the Cut-off Date, the Group I Mortgage Loans had Gross Margins ranging from
approximately 4.50% to approximately 7.00%, Minimum Mortgage Rates ranging from
approximately 7.74% per annum to approximately 15.25% per annum and Maximum
Mortgage Rates ranging from approximately 14.74% per annum to approximately
22.25% per annum. As of the Cut-off Date, the weighted average Gross Margin was
approximately 6.38%, the weighted average Minimum Mortgage Rate was
approximately 10.65% per annum and the weighted average Maximum Mortgage Rate
was approximately 17.65% per annum. The latest first Adjustment Date following
the Cut-off Date on any Group I Mortgage Loan occurs in January 2004 and the
weighted average next Adjustment Date for all of the Group I Mortgage Loans
following the Cut-off Date is April 2003.
The weighted average current loan-to-value ratio of the Group I Mortgage
Loans at origination was approximately 76.74%. At origination, no Group I
Mortgage Loan had a loan-to-value ratio greater than approximately 91.43% or
less than approximately 12.50%.
The weighted average remaining term to stated maturity of the Group I
Mortgage Loans was approximately 29 years and 9 months as of the Cut-off Date.
None of the Group I Mortgage Loans will have a first due date prior to November
2000 or after February 2001, or will have a remaining term to stated maturity of
less than 14 years and 8 months or greater than 30 years as of the Cut-off Date.
The latest maturity date of any Group I Mortgage Loan is January 2031.
The Group I Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
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PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
AT ORIGINATION ($) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------------ ----------------- ---------------- ----------------
0.01 - 25,000.00...... 3 $ 68,750.00 0.06%
25,000.01 - 50,000.00..... 96 3,963,510.00 3.26
50,000.01 - 75,000.00..... 185 11,638,255.00 9.56
75,000.01 - 100,000.00..... 166 14,629,027.00 12.02
100,000.01 - 125,000.00..... 154 17,295,190.50 14.21
125,000.01 - 150,000.00..... 118 16,362,822.00 13.45
150,000.01 - 175,000.00..... 78 12,553,221.00 10.31
175,000.01 - 200,000.00..... 76 14,253,174.00 11.71
200,000.01 - 225,000.00..... 58 12,414,261.00 10.20
225,000.01 - 250,000.00..... 35 8,353,170.00 6.86
250,000.01 - 275,000.00..... 33 8,639,871.00 7.10
275,000.01 - 300,000.00..... 2 571,500.00 0.47
300,000.01 - 350,000.00..... 3 959,135.00 0.79
----- --------------- ------
TOTAL.......................... 1,007 $121,701,886.50 100.00%
===== =============== ======
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE AS OF NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
THE CUT-OFF DATE ($) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- -------------------- ----------------- ---------------- ----------------
0.01 - 25,000.00..... 3 $ 68,730.47 0.06%
25,000.01 - 50,000.00..... 96 3,961,705.00 3.26
50,000.01 - 75,000.00..... 185 11,624,539.17 9.56
75,000.01 - 100,000.00..... 166 14,619,317.68 12.02
100,000.01 - 125,000.00..... 154 17,284,746.91 14.21
125,000.01 - 150,000.00..... 118 16,354,906.33 13.45
150,000.01 - 175,000.00..... 78 12,547,293.95 10.32
175,000.01 - 200,000.00..... 76 14,245,265.36 11.71
200,000.01 - 225,000.00..... 58 12,408,215.54 10.20
225,000.01 - 250,000.00..... 35 8,348,525.93 6.86
250,000.01 - 275,000.00..... 33 8,635,509.14 7.10
275,000.01 - 300,000.00..... 2 571,041.48 0.47
300,000.01 - 350,000.00..... 3 958,665.77 0.79
----- --------------- ------
TOTAL.......................... 1,007 $121,628,462.73 100.00%
===== =============== ======
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MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ----------------- ----------------- ---------------- ----------------
7.501 - 8.000............. 5 $ 1,015,196.12 0.83%
8.001 - 8.500............. 14 2,361,643.82 1.94
8.501 - 9.000............. 52 7,694,176.36 6.33
9.001 - 9.500............. 72 11,279,871.50 9.27
9.501 - 10.000............. 160 21,429,646.75 17.62
10.001 - 10.500............. 149 18,181,478.60 14.95
10.501 - 11.000............. 178 21,930,695.70 18.03
11.001 - 11.500............. 107 12,197,946.62 10.03
11.501 - 12.000............. 114 12,079,950.40 9.93
12.001 - 12.500............. 60 6,226,261.56 5.12
12.501 - 13.000............. 37 3,027,534.77 2.49
13.001 - 13.500............. 31 2,432,476.30 2.00
13.501 - 14.000............. 9 663,814.78 0.55
14.001 - 14.500............. 14 871,301.02 0.72
14.501 - 15.000............. 4 190,974.63 0.16
15.001 - 15.500............. 1 45,493.80 0.04
----- --------------- ------
Total...................... 1,007 $121,628,462.73 100.00%
===== =============== ======
GROSS MARGINS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ---------------- ----------------- ---------------- ----------------
4.001 - 4.500................ 8 $ 1,401,968.02 1.15%
4.501 - 5.000................ 19 2,759,525.58 2.27
5.001 - 5.500................ 4 574,439.49 0.47
5.501 - 6.000................ 294 35,266,769.83 29.00
6.001 - 6.500................ 327 42,455,953.96 34.91
6.501 - 7.000................ 355 39,169,805.85 32.20
----- --------------- ------
Total....................... 1,007 $121,628,462.73 100.00%
===== =============== ======
S-17
MAXIMUM MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM MORTGAGE RATE (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------------------- ----------------- ---------------- ----------------
14.001- 15.000............... 5 $ 1,015,196.12 0.83%
15.001- 16.000............... 66 10,055,820.18 8.27
16.001- 17.000............... 234 32,971,846.85 27.11
17.001- 18.000............... 328 40,228,565.69 33.07
18.001- 19.000............... 218 23,899,177.03 19.65
19.001- 20.000............... 97 9,253,796.33 7.61
20.001- 21.000............... 40 3,096,291.08 2.55
21.001- 22.000............... 18 1,062,275.65 0.87
22.001- 23.000............... 1 45,493.80 0.04
----- --------------- ------
Total....................... 1,007 $121,628,462.73 100.00%
===== =============== ======
MINIMUM MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM MORTGAGE RATE (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------------------- ----------------- ---------------- ----------------
7.001 - 8.000............... 5 $ 1,015,196.12 0.83%
8.001 - 9.000............... 66 10,055,820.18 8.27
9.001 - 10.000............... 232 32,709,518.25 26.89
10.001 - 11.000............... 327 40,112,174.30 32.98
11.001 - 12.000............... 221 24,277,897.02 19.96
12.001 - 13.000............... 97 9,253,796.33 7.61
13.001 - 14.000............... 40 3,096,291.08 2.55
14.001 - 15.000............... 18 1,062,275.65 0.87
15.001 - 16.000............... 1 45,493.80 0.04
----- --------------- ------
Total....................... 1,007 $121,628,462.73 100.00%
===== =============== ======
S-18
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL LOAN-TO-VALUE RATIO (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- -------------------------------- ----------------- ---------------- ----------------
10.001- 15.000............... 1 $ 49,985.69 0.04%
15.001- 20.000............... 1 59,973.17 0.05
20.001- 25.000............... 1 74,973.19 0.06
25.001- 30.000............... 5 256,893.48 0.21
30.001- 35.000............... 3 131,520.69 0.11
35.001- 40.000............... 4 361,802.92 0.30
40.001- 45.000............... 12 1,203,323.79 0.99
45.001- 50.000............... 16 1,459,283.61 1.20
50.001- 55.000............... 27 3,360,206.65 2.76
55.001- 60.000............... 27 2,364,460.42 1.94
60.001- 65.000............... 66 7,271,375.71 5.98
65.001- 70.000............... 92 10,299,166.64 8.47
70.001- 75.000............... 162 19,908,162.88 16.37
75.001- 80.000............... 338 41,734,862.67 34.31
80.001- 85.000............... 152 18,785,225.49 15.44
85.001- 90.000............... 99 14,192,091.51 11.67
90.001- 95.000............... 1 115,154.22 0.09
----- --------------- ------
Total....................... 1,007 $121,628,462.73 100.00%
===== =============== ======
S-19
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- -------- ----------------- ---------------- ----------------
ALABAMA............................ 7 $ 732,516.48 0.60%
ARIZONA............................ 38 3,904,659.91 3.21
ARKANSAS........................... 2 137,207.60 0.11
CALIFORNIA......................... 281 46,845,055.08 38.51
COLORADO........................... 45 6,150,503.76 5.06
CONNECTICUT........................ 10 1,046,261.83 0.86
DISTRICT OF COLUMBIA............... 3 238,930.40 0.20
FLORIDA............................ 94 8,324,001.23 6.84
GEORGIA............................ 19 1,749,190.03 1.44
HAWAII............................. 2 475,822.05 0.39
IDAHO.............................. 7 689,097.69 0.57
ILLINOIS........................... 53 6,304,639.52 5.18
INDIANA............................ 16 1,389,815.46 1.14
IOWA............................... 2 219,932.87 0.18
KANSAS............................. 16 1,335,734.82 1.10
KENTUCKY........................... 3 155,029.06 0.13
LOUISIANA.......................... 12 896,471.23 0.74
MAINE.............................. 4 465,189.08 0.38
MARYLAND........................... 3 381,064.44 0.31
MASSACHUSETTS...................... 44 7,270,205.93 5.98
MICHIGAN........................... 60 4,746,891.75 3.90
MINNESOTA.......................... 24 2,839,245.69 2.33
MISSISSIPPI........................ 1 67,173.00 0.06
MISSOURI........................... 22 1,610,487.64 1.32
MONTANA............................ 2 186,762.57 0.15
NEBRASKA........................... 1 59,119.12 0.05
NEVADA............................. 18 2,265,191.02 1.86
NEW HAMPSHIRE...................... 3 296,406.85 0.24
NEW JERSEY......................... 6 801,250.72 0.66
NEW MEXICO......................... 4 470,930.28 0.39
NORTH DAKOTA....................... 1 37,486.62 0.03
OHIO............................... 34 3,242,271.86 2.67
OKLAHOMA........................... 8 798,016.40 0.66
OREGON............................. 16 1,677,231.21 1.38
PENNSYLVANIA....................... 16 1,575,792.63 1.30
RHODE ISLAND....................... 1 107,934.43 0.09
SOUTH CAROLINA..................... 9 763,798.93 0.63
TENNESSEE.......................... 15 1,272,185.55 1.05
TEXAS.............................. 53 4,210,683.06 3.46
UTAH............................... 5 621,305.26 0.51
VIRGINIA........................... 7 1,008,334.13 0.83
WASHINGTON......................... 17 2,080,633.93 1.71
WEST VIRGINIA...................... 2 105,556.69 0.09
WISCONSIN.......................... 21 2,072,444.92 1.70
----- --------------- ------
TOTAL............................... 1,007 $121,628,462.73 100.00%
===== =============== ======
S-20
MORTGAGED PROPERTY TYPES OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------- ----------------- ---------------- ----------------
Single Family....................... 793 $ 93,636,788.29 76.99%
Two- to Four-Family................. 70 10,104,179.00 8.31
Planned Unit Development............ 73 10,104,178.82 8.31
Condominium......................... 59 6,804,831.56 5.59
Manufactured Housing................ 12 981,179.38 0.80
----- --------------- ------
Total.......................... 1,007 $121,628,462.73 100.00%
===== =============== ======
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ---------------- ----------------- ---------------- ----------------
Primary............................. 931 $114,337,303.94 94.01%
Investment.......................... 74 7,013,143.09 5.77
Second Home......................... 2 278,015.70 0.23
----- --------------- ------
Total.......................... 1,007 $121,628,462.73 100.00%
===== =============== ======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
LOAN PURPOSE OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------ ----------------- ---------------- ----------------
Equity-out Refinance................ 580 $ 70,131,947.65 57.66%
Purchase............................ 255 30,675,011.63 25.22
Rate-term Refinance................. 172 20,821,503.45 17.12
------ --------------- ------
Total.......................... 1,007 $121,628,462.73 100.00%
===== =============== ======
LOAN PROGRAMS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------ ----------------- ---------------- ----------------
Full Documentation Program...................... 590 $ 68,341,935.34 56.19%
Stated Income Documentation Program............. 344 43,267,924.00 35.57
Limited Documentation Program................... 73 10,018,603.39 8.24
------- --------------- ------
Total...................................... 1,007 $121,628,462.73 100.00%
===== =============== ======
S-21
RISK CATEGORIES OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CAREGORIES OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- --------------- ----------------- ---------------- ----------------
A+.................................. 297 $ 36,546,250.15 30.05%
A+MO................................ 16 1,526,712.23 1.26
A-.................................. 277 35,139,596.18 28.89
A-MO*............................... 1 247,406.82 0.20
B................................... 205 24,206,508.85 19.90
C................................... 112 12,219,264.33 10.05
C-.................................. 46 4,859,165.92 4.00
C-HS**.............................. 21 1,911,929.33 1.57
Credit Score Program................ 32 4,971,628.92 4.09
----- --------------- ------
Total.......................... 1,007 $121,628,462.73 100.00%
===== =============== ======
- -------------------------
* Underwritten pursuant to the Mortgage Credit Only program.
** Underwritten pursuant to the Home Saver program.
NEXT ADJUSTMENT DATES FOR THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MONTH OF NEXT ADJUSTMENT DATE OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ----------------------------- ----------------- ---------------- ----------------
October 2002....................... 2 $ 293,203.52 0.24%
November 2002...................... 7 1,005,554.26 0.83
December 2002...................... 46 4,958,301.72 4.08
January 2003....................... 668 82,083,318.47 67.49
October 2003....................... 2 182,060.29 0.15
November 2003...................... 5 458,520.75 0.38
December 2003...................... 17 2,149,178.27 1.77
January 2004....................... 260 30,498,325.45 25.07
----- --------------- ------
Total.................... 1,007 $121,628,462.73 100.00%
===== =============== ======
S-22
INITIAL PERIODIC RATE CAPS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL PERIODIC RATE CAP (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ----------------------------- ----------------- ---------------- ----------------
1.000............................... 6 $ 596,889.58 0.49%
1.500............................... 1,000 120,855,713.64 99.36
2.000............................... 1 175,859.51 0.14
----- --------------- ------
Total.......................... 1,007 $121,628,462.73 100.00%
===== =============== ======
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP I
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
SUBSEQUENT PERIODIC RATE CAP (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- -------------------------------- ----------------- ---------------- ----------------
1.000.................................. 8 $ 856,595.27 0.70%
1.500.................................. 999 120,771,867.46 99.30
----- --------------- ------
Total............................. 1,007 $121,628,462.73 100.00%
===== =============== ======
THE GROUP II MORTGAGE LOANS
The Group II Mortgage Loans consist of approximately 127 Mortgage Loans and
have an aggregate principal balance as of the Cut-off Date of approximately
$44,965,039.
The average principal balance of the Group II Mortgage Loans at origination
was approximately $354,215. No Group II Mortgage Loan had a principal balance at
origination greater than approximately $600,000 or less than approximately
$276,000. The average principal balance of the Group II Mortgage Loans as of the
Cut-off Date was approximately $354,055. No Group II Mortgage Loan had a
principal balance as of the Cut-off Date greater than approximately $599,761 or
less than approximately $275,878.
The Group II Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 7.35% per annum to approximately 14.25% per annum,
and the weighted average Mortgage Rate was approximately 10.17% per annum. As of
the Cut-off Date, the Group II Mortgage Loans had Gross Margins ranging from
approximately 4.50% to approximately 9.75%, Minimum Mortgage Rates ranging from
approximately 7.35% per annum to approximately 14.25% per annum and Maximum
Mortgage Rates ranging from approximately 14.35% per annum to approximately
21.25% per annum. As of the Cut-off Date, the weighted average Gross Margin was
approximately 6.27%, the weighted average Minimum Mortgage Rate was
approximately 10.17% per annum and the weighted average Maximum Mortgage Rate
was approximately 17.17% per annum. The latest first Adjustment Date following
the Cut-off Date on any Group II Mortgage Loan occurs in January 2004 and the
weighted average next Adjustment Date for all of the Group II Mortgage Loans
following the Cut-off Date is March 2003.
The weighted average current loan-to-value ratio of the Group II Mortgage
Loans at origination was approximately 78.10%. At origination, no Group II
Mortgage Loan had a loan-to-value ratio greater than approximately 90.00% or
less than approximately 47.17%.
The weighted average remaining term to stated maturity of the Group II
Mortgage Loans was approximately 29 years and 10 months as of the Cut-off Date.
None of the Group II Mortgage Loans will have a first due date prior to
S-23
January 2001 or after February 2001, or will have a remaining term to stated
maturity of less than 29 years and 9 months or greater than 30 years as of the
Cut-off Date. The latest maturity date of any Group II Mortgage Loan is January
2031.
The Group II Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
AT ORIGINATION ($) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------------ ----------------- ---------------- ----------------
275,000.01 - 300,000.00..... 33 $ 9,466,212.00 21.04%
300,000.01 - 350,000.00..... 34 10,965,565.00 24.38
350,000.01 - 400,000.00..... 35 13,140,748.00 29.21
400,000.01 - 450,000.00..... 14 5,995,100.00 13.33
450,000.01 - 500,000.00..... 9 4,293,450.00 9.54
500,000.01 - 550,000.00..... 1 524,250.00 1.17
550,000.01 - 600,000.00..... 1 600,000.00 1.33
--- -------------- ------
TOTAL.......................... 127 $44,985,325.00 100.00%
=== ============== ======
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE AS OF NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
THE CUT-OFF DATE ($) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ----------------------- ----------------- ---------------- ----------------
275,000.01 - 300,000.00..... 33 $ 9,461,804.77 21.04%
300,000.01 - 350,000.00..... 34 10,960,656.22 24.38
350,000.01 - 400,000.00..... 35 13,134,814.89 29.21
400,000.01 - 450,000.00..... 14 5,992,239.26 13.33
450,000.01 - 500,000.00..... 9 4,291,701.78 9.54
500,000.01 - 550,000.00..... 1 524,061.02 1.17
550,000.01 - 600,000.00..... 1 599,761.00 1.33
--- -------------- ------
TOTAL.......................... 127 $44,965,038.94 100.00%
=== ============== ======
S-24
MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ----------------- ----------------- ---------------- ----------------
7.001 - 7.500............... 1 $ 289,778.23 0.64%
7.501 - 8.000............... 1 279,696.67 0.62
8.001 - 8.500............... 4 1,349,111.64 3.00
8.501 - 9.000............... 18 6,190,481.61 13.77
9.001 - 9.500............... 15 5,127,345.31 11.40
9.501 - 10.000............... 26 9,411,971.79 20.93
10.001 - 10.500............... 15 5,612,791.06 12.48
10.501 - 11.000............... 30 10,859,603.03 24.15
11.001 - 11.500............... 7 2,249,066.63 5.00
11.501 - 12.000............... 7 2,323,416.65 5.17
12.001 - 12.500............... 1 366,950.00 0.82
13.001 - 13.500............... 1 449,904.52 1.00
14.001 - 14.500............... 1 454,921.80 1.01
--- -------------- ------
Total....................... 127 $44,965,038.94 100.00%
=== ============== ======
GROSS MARGINS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ---------------- ----------------- ---------------- ----------------
4.001 - 4.500................ 3 $ 1,059,380.86 2.36%
4.501 - 5.000................ 3 1,050,679.97 2.34
5.001 - 5.500................ 1 292,333.44 0.65
5.501 - 6.000................ 53 18,835,347.19 41.89
6.001 - 6.500................ 44 15,403,622.17 34.26
6.501 - 7.000................ 22 7,877,425.31 17.52
9.501 - 10.000................ 1 446,250.00 0.99
--- -------------- ------
Total....................... 127 $44,965,038.94 100.00%
=== ============== ======
S-25
MAXIMUM MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM MORTGAGE RATE (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------------------- ----------------- ---------------- ----------------
14.001- 15.000............... 2 $ 569,474.90 1.27%
15.001- 16.000............... 22 7,539,593.25 16.77
16.001- 17.000............... 41 14,539,317.10 32.33
17.001- 18.000............... 45 16,472,394.09 36.63
18.001- 19.000............... 14 4,572,483.28 10.17
19.001- 20.000............... 1 366,950.00 0.82
20.001- 21.000............... 1 449,904.52 1.00
21.001- 22.000............... 1 454,921.80 1.01
--- -------------- ------
Total....................... 127 $44,965,038.94 100.00%
=== ============== ======
MINIMUM MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM MORTGAGE RATE (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------------------- ----------------- ---------------- ----------------
7.001 - 8.000............... 2 $ 569,474.90 1.27%
8.001 - 9.000............... 22 7,539,593.25 16.77
9.001 - 10.000............... 41 14,539,317.10 32.33
10.001 - 11.000............... 45 16,472,394.09 36.63
11.001 - 12.000............... 14 4,572,483.28 10.17
12.001 - 13.000............... 1 366,950.00 0.82
13.001 - 14.000............... 1 449,904.52 1.00
14.001 - 15.000............... 1 454,921.80 1.01
--- -------------- ------
Total....................... 127 $44,965,038.94 100.00%
=== ============== ======
S-26
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL LOAN-TO-VALUE RATIO (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- -------------------------------- ----------------- ---------------- ----------------
45.001- 50.000............... 1 $ 399,849.40 0.89%
50.001- 55.000............... 2 731,748.87 1.63
55.001- 60.000............... 4 1,286,336.36 2.86
60.001- 65.000............... 6 2,227,573.28 4.95
65.001- 70.000............... 13 4,969,108.02 11.05
70.001- 75.000............... 19 6,882,453.25 15.31
75.001- 80.000............... 39 13,597,954.51 30.24
80.001- 85.000............... 25 8,621,269.03 19.17
85.001- 90.000............... 18 6,248,746.22 13.90
--- -------------- ------
Total....................... 127 $44,965,038.94 100.00%
=== ============== ======
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- -------- ----------------- ---------------- ----------------
ALABAMA............................. 1 $ 320,233.34 0.71%
ARIZONA............................. 3 1,064,486.83 2.37
CALIFORNIA.......................... 92 32,382,945.08 72.02
COLORADO............................ 2 685,309.99 1.52
CONNECTICUT......................... 1 349,618.03 0.78
FLORIDA............................. 4 1,651,931.18 3.67
GEORGIA............................. 1 276,170.78 0.61
ILLINOIS............................ 3 991,146.56 2.20
IOWA................................ 1 331,836.49 0.74
MARYLAND............................ 3 1,094,356.07 2.43
MASSACHUSETTS....................... 4 1,423,800.03 3.17
MINNESOTA........................... 2 613,356.54 1.36
MISSOURI............................ 1 279,762.32 0.62
NEVADA.............................. 4 1,444,787.06 3.21
NEW JERSEY.......................... 1 599,761.00 1.33
TEXAS............................... 1 355,833.91 0.79
VIRGINIA............................ 2 770,808.87 1.71
WASHINGTON.......................... 1 328,894.86 0.73
--- -------------- ------
TOTAL............................... 127 $44,965,038.94 100.00%
=== ============== ======
S-27
MORTGAGED PROPERTY TYPES OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------- ----------------- ---------------- ----------------
Single Family....................... 104 $36,580,690.85 81.35%
Planned Unit Development............ 20 7,097,446.92 15.79
Condominium......................... 2 887,051.77 1.97
Two- to Four-Family................. 1 399,849.40 0.89
--- -------------- ------
Total.......................... 127 $44,965,038.94 100.00%
=== ============== ======
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ---------------- ----------------- ---------------- ----------------
Primary............................. 126 $44,565,189.54 99.11%
Investment.......................... 1 399,849.40 0.89
--- -------------- ------
Total.......................... 127 $44,965,038.94 100.00%
=== ============== ======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
LOAN PURPOSE OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------ ----------------- ---------------- ----------------
Equity-out Refinance................ 77 $27,342,476.69 60.81%
Purchase............................ 34 11,961,675.30 26.60
Rate-term Refinance................. 16 5,660,886.95 12.59
--- -------------- ------
Total.......................... 127 $44,965,038.94 100.00%
=== ============== ======
LOAN PROGRAMS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ------------ ----------------- ---------------- ----------------
Stated Income Documentation Program............. 60 $21,461,765.94 47.73%
Full Documentation Program...................... 46 15,667,288.96 34.84
Limited Documentation Program................... 21 7,835,984.04 17.43
--- -------------- ------
Total...................................... 127 $44,965,038.94 100.00%
=== ============== ======
S-28
RISK CATEGORIES OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- --------------- ----------------- ---------------- ----------------
A+.................................. 58 $20,563,001.85 45.73%
A-.................................. 38 13,536,977.78 30.11
B................................... 15 5,200,941.14 11.57
C................................... 6 2,149,958.10 4.78
C-.................................. 2 739,921.80 1.65
Credit Score Program................ 8 2,774,238.27 6.17
--- -------------- ------
Total.......................... 127 $44,965,038.94 100.00%
=== ============== ======
NEXT ADJUSTMENT DATES FOR THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MONTH OF NEXT ADJUSTMENT DATE OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ----------------------------- ----------------- ---------------- ----------------
December 2002....................... 3 $ 991,765.66 2.21%
January 2003........................ 102 36,271,076.08 80.67
December 2003....................... 1 399,680.86 0.89
January 2004........................ 21 7,302,516.34 16.24
--- -------------- ------
Total.................... 127 $44,965,038.94 100.00%
=== ============== ======
INITIAL PERIODIC RATE CAPS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL PERIODIC RATE CAP (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- ----------------------------- ----------------- ---------------- ----------------
1.500............................... 127 $44,965,038.94 100.00%
--- ------------- ------
Total.......................... 127 $44,965,038.94 100.00%
=== ============= ======
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE GROUP II
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
SUBSEQUENT PERIODIC RATE CAP (%) OF MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
- -------------------------------- ----------------- ---------------- ----------------
1.000.................................. 1 $ 377,793.10 0.84%
1.500.................................. 126 44,587,245.84 99.16
--- ------------- ------
Total............................. 127 $44,965,038.94 100.00%
=== ============= ======
S-29
THE INDEX
As of any Adjustment Date, the "Index" applicable to the determination of
the Mortgage Rate on each Mortgage Loan will generally be the average of the
interbank offered rates for six-month United States dollar deposits in the
London market as published in THE WALL STREET JOURNAL and as most recently
available either (i) as of the first business day 45 days prior to that
Adjustment Date or (ii) as of the first business day of the month preceding the
month of the Adjustment Date, as specified in the related mortgage note. In the
event that the Index becomes unavailable or otherwise unpublished, the Servicer
will select a comparable alternative index over which it has no direct control
and which is readily verifiable.
UNDERWRITING STANDARDS OF THE ORIGINATOR AND REPRESENTATIONS CONCERNING THE
MORTGAGE LOANS
The information set forth in this section with regard to the Originator's
underwriting standards has been provided to the Depositor or compiled from
information provided to the Depositor by the Originator. None of the Depositor,
the Trustee, the Trust Administrator, the Mortgage Loan Seller, the Underwriter
or any of their respective affiliates has made any independent investigation of
this information or has made or will make any representation as to the accuracy
or completeness of this information.
The Originator commenced receiving applications for mortgage loans under
its regular lending program in February 1996. Accordingly, the Originator,
whether as an originator or acquirer of mortgage loans, does not have
representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of examining the Originator's
performance in servicing mortgage loans similar to the Mortgage Loans.
The Mortgage Loans will be acquired on the Closing Date by the Depositor
from the Mortgage Loan Seller, who in turn will have acquired the Mortgage Loans
prior to the Closing Date from the Originator. All of the Mortgage Loans were
originated or acquired by the Originator in accordance with the underwriting
criteria described in this section.
The Originator's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of the property
as collateral for the mortgage loan. All of the Mortgage Loans were also
underwritten with a view toward the resale of the Mortgage Loans in the
secondary mortgage market. While the Originator's primary consideration in
underwriting a mortgage loan is the value of the mortgaged property, the
Originator also considers, among other things, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the mortgaged property. The Mortgage Loans generally bear higher mortgage
rates than mortgage loans that are originated in accordance with Fannie Mae and
Freddie Mac standards, which is likely to result in rates of delinquencies and
foreclosures that are higher, and that may be substantially higher, than those
experienced by portfolios of mortgage loans underwritten in a more traditional
manner.
As a result of the Originator's underwriting criteria, changes in the
values of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure and loss experience on the Mortgage Loans than such changes would be
expected to have on mortgage loans that are originated in a more traditional
manner. No assurance can be given that the values of the related Mortgaged
Properties have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans. In addition, there can be no
assurance that the value of a Mortgaged Property estimated in any appraisal or
review is equal to the actual value of that Mortgaged Property at the time of
that appraisal or review.
The Mortgage Loans will have been originated in accordance with the
Originator's underwriting guidelines (the "Underwriting Guidelines"). On a
case-by-case basis, exceptions to the Underwriting Guidelines are made where
compensating factors exist. It is expected that a substantial portion of the
Mortgage Loans will represent these exceptions.
Each applicant completes an application which includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Underwriting Guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to matters such as credit history with local and
national merchants and lenders, installment debt payments and any record of
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defaults, bankruptcies, repossessions or judgments. Mortgaged properties that
are to secure mortgage loans generally are appraised by qualified independent
appraisers. These appraisers inspect and appraise the subject property and
verify that the property is in acceptable condition. Following each appraisal,
the appraiser prepares a report which includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation and are generally on forms acceptable to Fannie Mae and
Freddie Mac. The Underwriting Guidelines require a review of the appraisal by a
qualified employee of the Originator or by an appraiser retained by the
Originator. If the appraised value of a mortgaged property as determined by a
review is more than 7% but less than 25% lower than the value as determined by
the appraisal, then the Originator uses the value as determined by the review in
computing the loan-to-value ratio of the related mortgage loan. If the appraised
value of a mortgaged property as determined by a review is 25% or more lower
than the value as determined by the appraisal, then the Originator obtains a new
appraisal and repeats the review process.
The Mortgage Loans were originated consistent with and generally conform to
the Underwriting Guidelines' "Full Documentation," "Limited Documentation" and
"Stated Income Documentation" residential loan programs. Under each of the
programs, the Originator reviews the applicant's source of income, calculates
the amount of income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the debt
service-to-income ratio to determine the applicant's ability to repay the loan,
reviews the type and use of the property being financed, and reviews the
property. In determining the ability of the applicant to repay the loan, a rate
(the "Qualifying Rate") has been created under the Underwriting Guidelines that
generally is equal to the interest rate on that loan. The Underwriting
Guidelines require that mortgage loans be underwritten in a standardized
procedure which complies with applicable federal and state laws and regulations
and requires the Originator's underwriters to be satisfied that the value of the
property being financed, as indicated by an appraisal and a review of the
appraisal, currently supports the outstanding loan balance. In general, the
maximum loan amount for mortgage loans originated under the programs is
$500,000. The Underwriting Guidelines generally permit loans on one- to
four-family residential properties to have a loan-to-value ratio ("LTV") at
origination of up to 90% with respect to first liens loans. The maximum LTV
depends on, among other things, the purpose of the mortgage loan, a mortgagor's
credit history, repayment ability and debt service-to-income ratio, as well as
the type and use of the property. With respect to Mortgage Loans secured by
mortgaged properties acquired by a mortgagor under a "lease option purchase,"
the LTV of the related mortgage loan is based on the lower of the appraised
value at the time of origination of the mortgage loan or the sale price of the
related mortgaged property if the "lease option purchase price" was set less
than 12 months prior to origination and is based on the appraised value at the
time of origination if the "lease option purchase price" was set 12 months or
more prior to origination.
The Underwriting Guidelines require that the income of each applicant for a
mortgage loan under the Full Documentation program be verified. The specific
income documentation required for the Originator's various programs is as
follows: under the Full Documentation program, applicants usually are required
to submit one written form of verification of stable income for at least 12
months; under the Limited Documentation program, applicants usually are required
to submit verification of stable income for at least 12 months, such as 12
consecutive months of complete personal checking account bank statements, and
under the Stated Income Documentation program, an applicant may be qualified
based upon monthly income as stated on the mortgage loan application if the
applicant meets certain criteria. All the foregoing programs require that, with
respect to salaried employees, there be a telephone verification of the
applicant's employment. Verification of the source of funds, if any, required to
be deposited by the applicant into escrow in the case of a purchase money loan
is required.
In evaluating the credit quality of borrowers, the Originator utilizes
credit bureau risk scores (each, a "FICO Score"), a statistical ranking of
likely future credit performance developed by Fair, Isaac & Company and the
three national credit data repositories--Equifax, TransUnion and Experian.
The Underwriting Guidelines have the following categories and criteria for
grading the potential likelihood that an applicant will satisfy the repayment
obligations of a mortgage loan:
S-31
"A+" RISK. Under the "A+" risk category, the applicant must have generally
repaid installment or revolving debt according to its terms or must have a FICO
score of 620 or higher. A maximum of one 30-day late payment and no 60-day late
payments within the last 12 months is acceptable on an existing mortgage loan.
An existing mortgage loan is required to be current at the time of funding. No
open collection accounts or open charge-offs may remain open after the funding
of the loan. No bankruptcy or notice of default filings may have occurred during
the preceding three years. The mortgaged property must be in at least average
condition. A maximum LTV of 90% (or 85% for mortgage loans originated under the
Stated Income Documentation program), is permitted for a mortgage loan on a
single family owner-occupied or two-unit property. A maximum LTV of 85% is
permitted for a mortgage loan on a non-owner occupied property, an
owner-occupied condominium or a three- to four-family residential property. The
maximum LTV for rural, remote or unique properties is 85%. The maximum combined
LTV, including any related subordinate lien, is 100% for either a refinance loan
or a purchase money loan. The debt service-to-income ratio is usually 45% unless
the LTV is reduced. Open non-medical collection accounts or charge-off accounts,
not affecting title, with balances under $500 may remain open.
"A-" RISK. Under the "A-" risk category, an applicant must have generally
repaid installment or revolving debt according to its terms or must have a FICO
score of 590 or higher. A maximum of three 30-day late payment and no 60-day
late payments within the last 12 months is acceptable on an existing mortgage
loan. An existing mortgage loan is required to be current at the time of funding
of the loan. Minor derogatory items are allowed as to non-mortgage credit.
Medical derogatories are not considered. Open collection accounts or open
charge-offs not affecting title with balances of less than $1,000 may remain
open after funding of the loan. No bankruptcy may have occurred during the
preceding two years. No notice of default filings may have occurred during the
preceding three years. The mortgaged property must be in at least average
condition. A maximum LTV of 90% (or 80% for mortgage loans originated under the
Stated Income Documentation program), is permitted for a mortgage loan on a
single family owner-occupied or two-unit property. A maximum LTV of 80% (or 70%
for mortgage loans originated under the Stated Income Documentation program), is
permitted for a mortgage loan on a non-owner-occupied property. A maximum LTV of
85% (or 75% for mortgage loans originated under the Stated Income Documentation
program), is permitted for a mortgage loan on an owner- occupied condominium or
a three- to four-family residential property. The maximum LTV for rural, remote,
or unique properties is 80%. The maximum combined LTV, including any related
subordinate lien, is 100% for a refinance loan and 100% for a purchase money
loan. The debt service-to-income ratio is usually 50% unless the LTV is reduced.
"B" RISK. Under the "B" risk category, an applicant may have experienced
isolated credit problems, but should have generally repaid installment or
revolving debt according to its terms or must have a FICO score of 570 or
higher. Unlimited 30-day late payments and a maximum of one 90-day late payment
within the last 12 months is acceptable on an existing mortgage loan. An
existing mortgage loan must be less than 90 days late at the time of funding of
the loan. As to non-mortgage credit, some prior defaults may have occurred.
Medical derogatories are not considered. In most cases, open charge-offs or
collection accounts with balances of less than $2,500 may remain open after the
funding of the loan. No bankruptcy within the past 18 months or notice of
default filings within the last two years by the applicant may have occurred.
The mortgaged property must be in at least average condition. A maximum LTV of
80% (or 75% for mortgage loans originated under the Stated Income Documentation
program), is permitted for a mortgage loan on an owner-occupied detached
property originated under the Full Documentation program. A maximum LTV of 75%
is permitted for a mortgage loan on a non-owner-occupied property, an
owner-occupied condominium or a three- to four-family residential property (65%
for a mortgage loan on a non-owner occupied property and 70% for a mortgage loan
on an owner-occupied condominium or a three- to four-family residential property
originated under the Stated Income Documentation program). The maximum LTV for
rural, remote or unique properties is 70%. The maximum combined LTV, including
any related subordinate lien, is 100% for a refinance loan and for a purchase
money loan. The debt service-to-income ratio is usually 55% or less.
"C" RISK. Under the "C" risk category, an applicant may have experienced
significant credit problems in the past. Unlimited 30-day and 60-day late
payments and a maximum of one 90-day late payment within the last 12 months is
acceptable on an existing mortgage loan. An existing mortgage loan must be less
than 120 days late at the time of funding of the loan. As to non-mortgage
credit, significant prior defaults may have occurred. Open charge-offs or
collection accounts with balances of less than $5,000 may remain open after the
funding of the loan. No bankruptcy or notice of default filings by the applicant
may have occurred during the preceding 12 months. The mortgaged
S-32
property must be in average condition. In most cases, a maximum LTV of 75% for a
mortgage loan on a single family, owner-occupied or two-unit property for a full
documentation program (70% for mortgage loans originated under the Stated Income
Documentation program), is permitted. A maximum LTV of 70% is permitted for a
mortgage loan on a non-owner-occupied property, an owner-occupied condominium or
a three- to-four family residential property (60% for a mortgage loan on a
non-owner-occupied property and 65% for a mortgage loan on an owner-occupied
condominium or a three- to four-family residential property originated under the
Stated Income Documentation program). Rural, remote or unique properties are not
allowed. The maximum combined LTV, including any related subordinate lien, is
85% for a refinance loan and for a purchase money loan. The debt
service-to-income ratio is usually 59% or less.
"C-" RISK. Under the "C-" risk category, an applicant may have experienced
significant credit problems in the past. A maximum of two 90-day late payments
and one 120-day late payment is acceptable on an existing mortgage loan. An
existing mortgage loan must be less than 150 days late at the time of funding of
the loan. As to non-mortgage credit, significant prior defaults may have
occurred. Open charge-offs or collection accounts with balances may remain open
after the funding of the loan. There may be no current notice of default and any
bankruptcy must be discharged. The mortgaged property may exhibit some deferred
maintenance. A maximum LTV of 70% (55% for mortgage loans originated under the
Stated Income Documentation program), is permitted for a mortgage loan on a
single family owner-occupied or two-unit property. A maximum LTV of 65% is
permitted for a mortgage loan on a non-owner occupied property, an
owner-occupied condominium or a three- to four-family residential property (45%
for a mortgage loan on a non-owner-occupied property and 50% for a mortgage loan
on an owner-occupied condominium or a three- to four-family residential property
originated under the Stated Income Documentation program). Rural, remote or
unique properties are not allowed. The maximum combined LTV, including any
related subordinate lien, is 85% for a refinance loan and 80% for a purchase
money loan. The debt service-to-income ratio is usually 59% or less.
MORTGAGE CREDIT ONLY ("MO") A+ RISK. Under the MO "A+" risk category, the
applicant is allowed a maximum of two 30-day late payments and no 60-day late
payments within the last 12 months on an existing mortgage loan. An existing
mortgage loan is required to be current at the time of funding. No bankruptcy
within the past two years or notice of default filings may have occurred. The
mortgaged property must be in at least average condition. A maximum LTV of 80%
for mortgage loans originated under the Full Documentation program is permitted
for a mortgage loan on a single family owner-occupied or two-unit property. MO
"A+" loans are not made available under the Stated Income Documentation program.
A maximum LTV of 75% is permitted for a mortgage loan on a non-owner occupied
property, owner-occupied condominium, or three- to four-family residential
property. The MO "A+" program is not available for rural, remote or unique
properties. The maximum combined LTV, including any related subordinate lien, is
100% for a refinance loan. The debt service-to-income ratio is generally equal
to or less than 50%. The maximum loan amount is $300,000.
MORTGAGE CREDIT ONLY ("MO") A- RISK. The MO "A-" risk category allows for
three 30-day late payments and no 60-day late payments within the last 12 months
on an existing mortgage loan. An existing mortgage loan is not required to be
current at the time the application is submitted. Derogatory items are allowed
as to non-mortgage credit. No bankruptcy or notice of default filings may have
occurred during the preceding two years. The mortgaged property must be in at
least average condition. A maximum LTV of 75% for mortgage loans originated
under the Full Documentation program is permitted for a mortgage loan on a
single family owner-occupied or two-unit property. MO "A-" loans are not made
available under the Stated Income Documentation program. A maximum LTV of 70% is
permitted for a mortgage loan on a non-owner occupied property, owner-occupied
condominium, or three- to four-family residential property. The MO "A-" program
is not available for rural, remote or unique properties. The maximum combined
LTV, including any related subordinate lien, is 90% for a refinance loan. The
debt service-to-income ratio is generally equal to or less than 55%. The maximum
loan amount is $250,000.
HOME SAVER PROGRAM. The Originator originates loans under a program called
"Home Saver" to enable borrowers with an existing delinquent loan to preserve
their home ownership. The existing loan may be over 90 days delinquent, but any
bankruptcy proceeding must be dismissed before the loan is funded. The LTV may
not exceed 65%. Home Saver loans are not made available under the Stated Income
Documentation program. A maximum LTV of 60% is permitted for a mortgage loan on
a non-owner occupied property, owner-occupied condominium or a three- to
four-family residential property. The Home Saver program is not available for
rural, remote or unique properties. The
S-33
maximum combined LTV, including any related subordinate lien, is 80% for a
refinance loan. The maximum loan amount is $300,000.
CREDIT SCORE PROGRAM. Under the "Credit Score Program" for full
documentation loans, the credit risk grade is determined by the primary
borrower's credit score. Loans with a minimum score of 630 and one 30-day
mortgage late payments can have a maximum LTV of 90%. Loans with a minimum score
of 600 and three 30-day mortgage late payments can have a maximum LTV of 85%.
Loans with a minimum score of 580 with unlimited 30-day and one 60-day mortgage
late and less than 90 days at funding can have a maximum LTV of 80%. Loans with
a minimum score of 560 with unlimited 30-day and 60-day but no more than one
90-day mortgage late and less than 120 days at funding can have a maximum LTV of
75%. Loans with a minimum score of 540 with unlimited 30-day and 60-day but no
more than two 90-day and one 120-day mortgage late and less than 150 days at
funding can have a maximum LTV of 70%. The maximum LTV is reduced by 5% for
condominiums, Full Documentation program non-owner occupied properties or Stated
Income Documentation loans. Loans for non-owner occupied stated income, 3-4 unit
properties, manufactured housing, unique properties or properties located in
rural or remote areas are not allowed. No loan, regardless of credit score,
could have had a foreclosure or bankruptcy within the last 2 years. All other
derogatory credit is factored into the credit score and is not evaluated
individually. The maximum debt service-to-income ratio for loans with LTVs
greater than or equal to 85% is 50%. The maximum debt service-to-income ratio
for loans with LTVs less than 85% but greater than 70% is 55%. The maximum debt
service-to-income ratio for loans with LTVs less than or equal 70% is 59%. The
maximum loan amount for this program is $500,000.
EXCEPTIONS. As described above, the foregoing categories and criteria are
guidelines only. On a case-by-case basis, it may be determined that an applicant
warrants a debt service-to-income ratio exception, a pricing exception, an LTV
exception, an exception from certain requirements of a particular risk category,
etc. An exception may be allowed if the application reflects compensating
factors, such as: low LTV; pride of ownership; a maximum of one 30-day late
payment on all mortgage loans during the last 12 months; and stable employment
or ownership of current residence of four or more years. An exception may also
be allowed if the applicant places a down payment through escrow of at least 20%
of the purchase price of the mortgaged property or if the new loan reduces the
applicant's monthly aggregate mortgage payment by 25% or more. Accordingly, a
mortgagor may qualify in a more favorable risk category that, in the absence of
compensating factors, would satisfy only the criteria of a less favorable risk
category. It is expected that a substantial portion of the Mortgage Loans will
represent these kinds of exceptions.
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
The description in this prospectus supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted as of the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems the removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
certificates unless including these mortgage loans would materially alter the
characteristics of the Mortgage Pool as described in this prospectus supplement.
The Depositor believes that the information set forth in this prospectus
supplement will be representative of the characteristics of the Mortgage Pool as
it will be constituted at the time the certificates are issued, although the
range of Mortgage Rates and maturities and other characteristics of the Mortgage
Loans may vary.
YIELD ON THE CERTIFICATES
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of the prepayment for the month
in which the prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), to any
Mortgage Loan will adversely affect,
S-34
for an indeterminate period of time, the ability of the Servicer to collect full
amounts of interest on such Mortgage Loans. The Servicer is obligated to pay
from its own funds only those interest shortfalls attributable to full
prepayments by the mortgagors on the Mortgage Loans, but only to the extent of
one-half of its Servicing Fee for the related Due Period. Accordingly, the
effect of (i) any principal prepayments on the Mortgage Loans, to the extent
that any resulting shortfall (a "Prepayment Interest Shortfall") exceeds any
payments by the Servicer from its own funds ("Compensating Interest") or (ii)
any shortfalls resulting from the application of the Relief Act, will be to
reduce the aggregate amount of interest collected that is available for
distribution to certificateholders. Any such shortfalls will be allocated among
the certificates as provided under "Description of the Certificates--Interest
Distributions on the Offered Certificates" and "--Overcollateralization
Provisions" in this prospectus supplement. See "Certain Legal Aspects of the
Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in the
prospectus.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans as they change from time to time to accommodate changes in the Mortgage
Rates and by the rate of principal prepayments thereon (including for this
purpose, payments resulting from refinancings, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases, whether
optional or required, by the Depositor, the Originator or the Servicer). The
Mortgage Loans may be prepaid by the mortgagors at any time; however, as
described under "The Mortgage Pool" in this prospectus supplement, with respect
to approximately 90.91% of the Mortgage Loans, by aggregate principal balance of
the Mortgage Loans as of the Cut-off Date, a prepayment may subject the related
mortgagor to a Prepayment Charge.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in distributions in respect of principal to the holders of the class or classes
of Offered Certificates then entitled to receive distributions that otherwise
would be distributed over the remaining terms of the Mortgage Loans. Since the
rates of payment of principal on the Mortgage Loans will depend on future events
and a variety of factors, no assurance can be given as to that rate or the rate
of principal prepayments. The extent to which the yield to maturity of any class
of Offered Certificates may vary from the anticipated yield will depend upon the
degree to which the Offered Certificates are purchased at a discount or premium
and the degree to which the timing of payments thereon is sensitive to
prepayments on the Mortgage Loans. Further, an investor should consider, in the
case of any Offered Certificate purchased at a discount, the risk that a slower
than anticipated rate of principal payments on the Mortgage Loans could result
in an actual yield to the investor that is lower than the anticipated yield. In
the case of any such certificate purchased at a premium, the risk that a faster
than anticipated rate of principal payments could result in an actual yield to
the investor that is lower than the anticipated yield. In general, the earlier a
prepayment of principal is made on the Mortgage Loans, the greater the effect on
the yield to maturity of the Offered Certificates. As a result, the effect on an
investor's yield of principal payments occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Class A Certificates and the Mezzanine
Certificates would not be fully offset by a subsequent like reduction or
increase in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the yield to maturity on the Offered Certificates, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation.
The rate of payments (including prepayments), on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment and refinancing would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. The prepayment experience of the Delayed First Adjustment Mortgage
Loans may differ from that of the other Mortgage Loans. The Delayed First
Adjustment Mortgage Loans may be subject to greater
S-35
rates of prepayments as they approach their initial Adjustment Dates even if
market interest rates are only slightly higher or lower than the Mortgage Rates
on the Delayed First Adjustment Mortgage Loans as borrowers seek to avoid
changes in their monthly payments. In addition, the existence of the applicable
Periodic Rate Cap, Maximum Mortgage Rate and Minimum Mortgage Rate may affect
the likelihood of prepayments resulting from refinancings. There can be no
certainty as to the rate of prepayments on the Mortgage Loans during any period
or over the life of the certificates. See "Yield Considerations" in the
prospectus.
Because principal distributions are paid to certain classes of Offered
Certificates before other classes, holders of classes of Offered Certificates
having a later priority of payment bear a greater risk of losses than holders of
classes having earlier priorities for distribution of principal. This is because
the certificates having later priority will represent an increasing percentage
interest in the trust fund during the period prior to the commencement of
distributions of principal on these certificates. As described under
"Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement, prior to the Stepdown Date, all
principal payments on the Mortgage Loans will be allocated to the Class A
Certificates. Thereafter, as further described in this prospectus supplement,
during certain periods, subject to certain delinquency triggers described in
this prospectus supplement, all principal payments on the Mortgage Loans will be
allocated among all classes of Offered Certificates in the priorities described
under "Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates may be higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a Mortgage Loan, there can be no assurance that recourse
will be available beyond the specific Mortgaged Property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards of the Originator and
Representations Concerning the Mortgage Loans" in this prospectus supplement.
SPECIAL YIELD CONSIDERATIONS
The Mortgage Rates on the Mortgage Loans adjust semi-annually based upon
the Index, whereas the Pass-Through Rate on the Offered Certificates adjusts
monthly based upon One-Month LIBOR determined as described under "Description of
the Certificates--Calculation of One-Month LIBOR" in this prospectus supplement,
subject to the Net WAC Pass-Through Rate, with the result that increases in the
Pass-Through Rates on such certificates may be limited for extended periods in a
rising interest rate environment. Investors should note that all of the Mortgage
Loans are Delayed First Adjustment Mortgage Loans. The interest due on the
Mortgage Loans during any Due Period, net of the expenses of the trust, may not
equal the amount of interest that would accrue at One-Month LIBOR plus the
applicable spread on the Offered Certificates during the related Interest
Accrual Period; however, any shortfall of this kind will be payable to the
holders of such certificates as limited by the Maximum Pass-Through Rate, but
only to the extent and in the priority described under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
In addition, the Index and One-Month LIBOR may respond differently to economic
and market factors. Thus, it is possible, for example, that if both One-Month
LIBOR and the Index rise during the same period, One-Month LIBOR may rise more
rapidly than the Index, potentially resulting in the application of the Net WAC
Pass- Through Rate on the Offered Certificates, which would adversely affect the
yield to maturity on such certificates.
As described under "Description of the Certificates--Allocation of Losses;
Subordination," amounts otherwise distributable to holders of the Mezzanine
Certificates may be made available to protect the holders of the Class A
Certificates against interruptions in distributions due to certain mortgagor
delinquencies, to the extent not covered by P&I Advances. Such delinquencies may
affect the yield to investors in the Mezzanine Certificates and, even if
subsequently cured, will affect the timing of the receipt of distributions by
the holders of the Mezzanine Certificates. In addition, the rate of
delinquencies or losses will affect the rate of principal payments on the
Mezzanine Certificates. See "Description of the Certificates--Principal
Distributions on the Offered Certificates" in this prospectus supplement.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of that
security will be repaid to the investor. The weighted average life of each class
of
S-36
Offered Certificates will be influenced by the rate at which principal on the
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including repurchases and prepayments of principal by the borrower
as well as amounts received by virtue of condemnation, insurance or foreclosure
with respect to the Mortgage Loans), and the timing of these payments.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement (the
"Prepayment Assumption") assumes a prepayment rate for the mortgage loans of 28%
CPR. To assume 28% CPR or any other CPR percentage is to assume that the stated
percentage of the outstanding principal balance of the pool is prepaid over the
course of a year. No representation is made that the Mortgage Loans will prepay
at 28% CPR or any other rate.
The tables entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Specified Percentages of CPR" indicate the percentage of the
initial Certificate Principal Balance of the Class A Certificates and the
Mezzanine Certificates that would be outstanding after each of the dates shown
at various percentages of CPR and the corresponding weighted average lives of
these certificates. The tables are based on the following assumptions (the
"Modeling Assumptions"): (i) the Mortgage Pool consists of 21 mortgage loans
with the characteristics set forth below; (ii) distributions on the certificates
are received, in cash, on the 25th day of each month, commencing in April 2001;
(iii) the Mortgage Loans prepay at the percentages of CPR indicated; (iv) no
defaults or delinquencies occur in the payment by mortgagors of principal and
interest on the Mortgage Loans and no shortfalls due to the application of the
Relief Act are incurred; (v) none of the Depositor, the Servicer or any other
person purchases from the trust fund any Mortgage Loan under any obligation or
option under the Pooling and Servicing Agreement, except as indicated in
footnote two in the tables; (vi) scheduled monthly payments on the Mortgage
Loans are received on the first day of each month commencing in April 2001, and
are computed prior to giving effect to any prepayments received in the prior
month; (vii) prepayments representing payment in full of individual Mortgage
Loans are received on the last day of each month commencing in March 2001, and
include 30 days' interest thereon; (viii) the scheduled monthly payment for each
Mortgage Loan is calculated based on its principal balance, Mortgage Rate,
original term to stated maturity and remaining term to stated maturity so that
the Mortgage Loan will amortize in amounts sufficient to repay the remaining
principal balance of the Mortgage Loan by its remaining term to stated maturity;
(ix) the certificates are purchased on March 22, 2001; (x) the Servicing Fee
Rate is equal to 0.50% per annum and the rate at which fees and expenses are
payable to the Trust Administrator and the Trustee is equal to 0.0125% per
annum; (xi) the Index remains constant at 4.72375% per annum and the Mortgage
Rate on each Mortgage Loan is adjusted on the next Adjustment Date and on
subsequent Adjustment Dates, if necessary, to equal the Index plus the
applicable Gross Margin, subject to the applicable Periodic Rate Cap; (xii)
One-Month LIBOR remains constant at 5.0075% per annum; (xiii) the monthly
payment on each Mortgage Loan is adjusted on the Due Date immediately following
the next Adjustment Date and on subsequent Adjustment Dates, if necessary, to
equal a fully amortizing monthly payment.
S-37
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL REMAINING INITIAL
PRINCIPAL BALANCE TERM AMORTIZATION MONTHS TO MAXIMUM MINIMUM PERIODIC
AS OF THE MORTGAGE TO MATURITY TERM NEXT GROSS MORTGAGE MORTGAGE RATE
CUT OFF DATE RATE(%) (MONTHS) (MONTHS) ADJUSTMENT MARGIN(%) RATE(%) RATE(%) CAP(%)
------------ ------- -------- -------- ---------- --------- ------- ------- ------
GROUP I MORTGAGE LOANS:
$ 6,364,263.43 11.336% 360 359 22 6.207% 18.317% 11.336% 1.491%
$ 306,943.11 10.901% 360 357 21 6.474% 17.901% 10.901% 1.500%
$ 144,399.77 11.490% 360 357 20 6.500% 18.490% 11.490% 1.500%
$ 2,608,799.03 11.789% 360 359 34 6.558% 18.728% 11.789% 1.469%
$ 189,777.97 11.500% 360 358 33 6.450% 17.500% 11.500% 1.000%
$ 67,860.97 9.990% 360 355 32 6.750% 16.990% 9.990% 1.500%
$ 75,719,055.04 10.532% 360 358 22 6.343% 17.532% 10.532% 1.500%
$ 4,651,358.61 11.122% 358 355 21 6.612% 18.085% 11.122% 1.512%
$ 861,154.49 10.223% 360 356 20 6.188% 17.223% 10.223% 1.500%
$ 293,203.52 11.322% 360 356 19 5.933% 18.322% 11.322% 1.500%
$ 27,889,526.42 10.619% 360 359 34 6.461% 17.619% 10.619% 1.500%
$ 1,959,400.30 10.416% 355 353 33 6.491% 17.416% 10.416% 1.500%
$ 390,659.78 12.562% 272 269 32 6.568% 19.562% 12.562% 1.500%
$ 182,060.29 10.095% 360 356 31 6.338% 17.095% 10.095% 1.500%
GROUP II MORTGAGE LOANS:
$ 4,034,213.02 10.587% 360 359 22 6.015% 17.587% 10.587% 1.500%
$ 350,748.53 11.000% 360 358 21 6.000% 18.000% 11.000% 1.500%
$ 1,081,622.64 10.712% 360 359 34 6.193% 17.712% 10.712% 1.500%
$ 32,236,863.06 10.108% 360 359 22 6.307% 17.108% 10.108% 1.500%
$ 641,017.13 10.745% 360 357 21 6.614% 17.745% 10.745% 1.500%
$ 6,220,893.70 10.019% 360 359 34 6.249% 17.019% 10.019% 1.500%
$ 399,680.86 10.650% 360 358 33 6.450% 17.650% 10.650% 1.500%
SUBSEQUENT
PRINCIPAL BALANCE PERIODIC ADJUSTMENT
AS OF THE RATE FREQUENCY
CUT OFF DATE CAP(%) (MONTHS)
------------ ------ --------
GROUP I MORTGAGE LOANS:
$ 6,364,263.43 1.491% 6
$ 306,943.11 1.500% 6
$ 144,399.77 1.500% 6
$ 2,608,799.03 1.469% 6
$ 189,777.97 1.000% 6
$ 67,860.97 1.500% 6
$ 75,719,055.04 1.500% 6
$ 4,651,358.61 1.474% 6
$ 861,154.49 1.500% 6
$ 293,203.52 1.500% 6
$ 27,889,526.42 1.500% 6
$ 1,959,400.30 1.500% 6
$ 390,659.78 1.500% 6
$ 182,060.29 1.270% 6
GROUP II MORTGAGE LOANS:
$ 4,034,213.02 1.500% 6
$ 350,748.53 1.500% 6
$ 1,081,622.64 1.500% 6
$ 32,236,863.06 1.494% 6
$ 641,017.13 1.500% 6
$ 6,220,893.70 1.500% 6
$ 399,680.86 1.500% 6
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables. Any
discrepancy may have an effect upon the percentages of the initial Certificate
Principal Balance outstanding, and the weighted average lives, of the Offered
Certificates set forth in the tables. In addition, since the actual Mortgage
Loans will have characteristics that differ from those assumed in preparing the
tables and since it is not likely the level of the Index or One-Month LIBOR will
remain constant as assumed, the Offered Certificates may mature earlier or later
than indicated by the tables. In addition, as described under "Description of
the Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement, the occurrence of the Stepdown Date or a Trigger Event
will have the effect of accelerating or decelerating the amortization of the
Offered Certificates, affecting the weighted average lives of such certificates.
Based on the foregoing assumptions, the tables indicate the weighted average
lives of the Class A Certificates and each class of Mezzanine Certificates and
set forth the percentages of the initial Certificate Principal Balance of such
certificates that would be outstanding after each of the Distribution Dates
shown, at various percentages of CPR. Neither the prepayment model used in this
prospectus supplement nor any other prepayment model or assumption purports to
be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. Variations in the prepayment experience and the balance of the
Mortgage Loans that prepay may increase or decrease the percentages of initial
Certificate Principal Balances, and weighted average lives, shown in the
following tables. These variations may occur even if the average prepayment
experience of all the Mortgage Loans equals any of the specified percentages of
CPR.
S-38
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS A-1
---------
DISTRIBUTION DATE 0% 15% 28% 35% 45%
- ----------------- -- --- --- --- ---
Initial Percentage..................... 100% 100% 100% 100% 100%
March 25, 2002......................... 99 82 66 58 46
March 25, 2003......................... 99 66 42 30 16
March 25, 2004......................... 98 53 24 13 0
March 25, 2005......................... 97 41 21 13 0
March 25, 2006......................... 96 35 15 9 0
March 25, 2007......................... 96 29 11 6 0
March 25, 2008......................... 95 25 8 4 0
March 25, 2009......................... 93 21 6 2 0
March 25, 2010......................... 92 17 4 2 0
March 25, 2011......................... 91 15 3 1 0
March 25, 2012......................... 89 12 2 * 0
March 25, 2013......................... 87 10 1 * 0
March 25, 2014......................... 85 9 1 0 0
March 25, 2015......................... 83 7 * 0 0
March 25, 2016......................... 80 6 * 0 0
March 25, 2017......................... 78 5 0 0 0
March 25, 2018......................... 74 4 0 0 0
March 25, 2019......................... 71 3 0 0 0
March 25, 2020......................... 67 3 0 0 0
March 25, 2021......................... 63 2 0 0 0
March 25, 2022......................... 58 2 0 0 0
March 25, 2023......................... 52 1 0 0 0
March 25, 2024......................... 46 1 0 0 0
March 25, 2025......................... 40 1 0 0 0
March 25, 2026......................... 34 * 0 0 0
March 25, 2027......................... 29 * 0 0 0
March 25, 2028......................... 22 0 0 0 0
March 25, 2029......................... 15 0 0 0 0
March 25, 2030......................... 7 0 0 0 0
March 25, 2031......................... 0 0 0 0 0
Weighted Average Life in Years(1)...... 20.92 5.03 2.58 1.90 1.12
Weighted Average Life in Years(1)(2)... 20.89 4.65 2.35 1.73 1.12
* Represents less than one-half of one percent.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related distribution date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the certificate.
(2) Assumes the Servicer exercises its option to purchase the mortgage loans on
the earliest possible distribution date on which it is permitted to
exercise this option. See "Pooling and Servicing Agreement--Termination" in
this prospectus supplement.
S-39
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS A-2
---------
DISTRIBUTION DATE 0% 15% 28% 35% 45%
- ----------------- -- --- --- --- ---
Initial Percentage..................... 100% 100% 100% 100% 100%
March 25, 2002......................... 99 81 66 58 46
March 25, 2003......................... 99 66 42 30 16
March 25, 2004......................... 98 52 24 12 0
March 25, 2005......................... 97 41 21 12 0
March 25, 2006......................... 96 34 15 9 0
March 25, 2007......................... 95 29 11 6 0
March 25, 2008......................... 94 24 8 4 0
March 25, 2009......................... 93 20 5 2 0
March 25, 2010......................... 92 17 4 1 0
March 25, 2011......................... 90 14 3 1 0
March 25, 2012......................... 89 12 2 * 0
March 25, 2013......................... 87 10 1 0 0
March 25, 2014......................... 85 8 1 0 0
March 25, 2015......................... 83 7 * 0 0
March 25, 2016......................... 80 6 0 0 0
March 25, 2017......................... 77 5 0 0 0
March 25, 2018......................... 74 4 0 0 0
March 25, 2019......................... 71 3 0 0 0
March 25, 2020......................... 67 2 0 0 0
March 25, 2021......................... 62 2 0 0 0
March 25, 2022......................... 58 2 0 0 0
March 25, 2023......................... 52 1 0 0 0
March 25, 2024......................... 46 1 0 0 0
March 25, 2025......................... 40 * 0 0 0
March 25, 2026......................... 35 * 0 0 0
March 25, 2027......................... 29 0 0 0 0
March 25, 2028......................... 23 0 0 0 0
March 25, 2029......................... 16 0 0 0 0
March 25, 2030......................... 8 0 0 0 0
March 25, 2031......................... 0 0 0 0 0
Weighted Average Life in Years(1)...... 20.90 4.97 2.54 1.87 1.11
Weighted Average Life in Years(1)(2)... 20.87 4.63 2.34 1.72 1.11
* Represents less than one-half of one percent.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related distribution date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the certificate.
(2) Assumes the Servicer exercises its option to purchase the mortgage loans on
the earliest possible distribution date on which it is permitted to
exercise this option. See "Pooling and Servicing Agreement--Termination" in
this prospectus supplement.
S-40
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-1
---------
DISTRIBUTION DATE 0% 15% 28% 35% 45%
- ----------------- -- --- --- --- ---
Initial Percentage..................... 100% 100% 100% 100% 100%
March 25, 2002......................... 100 100 100 100 100
March 25, 2003......................... 100 100 100 100 100
March 25, 2004......................... 100 100 100 100 98
March 25, 2005......................... 100 100 53 50 93
March 25, 2006......................... 100 86 38 23 51
March 25, 2007......................... 100 73 27 15 27
March 25, 2008......................... 100 61 19 9 12
March 25, 2009......................... 100 51 14 6 4
March 25, 2010......................... 100 43 10 2 0
March 25, 2011......................... 100 36 7 0 0
March 25, 2012......................... 100 30 4 0 0
March 25, 2013......................... 100 25 1 0 0
March 25, 2014......................... 100 21 0 0 0
March 25, 2015......................... 100 18 0 0 0
March 25, 2016......................... 100 15 0 0 0
March 25, 2017......................... 100 12 0 0 0
March 25, 2018......................... 100 10 0 0 0
March 25, 2019......................... 100 8 0 0 0
March 25, 2020......................... 100 7 0 0 0
March 25, 2021......................... 100 5 0 0 0
March 25, 2022......................... 100 3 0 0 0
March 25, 2023......................... 100 1 0 0 0
March 25, 2024......................... 100 0 0 0 0
March 25, 2025......................... 99 0 0 0 0
March 25, 2026......................... 86 0 0 0 0
March 25, 2027......................... 72 0 0 0 0
March 25, 2028......................... 56 0 0 0 0
March 25, 2029......................... 38 0 0 0 0
March 25, 2030......................... 19 0 0 0 0
March 25, 2031......................... 0 0 0 0 0
Weighted Average Life in Years(1)...... 27.24 9.59 5.23 4.62 5.38
Weighted Average Life in Years(1)(2)... 27.16 8.78 4.77 4.26 3.83
* Represents less than one-half of one percent.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related distribution date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the certificate.
(2) Assumes the Servicer exercises its option to purchase the mortgage loans on
the earliest possible distribution date on which it is permitted to
exercise this option. See "Pooling and Servicing Agreement--Termination" in
this prospectus supplement.
S-41
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-2
---------
DISTRIBUTION DATE 0% 15% 28% 35% 45%
- ----------------- -- --- --- --- ---
Initial Percentage..................... 100% 100% 100% 100% 100%
March 25, 2002......................... 100 100 100 100 100
March 25, 2003......................... 100 100 100 100 100
March 25, 2004......................... 100 100 100 100 100
March 25, 2005......................... 100 100 53 35 18
March 25, 2006......................... 100 86 38 23 9
March 25, 2007......................... 100 73 27 15 0
March 25, 2008......................... 100 61 19 8 0
March 25, 2009......................... 100 51 14 * 0
March 25, 2010......................... 100 43 9 0 0
March 25, 2011......................... 100 36 2 0 0
March 25, 2012......................... 100 30 0 0 0
March 25, 2013......................... 100 25 0 0 0
March 25, 2014......................... 100 21 0 0 0
March 25, 2015......................... 100 18 0 0 0
March 25, 2016......................... 100 15 0 0 0
March 25, 2017......................... 100 12 0 0 0
March 25, 2018......................... 100 10 0 0 0
March 25, 2019......................... 100 5 0 0 0
March 25, 2020......................... 100 2 0 0 0
March 25, 2021......................... 100 0 0 0 0
March 25, 2022......................... 100 0 0 0 0
March 25, 2023......................... 100 0 0 0 0
March 25, 2024......................... 100 0 0 0 0
March 25, 2025......................... 99 0 0 0 0
March 25, 2026......................... 86 0 0 0 0
March 25, 2027......................... 72 0 0 0 0
March 25, 2028......................... 56 0 0 0 0
March 25, 2029......................... 38 0 0 0 0
March 25, 2030......................... 19 0 0 0 0
March 25, 2031......................... 0 0 0 0 0
Weighted Average Life in Years(1)...... 27.23 9.43 5.06 4.27 3.94
Weighted Average Life in Years(1)(2)... 27.16 8.78 4.69 4.00 3.72
* Represents less than one-half of one percent.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related distribution date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the certificate.
(2) Assumes the Servicer exercises its option to purchase the mortgage loans on
the earliest possible distribution date on which it is permitted to
exercise this option. See "Pooling and Servicing Agreement--Termination" in
this prospectus supplement.
S-42
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS B
-------
DISTRIBUTION DATE 0% 15% 28% 35% 45%
- ----------------- -- --- --- --- ---
Initial Percentage..................... 100% 100% 100% 100% 100%
March 25, 2002......................... 100 100 100 100 100
March 25, 2003......................... 100 100 100 100 100
March 25, 2004......................... 100 100 100 100 100
March 25, 2005......................... 100 100 53 35 18
March 25, 2006......................... 100 86 38 23 0
March 25, 2007......................... 100 73 27 11 0
March 25, 2008......................... 100 61 19 0 0
March 25, 2009......................... 100 51 9 0 0
March 25, 2010......................... 100 43 0 0 0
March 25, 2011......................... 100 36 0 0 0
March 25, 2012......................... 100 30 0 0 0
March 25, 2013......................... 100 25 0 0 0
March 25, 2014......................... 100 21 0 0 0
March 25, 2015......................... 100 18 0 0 0
March 25, 2016......................... 100 12 0 0 0
March 25, 2017......................... 100 5 0 0 0
March 25, 2018......................... 100 0 0 0 0
March 25, 2019......................... 100 0 0 0 0
March 25, 2020......................... 100 0 0 0 0
March 25, 2021......................... 100 0 0 0 0
March 25, 2022......................... 100 0 0 0 0
March 25, 2023......................... 100 0 0 0 0
March 25, 2024......................... 100 0 0 0 0
March 25, 2025......................... 99 0 0 0 0
March 25, 2026......................... 86 0 0 0 0
March 25, 2027......................... 72 0 0 0 0
March 25, 2028......................... 56 0 0 0 0
March 25, 2029......................... 38 0 0 0 0
March 25, 2030......................... 19 0 0 0 0
March 25, 2031......................... 0 0 0 0 0
Weighted Average Life in Years(1)...... 27.21 9.17 4.88 4.08 3.61
Weighted Average Life in Years(1)(2)... 27.16 8.78 4.67 3.92 3.49
* Represents less than one-half of one percent.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related distribution date,
(b) adding the results and (c) dividing the sum by the initial Certificate
Principal Balance of the certificate.
(2) Assumes the Servicer exercises its option to purchase the mortgage loans on
the earliest possible distribution date on which it is permitted to
exercise this option. See "Pooling and Servicing Agreement--Termination" in
this prospectus supplement.
S-43
There is no assurance that prepayments of the Mortgage Loans included will
conform to any of the levels of CPR indicated in the immediately preceding
tables, or to any other level, or that the actual weighted average lives of the
Offered Certificates will conform to any of the weighted average lives set forth
in the immediately preceding tables. Furthermore, the information contained in
the tables with respect to the weighted average lives of the Offered
Certificates is not necessarily indicative of the weighted average lives that
might be calculated or projected under different or varying prepayment
assumptions.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the immediately preceding tables. In addition, it is unlikely that any
Mortgage Loan will prepay at any constant percentage until maturity, that all of
the Mortgage Loans will prepay at the same rate. The timing of changes in the
rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments is consistent with
the expectations of investors.
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class X/N Certificates, the
Class B Certificates and the Class M-2 Certificates have been reduced to zero,
the yield to maturity on the Class M-1 Certificates will become extremely
sensitive to losses on the Mortgage Loans (and the timing thereof) that are
covered by subordination, because the entire amount of any Realized Losses (to
the extent not covered by Net Monthly Excess Cashflow) will be allocated to the
Class M-1 Certificates. If the Certificate Principal Balances of the Class X/N
Certificates and the Class B Certificates have been reduced to zero, the yield
to maturity on the Class M-2 Certificates will become extremely sensitive to
losses on the Mortgage Loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow) will be allocated to the Class M-2
Certificates. If the Certificate Principal Balances of the Class X/N
Certificates have been reduced to zero, the yield to maturity on the Class B
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of any Realized Losses (to the extent not covered by Net Monthly Excess
Cashflow) will be allocated to the Class B Certificates. The initial undivided
interests in the trust fund evidenced by the Class M-1 Certificates, the Class
M-2 Certificates, the Class B Certificates and the Class X/N Certificates are
approximately 8.00%, approximately 3.50%, approximately 2.00% and approximately
3.00%, respectively. Investors in the Mezzanine Certificates should fully
consider the risk that Realized Losses on the Mortgage Loans could result in the
failure of investors to fully recover their investments. In addition, once
Realized Losses have been allocated to the Mezzanine Certificates, their
Certificate Principal Balances will be permanently reduced by the amounts so
allocated. Therefore, the amounts of Realized Losses allocated to the Mezzanine
Certificates will no longer accrue interest nor will these amounts be reinstated
thereafter. However, Allocated Realized Loss Amounts may be paid to the holders
of the Mezzanine Certificates from Net Monthly Excess Cashflow in the priorities
set forth under "Description of the Certificates --Overcollateralization
Provisions" in this prospectus supplement.
Unless the Certificate Principal Balance of the Class A Certificates has
been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until the Stepdown Date or during any period in which a
Trigger Event is in effect. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a PRO RATA basis among all of the
Offered Certificates. As a result of the longer weighted average lives of the
Mezzanine Certificates, the holders of such certificates have a greater risk of
suffering a loss on their investments. Further, because a Trigger Event is based
on delinquencies and not losses, it is possible for the Mezzanine Certificates
to receive no principal distributions (unless the Certificate Principal Balance
of the Class A Certificates has been reduced to zero) on and after the Stepdown
Date even if no losses have occurred on the Mortgage Pool. For additional
considerations relating to the yield on the Mezzanine Certificates, see "Yield
Considerations" in the prospectus.
S-44
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Ace Securities Corp. Home Equity Loan Trust, Series 2001-NC1, Asset
Backed Pass-Through Certificates will consist of nine classes of certificates,
designated as (i) the Class A-1 Certificates and the Class A-2 Certificates
(together, the "Class A Certificates"); (ii) the Class M-1 Certificates, the
Class M-2 Certificates and the Class B Certificates (the "Mezzanine
Certificates"); (iii) the Class N Certificates and the Class X Certificates
(collectively, the Class X/N Certificates", and together with the Mezzanine
Certificates, the "Subordinate Certificates"); and (iv) the Class R Certificates
and the Class R-III Certificates (together, the "Residual Certificates"). Only
the Class A Certificates and the Mezzanine Certificates (collectively, the
"Offered Certificates") are offered by this prospectus supplement. The Class X/N
Certificates and the Residual Certificates, which are not being offered by this
prospectus supplement, will be purchased by the Underwriter, which has informed
the Depositor that it intends to sell these certificates to an affiliate of the
Servicer.
Distributions on the Offered Certificates will be made on the 25th day of
each month, or, if that day is not a business day, on the next succeeding
business day, beginning in April 2001 to the persons in whose names such
certificates are registered at the close of business on the Record Date. The
"Record Date" for the Offered Certificates is the business day immediately
preceding such Distribution Date, for so long as the Offered Certificates are
held in book-entry form and the last business day of the month immediately
preceding the month in which the related Distribution Date occurs if the Offered
Certificates are held in physical form.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust fund consisting primarily of the Mortgage Pool of
conventional, one- to four-family, adjustable-rate, first lien mortgage loans
having original terms to maturity of not greater than 30 years. The certificates
have an aggregate principal balance as of the Cut-off Date of approximately
$166,593,502, subject to a permitted variance as described under "The Mortgage
Pool" in this prospectus supplement. The Class A-1 Certificates represent
interests in the Group I Mortgage Loans, and the Class A-2 Certificates
represent interests in the Group II Mortgage Loans. The Mezzanine Certificates
represent interests in all of the Mortgage Loans.
Each class of Offered Certificates will have the initial Certificate
Principal Balance set forth in the table appearing on the cover of this
prospectus supplement. The Pass-Through Rates on the Offered Certificates will
be calculated for each Distribution Date as described under "--Pass-Through
Rate" below. The Class A Certificates evidence an initial undivided interest of
approximately 83.50% in the trust fund, the Class M-1 Certificates, the Class
M-2 Certificates and the Class B Certificates evidence initial undivided
interests of approximately 8.00%, approximately 3.50% and approximately 2.00%,
respectively, in the trust fund and the Class X/N Certificates evidence an
initial undivided interest of approximately 3.00% in the trust fund.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (for so long as
they are registered in the name of the applicable depository or its nominee, the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Book-Entry Certificates ("Certificate Owners") will hold such certificates
through The Depository Trust Company ("DTC") in the United States, or
Clearstream Banking Luxembourg, formerly known as Cedelbank SA ("Clearstream"),
or the Euroclear System ("Euroclear") in Europe, if they are participants of
such systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Certificates will be issued in one or more certificates
which equal the aggregate Certificate Principal Balance of such Certificates and
will initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Clearstream and
The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European
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Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations of $50,000. Except as described below, no
Certificate Owner acquiring a Book-Entry Certificate (each, a "beneficial
owner") will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and until Definitive
Certificates are issued, it is anticipated that the only "Certificateholder" of
the Offered Certificates will be Cede & Co., as nominee of DTC. Certificate
Owners will not be Certificateholders as that term is used in the Pooling and
Servicing Agreement. Certificate Owners are only permitted to exercise their
rights indirectly through DTC and participants of DTC ("DTC Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trust Administrator through DTC
and DTC Participants. While the Book-Entry Certificates are outstanding (except
under the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among DTC Participants on whose behalf it
acts with respect to the Book-Entry Certificates and is required to receive and
transmit distributions of principal of, and interest on, the Book-Entry
Certificates. DTC Participants and indirect participants with whom Certificate
Owners have accounts with respect to Book-Entry Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates representing their
respective interests in the Book-Entry Certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not DTC Participants may
transfer ownership of Book-Entry Certificates only through DTC Participants and
indirect participants by instructing such DTC Participants and indirect
participants to transfer Book-Entry Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Book-Entry Certificates,
which account is maintained with their respective DTC Participants. Under the
Rules and in accordance with DTC's normal procedures, transfers of ownership of
Book-Entry Certificates will be executed through DTC and the accounts of the
respective DTC Participants at DTC will be debited and credited. Similarly, the
DTC Participants and indirect participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing
Certificate Owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant or
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Certificates, see "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its DTC Participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC Participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the Rules, as
in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and as such is subject
to regulation by the Institute Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream Participants")
and facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Clearstream provides
various services, including safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Clearstream also deals with domestic securities markets in several
countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with the Euroclear Operator (as
defined below) in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 29 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Euroclear Bank S.A./N.V. (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other
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professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trust Administrator to Cede & Co. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each DTC
Participant will be responsible for disbursing such payments to the Certificate
Owners of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trust Administrator to Cede & Co.
Distributions with respect to Certificates held through Clearstream or Euroclear
will be credited to the cash accounts of Clearstream Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Material Federal Income Tax Considerations--REMICS--Taxation
of Certain Foreign Investors" in the Prospectus. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a Certificate Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
DTC has advised the Trust Administrator that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. Clearstream or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a Certificateholder
under the Pooling Agreement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related DTC
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor advises the Trust Administrator in writing that
DTC is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Certificates and the Depositor or the Trust Administrator is unable to locate a
qualified successor, (b) the Depositor, at its sole option, with the consent of
the Trust Administrator, elects to terminate a book-entry system through DTC or
(c) after the occurrence of a Servicer Event of Default (as defined in the
Pooling and Servicing Agreement), Certificate Owners having percentage interests
aggregating not less than 51% of the Book-Entry Certificates advise the Trust
Administrator and DTC through the Financial Intermediaries and the DTC
Participants in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of Certificate
Owners.
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Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trust Administrator will be required to notify all
Certificate Owners of the occurrence of such event and the availability through
DTC of Definitive Certificates. Upon surrender by DTC of the global certificate
or certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trust Administrator will issue Definitive Certificates, and
thereafter the Trust Administrator will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling Agreement.
In the event any Definitive Certificates are issued, surrender of such
Definitive Certificates shall occur at the office designated from time to time
for such purposes by the certificate registrar. As of the Closing Date, the
certificate registrar designates its offices located at 123 Washington Street,
New York, New York 10006 for this purpose.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer, the Trust Administrator or the Trustee
will have any responsibility for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
PASS-THROUGH RATES
The pass-through rate (the "Pass-Through Rate") on the Class A-1
Certificates will be a rate per annum equal to the lesser of (i) One-Month LIBOR
plus 0.235% in the case of each Distribution Date through and including the
Distribution Date on which the aggregate principal balance of the Mortgage Loans
(and properties acquired in respect thereof) remaining in the trust fund is
reduced to less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month LIBOR plus 0.470%, in the case of any
Distribution Date thereafter and (ii) the Net WAC Pass-Through Rate for the
Distribution Date.
The Pass-Through Rate on the Class A-2 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.290% in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the Mortgage Loans (and properties acquired in
respect thereof) remaining in the trust fund is reduced to less than 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date, or
One-Month LIBOR plus 0.580%, in the case of any Distribution Date thereafter and
(ii) the Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-1 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.640% in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the Mortgage Loans (and properties acquired in
respect thereof) remaining in the trust fund is reduced to less than 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date, or
One-Month LIBOR plus 0.960%, in the case of any Distribution Date thereafter and
(ii) the Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-2 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.200% in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the Mortgage Loans (and properties acquired in
respect thereof) remaining in the trust fund is reduced to less than 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date, or
One-Month LIBOR plus 1.800%, in the case of any Distribution Date thereafter and
(ii) the Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class B Certificates will be a rate per annum
equal to the lesser of (i) One-Month LIBOR plus 2.500% in the case of each
Distribution Date through and including the Distribution Date on which the
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aggregate principal balance of the Mortgage Loans (and properties acquired in
respect thereof) remaining in the trust fund is reduced to less than 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date, or
One-Month LIBOR plus 3.750%, in the case of any Distribution Date thereafter and
(ii) the Net WAC Pass-Through Rate for the Distribution Date.
GLOSSARY
"ACCRUAL RATE": With respect to the Class A Certificates and the Mezzanine
Certificates and any Distribution Date, the per annum rate equal to the lesser
of (i) the Pass-Through Rate payable if clause (i) of the related definition of
Pass-Through Rate were used to calculate interest and (ii) the Maximum
Pass-Through Rate.
"ALLOCATED REALIZED LOSS AMOUNT": With respect to the Mezzanine Certificates and
any Distribution Date, the sum of (i) any realized loss allocated to the class
of Mezzanine Certificates on the Distribution Date and (ii) any Allocated
Realized Loss Amount for that class remaining unpaid from the previous
Distribution Date plus accrued interest at the related Pass-Through Rate on that
class of certificates for the most recently ended Interest Accrual Period.
"AVAILABLE DISTRIBUTION AMOUNT": The Available Distribution Amount for any
Distribution Date is equal to the sum, net of amounts reimbursable therefrom to
the Servicer, the Trust Administrator or the Trustee, of an amount equal to (i)
the aggregate amount of scheduled monthly payments on the Mortgage Loans due on
the related Due Date and received on or prior to the related Determination Date,
after deduction of the Servicing Fee and the Administration Fee; (ii)
unscheduled payments in respect of the Mortgage Loans (including prepayments,
insurance proceeds, liquidation proceeds and proceeds from repurchases of and
substitutions for the Mortgage Loans occurring during the Prepayment Period and
(iii) all P&I Advances with respect to the Mortgage Loans received for the
Distribution Date.
"BASIS RISK SHORTFALL": With respect to the Class A Certificates and the
Mezzanine Certificates and any Distribution Date on which the Pass-Through Rate
is limited to the Net WAC Pass-Through Rate, an amount equal to interest accrued
during the related Interest Accrual Period on the aggregate Certificate
Principal Balance of the certificates immediately prior to the related
Distribution Date at a per annum rate equal to the excess of (i) the Accrual
Rate for the Distribution Date over (ii) the Net WAC Pass-Through Rate for the
Distribution Date.
"CERTIFICATE PRINCIPAL BALANCE": The Certificate Principal Balance of an Offered
Certificate outstanding at any time represents the then maximum amount that the
holder of such certificate is entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in the
trust fund. The Certificate Principal Balance of any class of Offered
Certificates as of any date of determination is equal to the initial Certificate
Principal Balance of such certificate reduced by the aggregate of (i) all
amounts allocable to principal previously distributed with respect to that
certificate and (ii) any reductions in the Certificate Principal Balance of such
certificate deemed to have occurred in connection with allocations of Realized
Losses in the manner described in this prospectus supplement. The Certificate
Principal Balance of the Class X/N Certificates as of any date of determination
is equal to the excess, if any, of (i) the then aggregate principal balance of
the Mortgage Loans over (ii) the then aggregate Certificate Principal Balance of
the Class A Certificates and the Mezzanine Certificates.
"CLASS A PRINCIPAL ALLOCATION PERCENTAGE": The Class A Principal Allocation
Percentage for any Distribution Date is the percentage equivalent of a fraction,
determined as follows: (i) in the case of the Class A-1 Certificates, the
numerator of which is (x) the portion of the Principal Remittance Amount for
such Distribution Date that is attributable to principal received or advanced on
the Group I Mortgage Loans, and the denominator of which is (y) the Principal
Remittance Amount for such Distribution Date, and (ii) in the case of the Class
A-2 Certificates, the numerator of which is (x) the portion of the Principal
Remittance Amount for such Distribution Date that is attributable to principal
received or advanced on the Group II Mortgage Loans, and the denominator of
which is (y) the Principal Remittance Amount for such Distribution Date.
"CLASS A PRINCIPAL DISTRIBUTION AMOUNT": The Class A Principal Distribution
Amount is an amount equal to the excess of (x) the Certificate Principal Balance
of the Class A Certificates immediately prior to the Distribution Date over (y)
the
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lesser of (A) the product of (i) approximately 67.00% and (ii) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period minus $832,968.
"CLASS B PRINCIPAL DISTRIBUTION AMOUNT": The Class B Principal Distribution
Amount is an amount equal to the excess of (x) the sum of (i) the Certificate
Principal Balance of the Class A Certificates after taking into account the
payment of the Class A Principal Distribution Amount on the Distribution Date,
(ii) the Certificate Principal Balance of the Class M-1 Certificates after
taking into account the payment of the Class M-1 Principal Distribution Amount
on the Distribution Date, (iii) the Certificate Principal Balance of the Class
M-2 Certificates after taking into account the payment of the Class M-2
Principal Distribution Amount on the Distribution Date and (iv) the Certificate
Principal Balance of the Class B Certificates immediately prior to the
Distribution Date over (y) the lesser of (A) the product of (i) approximately
94.00% and (ii) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period and (B) the aggregate principal balance of
the Mortgage Loans as of the last day of the related Due Period minus $832,968.
"CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-1 Principal Distribution
Amount is an amount equal to the excess of (x) the sum of (i) the Certificate
Principal Balance of the Class A Certificates after taking into account the
payment of the Class A Principal Distribution Amount on the Distribution Date
and (ii) the Certificate Principal Balance of the Class M-1 Certificates
immediately prior to the Distribution Date over (y) the lesser of (A) the
product of (i) approximately 83.00% and (ii) the aggregate principal balance of
the Mortgage Loans as of the last day of the related Due Period and (B) the
aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period minus $832,968.
"CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-2 Principal Distribution
Amount is an amount equal to the excess of (x) the sum of (i) the Certificate
Principal Balance of the Class A Certificates after taking into account the
payment of the Class A Principal Distribution Amount on the Distribution Date,
(ii) the Certificate Principal Balance of the Class M-1 Certificates after
taking into account the payment of the Class M-1 Principal Distribution Amount
on the Distribution Date and (iii) the Certificate Principal Balance of the
Class M-2 Certificates immediately prior to the Distribution Date over (y) the
lesser of (A) the product of (i) approximately 90.00% and (ii) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period minus $832,968.
"CREDIT ENHANCEMENT PERCENTAGE": The Credit Enhancement Percentage for any
Distribution Date is the percentage obtained by dividing (x) the aggregate
Certificate Principal Balance of the Subordinate Certificates by (y) the
aggregate principal balance of the Mortgage Loans, calculated after taking into
account distributions of principal on the Mortgage Loans and distribution of the
Principal Distribution Amount to the holders of the certificates then entitled
to distributions of principal on the Distribution Date.
"DETERMINATION DATE": The Determination Date with respect to any Distribution
Date is on the 10th day of the month in which the Distribution Date occurs or,
if such day is not a business day, on the immediately preceding business day.
"DUE PERIOD": The Due Period with respect to any Distribution Date commences on
the second day of the month immediately preceding the month in which the
Distribution Date occurs and ends on the first day of the month in which the
Distribution Date occurs.
"EXPENSE ADJUSTED MAXIMUM MORTGAGE RATE": The Expense Adjusted Maximum Mortgage
Rate on any Mortgage Loan is equal to the Maximum Mortgage Rate thereon MINUS
the sum of (i) the Administration Fee Rate and (ii) the Servicing Fee Rate.
"EXPENSE ADJUSTED MORTGAGE RATE": The Expense Adjusted Mortgage Rate on any
Mortgage Loan is equal to the then applicable Mortgage Rate on the Mortgage Loan
MINUS the sum of (i) the Administration Fee Rate and (ii) the Servicing Fee
Rate.
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"EXTRA PRINCIPAL DISTRIBUTION AMOUNT": The Extra Principal Distribution Amount
for any Distribution Date will be the lesser of (i) the Net Monthly Excess
Cashflow for such Distribution Date and (ii) the Overcollateralization Increase
Amount.
"GROUP I BASIC PRINCIPAL DISTRIBUTION AMOUNT": The Group I Basic Principal
Distribution Amount for any Distribution Date will be the sum of (i) the
Principal Remittance Amount with respect to the Group I Mortgage Loans minus
(ii) the amount of any Overcollateralization Reduction Amount for the
Distribution Date multiplied by a fraction, the numerator of which is (x) the
portion of the Principal Remittance Amount for such Distribution Date that is
attributable to principal received or advanced on the Group I Mortgage Loans,
and the denominator of which is (y) the Principal Remittance Amount for such
Distribution Date.
"GROUP II BASIC PRINCIPAL DISTRIBUTION AMOUNT": The Group II Basic Principal
Distribution Amount for any Distribution Date will be the sum of (i) the
Principal Remittance Amount with respect to the Group II Mortgage Loans minus
(ii) the amount of any Overcollateralization Reduction Amount for the
Distribution Date multiplied by a fraction, the numerator of which is (x) the
portion of the Principal Remittance Amount for such Distribution Date that is
attributable to principal received or advanced on the Group II Mortgage Loans,
and the denominator of which is (y) the Principal Remittance Amount for such
Distribution Date.
"GROUP I CLASS A PRINCIPAL DISTRIBUTION AMOUNT": The Group I Class A Principal
Distribution Amount for the Class A-1 Certificates and any Distribution Date is
the Class A Principal Distribution Amount multiplied by a fraction, the
numerator of which is (x) the portion of the Principal Remittance Amount for
such Distribution Date that is attributable to principal received or advanced on
the Group I Mortgage Loans, and the denominator of which is (y) the Principal
Remittance Amount for such Distribution Date.
"GROUP II CLASS A PRINCIPAL DISTRIBUTION AMOUNT": The Group II Class A Principal
Distribution Amount for the Class A-2 Certificates and any Distribution Date is
the Class A Principal Distribution Amount multiplied by a fraction, the
numerator of which is (x) the portion of the Principal Remittance Amount for
such Distribution Date that is attributable to principal received or advanced on
the Group II Mortgage Loans, and the denominator of which is (y) the Principal
Remittance Amount for such Distribution Date.
"INTEREST ACCRUAL PERIOD": The Interest Accrual Period for the Class A
Certificates and the Mezzanine Certificates and any Distribution Date is the
period commencing on the Distribution Date of the month immediately preceding
the month in which such Distribution Date occurs (or, in the case of the first
period, commencing on the Closing Date), and ending on the day preceding such
Distribution Date. All distributions of interest on such certificates will be
based on a 360-day year and the actual number of days in the applicable Interest
Accrual Period.
"INTEREST CARRY FORWARD AMOUNT": The Interest Carry Forward Amount with respect
to any class of Offered Certificates and any Distribution Date is equal to the
amount, if any, by which the Interest Distribution Amount for that class of
certificates for the immediately preceding Distribution Date exceeded the actual
amount distributed on the certificates in respect of interest on the immediately
preceding Distribution Date, together with any Interest Carry Forward Amount
with respect to the certificates remaining unpaid from the previous Distribution
Date, plus interest accrued thereon at the related Pass-Through Rate on the
certificates for the most recently ended Interest Accrual Period.
"INTEREST DISTRIBUTION AMOUNT": The Interest Distribution Amount for the Offered
Certificates of any class on any Distribution Date is equal to interest accrued
during the related Interest Accrual Period on the Certificate Principal Balance
of that class immediately prior to the Distribution Date at the Pass-Through
Rate for that class, reduced, to not less than zero, in the case of each class,
by the allocable share, if any, for that class of Prepayment Interest Shortfalls
to the extent not covered by Compensating Interest paid by the Servicer and
shortfalls resulting from the application of the Relief Act.
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"INTEREST REMITTANCE AMOUNT": The Interest Remittance Amount for any
Distribution Date is that portion of the Available Distribution Amount for that
Distribution Date that represents interest received or advanced on the Mortgage
Loans.
"MAXIMUM PASS-THROUGH RATE": The Maximum Pass-Through Rate for any Distribution
Date is a rate per annum equal to the weighted average of the Expense Adjusted
Maximum Mortgage Rates on the then outstanding Mortgage Loans, weighted based on
their Scheduled Principal Balances as of the first day of the calendar month
preceding the month in which the Distribution Date occurs multiplied by a
fraction, the numerator of which is 30 and the denominator of which is the
actual number of days elapsed in the related Interest Accrual Period.
"NET MONTHLY EXCESS CASHFLOW": The Net Monthly Excess Cashflow for any
Distribution Date is equal to the sum of (i) any Overcollateralization Reduction
Amount and (ii) the excess of (x) the Available Distribution Amount for the
Distribution Date over (y) the sum for the Distribution Date of the aggregate of
the Senior Interest Distribution Amounts payable to the holders of the Class A
Certificates, the aggregate of the Interest Distribution Amounts payable to the
holders of the Mezzanine Certificates, the Group I Basic Principal Distribution
Amount and the Group II Basic Principal Distribution Amount.
"NET WAC PASS-THROUGH RATE": The Net WAC Pass-Through Rate for any Distribution
Date is a rate per annum equal to the weighted average of the Expense Adjusted
Mortgage Rates on the then outstanding Mortgage Loans, weighted based on their
Scheduled Principal Balances as of the first day of the calendar month preceding
the month in which the Distribution Date occurs multiplied by a fraction, the
numerator of which is 30 and the denominator of which is the actual number of
days elapsed in the related Interest Accrual Period.
"OVERCOLLATERALIZATION INCREASE AMOUNT": An Overcollateralization Increase
Amount with respect to the Offered Certificates and any Distribution Date is any
amount of Net Monthly Excess Cashflow actually applied as an accelerated payment
of principal to the extent the Required Overcollateralized Amount exceeds the
Overcollateralized Amount.
"OVERCOLLATERALIZATION REDUCTION AMOUNT": An Overcollateralization Reduction
Amount for any Distribution Date is the amount by which the Overcollateralized
Amount exceeds the Required Overcollateralized Amount after taking into account
all other distributions to be made on the Distribution Date.
"OVERCOLLATERALIZED AMOUNT": The Overcollateralized Amount with respect to any
Distribution Date is the excess, if any, of (x) the aggregate stated principal
balance of the Mortgage Loans, as defined in the pooling and servicing
agreement, immediately following the related Distribution Date over (y) the sum
of the aggregate Certificate Principal Balances of the Class A Certificates and
the Mezzanine Certificates, after taking into account the payment of the amounts
described in clauses (b)(i) through (iv) of the definition of Principal
Distribution Amount on the related Distribution Date.
"PREPAYMENT PERIOD": The Prepayment Period with respect to any Distribution Date
is the calendar month immediately preceding the month in which the Distribution
Date occurs.
"PRINCIPAL DISTRIBUTION AMOUNT": With respect to the Class A-1 Certificates, the
Group I Basic Principal Distribution Amount plus the related portion of the
Extra Principal Distribution Amount. With respect to the Class A-2 Certificates,
the Group I Basic Principal Distribution Amount plus the related portion of the
Extra Principal Distribution Amount.
"PRINCIPAL REMITTANCE AMOUNT": The Principal Remittance Amount for any
Distribution Date is the sum of (i) the principal portion of all scheduled
monthly payments on the Mortgage Loans actually received or advanced on or prior
to the related Determination Date; (ii) the principal portion of all proceeds
received in respect of the repurchase of a Mortgage Loan, or, in the case of a
substitution, amounts representing a principal adjustment, as required by the
Pooling and Servicing Agreement during the related Prepayment Period; and (iii)
the principal portion of all other unscheduled collections, including insurance
proceeds, liquidation proceeds and all full and partial principal prepayments,
received
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during the related Prepayment Period net of reimbursements, including
reimbursements to the Trustee, the Trust Administrator and the Servicer, to the
extent applied as recoveries of principal on the Mortgage Loans.
"SCHEDULED PRINCIPAL BALANCE": The Scheduled Principal Balance of any Mortgage
Loan as of any date of determination is equal to the principal balance of the
Mortgage Loan as of the Cut-off Date, after application of all scheduled
principal payments due on or before the Cut-off Date, whether or not received,
reduced by (i) the principal portion of all monthly payments due on or before
the date of determination, whether or not received; (ii) all amounts allocable
to unscheduled principal that were received prior to the calendar month in which
the date of determination occurs and (iii) any Bankruptcy Loss occurring out of
a Deficient Valuation that was incurred prior to the calendar month in which the
date of determination occurs.
"SENIOR INTEREST DISTRIBUTION AMOUNT": The Senior Interest Distribution Amount
for any Distribution Date is equal to the Interest Distribution Amount for such
Distribution Date for the Class A Certificates and the Interest Carry Forward
Amount, if any, for such Distribution Date for the Class A Certificates.
"STEPDOWN DATE": The Stepdown Date is the earlier to occur of (i) the later to
occur of (x) the Distribution Date occurring in April 2004 and (y) the first
Distribution Date on which the Credit Enhancement Percentage (calculated for
this purpose only after taking into account distributions of principal on the
Mortgage Loans, but prior to any distribution of the Principal Distribution
Amount to the holders of the certificates then entitled to distributions of
principal on the Distribution Date), is greater than or equal to approximately
33.00% and (ii) the first Distribution Date on which the Certificate Principal
Balance of the Class A Certificates has been reduced to zero.
"TRIGGER EVENT": With respect to any Distribution Date, a Trigger Event is in
effect if the percentage obtained by dividing (i) the principal amount of
Mortgage Loans delinquent 60 days or more by (ii) the aggregate principal
balance of the Mortgage Loans, in each case, as of the last day of the previous
calendar month exceeds the lesser of (x) 40% of the Credit Enhancement
Percentage and (y) 13.20%.
"UNPAID BASIS RISK SHORTFALL": With respect to the Class A Certificates and the
Mezzanine Certificates and any Distribution Date, an amount equal to (i) the
Basis Risk Shortfall for the previous Distribution Date plus (ii) the unpaid
Basis Risk Shortfall for the previous Distribution Date, to the extent not paid
on the previous Distribution Date plus (iii) interest accrued on the unpaid
amount for the most recently ended Interest Accrual Period at the applicable
Accrual Rate.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
Holders of the Offered Certificates will be entitled to receive on each
Distribution Date, interest distributions in an aggregate amount equal to
interest accrued during the related Interest Accrual Period on the Certificate
Principal Balances thereof at the then-applicable Pass-Through Rates thereon, in
the priorities set forth below.
On each Distribution Date, the Interest Remittance Amount will be
distributed in the following order of priority:
FIRST, concurrently to the holders of the Class A-1 Certificates and the
Class A-2 Certificates, the Senior Interest Distribution Amount; provided,
however, that any shortfall in the amount available to make the distribution of
the aggregate of the Senior Interest Distribution Amounts for such classes
pursuant to this clause first will be allocated among such classes as described
below;
SECOND, to the holders of the Class M-1 Certificates, the Interest
Distribution Amount allocable to the Class M-1 Certificates;
THIRD, to the holders of the Class M-2 Certificates, the Interest
Distribution Amount allocable to the Class M-2 Certificates; and
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FOURTH, to the holders of the Class B Certificates, the Interest
Distribution Amount allocable to the Class B Certificates.
On any Distribution Date, any shortfalls resulting from the application of
the Relief Act and any Prepayment Interest Shortfalls to the extent not covered
by Compensating Interest paid by the Servicer will be allocated first, to Net
Monthly Excess Cashflow according to the priorities set forth under "Description
of the Certificates--Overcollateralization Provisions" in this prospectus
supplement, second, to the Class B Certificates, third, to the Class M-2
Certificates, fourth, to the Class M-1 Certificates, and fifth, to the Class A
Certificates. The holders of the Offered Certificates will be entitled to
reimbursement for any of these interest shortfalls, subject to available funds,
in the priorities described under "--Overcollateralization Provisions"in this
prospectus supplement.
With respect to any Distribution Date, to the extent that the aggregate
Interest Distribution Amount exceeds the Interest Remittance Amount, a shortfall
in interest distributions on one or more classes of Offered Certificates will
result and payments of Interest Carry Forward Amount to the Offered Certificates
will be made. The Interest Carry Forward Amount with respect to the Class A
Certificates, if any, is distributed as part of the Senior Interest Distribution
Amount on each Distribution Date. The Interest Carry Forward Amount with respect
to the Mezzanine Certificates, if any, may be carried forward to succeeding
Distribution Dates and, subject to available funds, will be distributed in the
manner set forth in "--Overcollateralization Provisions" in this prospectus
supplement.
On any Distribution Date, in the case of the Class A-1 Certificates and the
Class A-2 Certificates, any other shortfall in the amount available to make the
distribution of the aggregate of the Senior Interest Distribution Amounts for
such classes pursuant to clause first above will be allocated among such
classes, in reduction of the amount distributable to each such class pursuant to
clause first above, in accordance with the following rules:
o The portion of the Interest Remittance Amount attributable to the Group
I Mortgage Loans will be allocated
first, to pay the Class A-1 Certificates the Senior Interest
Distribution Amount; and
second, to pay the Class A-2 Certificates the Senior Interest
Distribution Amount for the Class A-2 Certificates, to the extent not
paid pursuant to the next bullet point below.
o The portion of the Interest Remittance Amount attributable to the Group
II Mortgage Loans will be allocated
first, to pay the Class A-2 Certificates the Senior Interest
Distribution Amount for the Class A-2 Certificates; and
second, to pay the Class A-1 Certificates the Senior Interest
Distribution Amount for the Class A-1 Certificates, to the extent not
paid pursuant to the previous bullet point above.
If on any Distribution Date, as a result of the foregoing allocation rules,
either class of the Class A Certificates does not receive the related Senior
Interest Distribution Amount, if any, then such unpaid amounts will be
recoverable by the holders of such classes, with interest thereon, on future
Distribution Dates, as Interest Carry Forward Amounts, subject to the priorities
described in this prospectus supplement.
Except as otherwise described in this prospectus supplement, on any
Distribution Date, distributions of the Interest Distribution Amount for a class
of certificates will be made in respect of that class of certificates, to the
extent provided in this prospectus supplement, on a PARI PASSU basis, based on
the Certificate Principal Balance of the certificates of each class.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period (other than the initial
Interest Accrual Period) and each class of Offered Certificates, on the second
business day preceding such Interest Accrual Period, (each such date, an
"Interest
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Determination Date"), the Trust Administrator will determine One-Month LIBOR for
such Interest Accrual Period. With respect to the initial Interest Accrual
Period, on the Closing Date, the Trust Administrator will determine One-Month
LIBOR for such Interest Accrual Period based on information available on the
second business day preceding the Closing Date (the related "Interest
Determination Date"). "One Month LIBOR" means, as of any Interest Determination
Date, the London interbank offered rate for one-month U.S. dollar deposits which
appears on Telerate Page 3750 (as defined herein) as of 11:00 a.m. (London time)
on such date. If such rate does not appear on Telerate Page 3750, the rate for
that day will be determined on the basis of the offered rates of the Reference
Banks (as defined herein) for one-month U.S. dollar deposits, as of 11:00 a.m.
(London time) on such Interest Determination Date. The Trust Administrator will
request the principal London office of each of the Reference Banks to provide a
quotation of its rate.
If on such Interest Determination Date two or more Reference Banks provide such
offered quotations, One-Month LIBOR for the related Interest Accrual Period
shall be the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 0.0625%). If on such Interest
Determination Date fewer than two Reference Banks provide such offered
quotations, One-Month LIBOR for the related Interest Accrual Period shall be the
higher of (x) One-Month LIBOR as determined on the previous Interest
Determination Date and (y) the Reserve Interest Rate (as defined herein).
As used in this section, "business day" means a day on which banks are open
for dealing in foreign currency and exchange in London and New York City;
"Telerate Page 3750" means the display page currently so designated on the Dow
Jones Telerate Capital Markets Report (or such other page as may replace that
page on that service for the purpose of displaying comparable rates or prices);
"Reference Banks" means leading banks selected by the Trust Administrator and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) which have been
designated as such by the Trust Administrator and (iii) not controlling,
controlled by, or under common control with, the Depositor or the Servicer; and
"Reserve Interest Rate" shall be the rate per annum that the Trust Administrator
determines to be either (i) the arithmetic mean (rounded upwards if necessary to
the nearest whole multiple of 0.0625%) of the one-month U.S. dollar lending
rates which New York City banks selected by the Trust Administrator are quoting
on the relevant Interest Determination Date to the principal London offices of
leading banks in the London interbank market or, (ii) in the event that the
Trust Administrator can determine no such arithmetic mean, the lowest one-month
U.S. dollar lending rate which New York City banks selected by the Trust
Administrator are quoting on such Interest Determination Date to leading
European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trust Administrator and the Trust Administrator's calculation of the rate of
interest applicable to the Class A Certificates and the Mezzanine Certificates
for the related Interest Accrual Period shall (in the absence of manifest error)
be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each Distribution Date, the Principal Distribution Amount will be
distributed to the holders of the Offered Certificates then entitled to
principal distributions. In no event will the Principal Distribution Amount with
respect to any Distribution Date be (i) less than zero or (ii) greater than the
then outstanding aggregate Certificate Principal Balance of the Offered
Certificates.
On each Distribution Date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Group I Basic Principal Distribution Amount
shall be distributed:
FIRST, to the Class A-1 Certificates, until the Certificate Principal
Balance of the Class A-1 Certificates has been reduced to zero; and
SECOND, to the Class A-2 Certificates, until the Certificate Principal
Balance of the Class A-2 Certificates has been reduced to zero (after taking
into account distributions of the Group II Basic Principal Distribution Amount
set forth below).
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On each Distribution Date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Group II Basic Principal Distribution Amount
shall be distributed:
FIRST, to the Class A-2 Certificates, until the Certificate Principal
Balance of the Class A-2 Certificates has been reduced to zero; and
SECOND, to the Class A-1 Certificates, until the Certificate Principal
Balance of the Class A-1 Certificates has been reduced to zero (after taking
into account distributions of the Group I Basic Principal Distribution Amount
set forth above).
On each Distribution Date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, any remaining Group I Principal Distribution Amount
and any remaining Group II Principal Distribution Amount shall be distributed:
FIRST, to the Class M-1 Certificates, until the Certificate Principal
Balance of the Class M-1 Certificates has been reduced to zero;
SECOND, to the Class M-2 Certificates, until the Certificate Principal
Balance of the Class M-2 Certificates has been reduced to zero; and
THIRD, to the Class B Certificates, until the Certificate Principal Balance
of the Class B Certificates has been reduced to zero.
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the Group I Basic Principal Distribution
Amount shall be distributed:
FIRST, to the Class A-1 Certificates, the lesser of (x) the Group I Basic
Principal Distribution Amount and (y) the Group I Class A Principal
Distribution Amount, until the Certificate Principal Balance of the Class
A-1 Certificates has been reduced to zero; and
SECOND, to the Class A-2 Certificates, the lesser of (x) the Group II Basic
Principal Distribution Amount and (y) the Group II Class A Principal
Distribution Amount, until the Certificate Principal Balance of the Class
A-2 Certificates has been reduced to zero (after taking into account
distributions of the Group II Basic Principal Distribution Amount set forth
below).
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the Group II Basic Principal
Distribution Amount shall be distributed:
FIRST, to the Class A-2 Certificates, the lesser of (x) the Group II Basic
Principal Distribution Amount and (y) the Group II Class A Principal
Distribution Amount, until the Certificate Principal Balance of the Class
A-2 Certificates has been reduced to zero; and
SECOND, to the Class A-1 Certificates, the lesser of (x) the Group I Basic
Principal Distribution Amount and (y) the Group I Class A Principal
Distribution Amount, until the Certificate Principal Balance of the Class
A-1 Certificates has been reduced to zero (after taking into account
distributions of the Group I Basic Principal Distribution Amount set forth
above).
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, any remaining Group I Basic Principal
Distribution Amount and Group II Basic Principal Distribution Amount shall be
distributed:
FIRST, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the holders of the Class A
Certificates under clause first above, and (y) the Class M-1 Principal
Distribution Amount, shall be
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distributed to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance of the Class M-1 Certificates has been
reduced to zero;
SECOND, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A Certificates under clause first above and to the holders of the
Class M-1 Certificates under clause second above, and (y) the Class M-2
Principal Distribution Amount, shall be distributed to the holders of the
Class M-2 Certificates, until the Certificate Principal Balance of the
Class M-2 Certificates has been reduced to zero; and
THIRD, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A Certificates under clause first above, to the holders of the Class
M-1 Certificates under clause second above and to the holders of the Class
M-2 Certificates under clause third above, and (y) the Class B Principal
Distribution Amount, shall be distributed to the holders of the Class B
Certificates, until the Certificate Principal Balance of the Class B
Certificates has been reduced to zero.
The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the Mortgage Loans evidenced by the Subordinate Certificates. Increasing the
respective percentage interest in the trust fund of the Mezzanine Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Mezzanine Certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Class
A Certificates consists of subordination, as described in this section, and
overcollateralization, as described under "--Overcollateralization Provisions"
in this prospectus supplement.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described in this section, to
the rights of the holders of the Class A Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Certificates of the full amount of their scheduled monthly payments of
interest and principal and to afford these holders protection against Realized
Losses.
The protection afforded to the holders of the Class A Certificates by means
of the subordination of the Subordinate Certificates will be accomplished by (i)
the preferential right of the holders of the Class A Certificates to receive on
any Distribution Date, prior to distribution on the Subordinate Certificates,
distributions in respect of interest and principal, subject to available funds
and (ii) if necessary, the right of the holders of the Class A Certificates to
receive future distributions of amounts that would otherwise be payable to the
holders of the Subordinate Certificates.
In addition, (i) the rights of the holders of the Class M-1 Certificates
will be senior to the rights of holders of the Class M-2 Certificates, the Class
B Certificates and the Class X/N Certificates, (ii) the rights of the holders of
the Class M-2 Certificates will be senior to the rights of the holders of the
Class B Certificates and the Class X/N Certificates and (iii) the rights of the
holders of the Class B Certificates will be senior to the rights of the holders
of the Class X/N Certificates. This subordination is intended to enhance the
likelihood of regular receipt by the holders of more senior certificates of
distributions in respect of interest and principal and to afford these holders
protection against Realized Losses.
OVERCOLLATERALIZATION PROVISIONS
The weighted average Expense Adjusted Mortgage Rate for the Mortgage Loans
is expected to be higher than the weighted average of the Pass-Through Rates on
the Offered Certificates, thus generating excess interest collections which, in
the absence of Realized Losses, will not be necessary to fund interest
distributions on the Offered Certificates. Additional excess interest will be
generated by the portion of the Mortgage Pool represented by the
Overcollateralized
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Amount. The Pooling and Servicing Agreement requires that, on each Distribution
Date, the Net Monthly Excess Cashflow, if any, be applied on the related
Distribution Date as an accelerated payment of principal on the class or classes
of Offered Certificates then entitled to receive distributions in respect of
principal, but only to the limited extent described in this section.
With respect to any Distribution Date, any Net Monthly Excess Cashflow (or,
in the case of clause first below, the Net Monthly Excess Cashflow exclusive of
any Overcollateralization Reduction Amount) shall be paid as follows:
FIRST, to the holders of the class or classes of certificates then entitled
to receive distributions in respect of principal, in an amount equal to any
Extra Principal Distribution Amount, payable to such holders in accordance
with the priorities set forth under "--ALLOCATION OF EXTRA PRINCIPAL
DISTRIBUTION AMOUNT" below;
SECOND, to the holders of the class or classes of certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the Overcollateralization Increase Amount;
THIRD, to the holders of the Class M-1 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class M-1 Certificates;
FOURTH, to the holders of the Class M-1 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to the Class M-1 Certificates;
FIFTH, to the holders of the Class M-2 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class M-2 Certificates;
SIXTH, to the holders of the Class M-2 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to the Class M-2 Certificates;
SEVENTH, to the holders of the Class B Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class B Certificates;
EIGHTH, to the holders of the Class B Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to the Class B Certificates;
NINTH, to the holders of the Class A Certificates, in an amount equal to
such certificates' allocated share of any Prepayment Interest Shortfalls on
the Mortgage Loans to the extent not covered by Compensating Interest paid
by the Servicer and any shortfalls resulting from the application of the
Relief Act with respect to the Mortgage Loans;
TENTH, to the holders of the Class M-1 Certificates, in an amount equal to
the Class M-1 Certificates' allocated share of any Prepayment Interest
Shortfalls on the Mortgage Loans to the extent not covered by Compensating
Interest paid by the Servicer and any shortfalls resulting from the
application of the Relief Act with respect to the Mortgage Loans;
ELEVENTH, to the holders of the Class M-2 Certificates, in an amount equal
to the Class M-2 Certificates' allocated share of any Prepayment Interest
Shortfalls on the Mortgage Loans to the extent not covered by Compensating
Interest paid by the Servicer and any shortfalls resulting from the
application of the Relief Act with respect to the Mortgage Loans;
TWELFTH, to the holders of the Class B Certificates, in an amount equal to
the Class B Certificates' allocated share of any Prepayment Interest
Shortfalls on the Mortgage Loans to the extent not covered by Compensating
Interest paid by the Servicer and any shortfalls resulting from the
application of the Relief Act with respect to the Mortgage
Loans;
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THIRTEENTH, to the Reserve Fund (the "Reserve Fund") established in
accordance with the terms of the Pooling and Servicing Agreement and then
from that Reserve Fund, to pay to the holders of the Class A Certificates
and the Mezzanine Certificates any Basis Risk Shortfall and any Unpaid
Basis Risk Shortfall;
FOURTEENTH, to pay the Servicer the special servicing fee as provided in
the Pooling and Servicing Agreement;
FIFTEENTH, to the holders of the Class X/N Certificates as provided in the
Pooling and Servicing Agreement; and
SIXTEENTH, to the holders of the Residual Certificates, any remaining
amounts.
As of the Closing Date, the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date will exceed the sum of the aggregate Certificate
Principal Balances of the Class A Certificates and the Mezzanine Certificates by
an amount equal to approximately $5,000,502, which is equal to the initial
Certificate Principal Balance of the Class X/N Certificates. This amount
represents approximately 3.00% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, which is the initial amount of
overcollateralization required to be provided by the Mortgage Pool under the
Pooling and Servicing Agreement. Under the Pooling and Servicing Agreement, the
Overcollateralized Amount is required to be maintained at the "Required
Overcollateralized Amount." In the event that Realized Losses are incurred on
the Mortgage Loans, such Realized Losses may result in an overcollateralization
deficiency since the Realized Losses will reduce the principal balance of the
Mortgage Loans without a corresponding reduction to the aggregate Certificate
Principal Balances of the Offered Certificates. In the event of an
overcollateralization deficiency, the Pooling and Servicing Agreement requires
the payment from Net Monthly Excess Cashflow, subject to available funds, of an
amount equal to the overcollateralization deficiency, which shall constitute a
principal distribution on the Offered Certificates in reduction of the
Certificate Principal Balances of the Offered Certificates. This has the effect
of accelerating the amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans, and of increasing the Overcollateralized
Amount.
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the required Overcollateralized Amount may be permitted to decrease
("step down"), below the initial $5,000,502 level to a level equal to 6.00% of
the then current aggregate outstanding principal balance of the Mortgage Loans
(after giving effect to principal payments to be distributed on the related
Distribution Date), subject to a floor of $832,968. In the event that the
Required Overcollateralized Amount is permitted to step down on any Distribution
Date, the Pooling and Servicing Agreement provides that a portion of the
principal which would otherwise be distributed to the holders of the Offered
Certificates on the related Distribution Date shall be distributed to the
holders of the Class X/N Certificates pursuant to the priorities set forth
above.
With respect to each Distribution Date, the Overcollateralization Reduction
Amount, after taking into account all other distributions to be made on the
related Distribution Date, shall be distributed as Net Monthly Excess Cashflow
pursuant to the priorities set forth above. This has the effect of decelerating
the amortization of the Offered Certificates relative to the amortization of the
Mortgage Loans, and of reducing the Overcollateralized Amount. However, if on
any Distribution Date a Trigger Event is in effect, the Required
Overcollateralized Amount will not be permitted to step down on the related
Distribution Date.
ALLOCATION OF EXTRA PRINCIPAL DISTRIBUTION AMOUNT
On each Distribution Date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Extra Principal Distribution Amount shall be
distributed first, to the Class A Certificates, allocated between the classes of
Class A Certificates as described below, until the Certificate Principal Balance
of the Class A Certificates has been reduced to zero; second, to the Class M-1
Certificates, until the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero; third, to the Class M-2 Certificates,
until the Certificate Principal Balance of the Class M-2 Certificates has been
reduced to zero; and fourth, to the Class B Certificates, until the Certificate
Principal Balance of the Class B Certificates has been reduced to zero.
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On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of each class of Offered
Certificates shall be entitled to receive distributions in respect of principal
to the extent of the Extra Principal Distribution Amount in the following
amounts and order of priority:
FIRST, the lesser of (x) the Principal Distribution Amount and (y) the
Class A Principal Distribution Amount, shall be distributed to the holders
of the Class A Certificates, allocated between the classes of Class A
Certificates as described below, until the Certificate Principal Balance of
the Class A Certificates has been reduced to zero;
SECOND, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the holders of the Class A
Certificates under clause first above, and (y) the Class M-1 Principal
Distribution Amount, shall be distributed to the holders of the Class M-1
Certificates, until the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero;
THIRD, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A Certificates under clause first above and to the holders of the
Class M-1 Certificates under clause second above, and (y) the Class M-2
Principal Distribution Amount, shall be distributed to the holders of the
Class M-2 Certificates, until the Certificate Principal Balance of the
Class M-2 Certificates has been reduced to zero; and
FOURTH, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A Certificates under clause first above, to the holders of the Class
M-1 Certificates under clause second above and to the holders of the Class
M-2 Certificates under clause third above, and (y) the Class B Principal
Distribution Amount, shall be distributed to the holders of the Class B
Certificates, until the Certificate Principal Balance of the Class B
Certificates has been reduced to zero.
The Extra Principal Distribution Amount payable to the holders of the Class
A Certificates on any Distribution Date will be allocated between the Class A-1
Certificates and the Class A-2 Certificates on a PRO RATA basis based on the
Class A Principal Allocation Percentage for each such class for such
Distribution Date; provided, however, that if the Certificate Principal Balance
of either class of Class A Certificates is reduced to zero, then the remaining
amount of Extra Principal Distribution Amount distributable to the holders of
the Class A Certificates on such Distribution Date, and the amount of Extra
Principal Distribution Amount distributable to the holders of the Class A
Certificates on all subsequent Distribution Dates, will be distributed to the
holders of the class of Class A Certificates remaining outstanding, until the
Certificate Principal Balance of such class of Class A Certificates remaining
outstanding has been reduced to zero.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired on behalf of the certificateholders by deed in lieu of foreclosure or
otherwise), the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which the related Mortgage Loan was finally liquidated,
after application of all amounts recovered (net of amounts reimbursable to the
Servicer for P&I Advances, servicing advances and other related expenses,
including attorneys' fees) towards interest and principal owing on the Mortgage
Loan. The amount of loss realized and any Bankruptcy Losses are referred to in
this prospectus supplement as "Realized Losses." In the event that amounts
recovered in connection with the final liquidation of a defaulted Mortgage Loan
are insufficient to reimburse the Servicer for P&I Advances and servicing
advances, these amounts may be reimbursed to the Servicer out of any funds in
the distribution account prior to the distribution on the certificates.
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date: first, to Net Monthly Excess Cashflow, second, to the Class
X/N Certificates, until the Certificate Principal Balance of the Class X/N
Certificates has been reduced to zero, third, to the Class B Certificates,
fourth, to the Class M-2 Certificates and fifth, to the Class M-1 Certificates.
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The Pooling and Servicing Agreement does not permit the allocation of
Realized Losses to the Class A Certificates. Investors in the Class A
Certificates should note that although Realized Losses cannot be allocated to
the Class A Certificates, under certain loss scenarios there will not be enough
principal and interest on the Mortgage Loans to pay the Class A Certificates all
interest and principal amounts to which they are then entitled.
Once Realized Losses have been allocated to the Mezzanine Certificates,
such amounts with respect to these certificates will no longer accrue interest
nor will such amounts be reinstated thereafter. However, Allocated Realized Loss
Amounts may be paid to the holders of the Mezzanine Certificates from Net
Monthly Excess Cashflow, according to the priorities set forth under
"--Overcollateralization Provisions" above.
Any allocation of a Realized Loss to a certificate will be made by reducing
the Certificate Principal Balance of that certificate by the amount so allocated
as of the Distribution Date in the month following the calendar month in which
the Realized Loss was incurred. Notwithstanding anything to the contrary
described in this prospectus supplement, in no event will the Certificate
Principal Balance of any certificate be reduced more than once in respect of any
particular amount both (i) allocable to the certificate in respect of Realized
Losses and (ii) payable as principal to the holder of the certificate from Net
Monthly Excess Cashflow.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
P&I ADVANCES
Subject to the limitations set forth in the following paragraph, the
Servicer will be obligated to advance or cause to be advanced on or before each
Distribution Date its own funds, or funds in the distribution account that are
not included in the Available Distribution Amount for the Distribution Date. The
amount of the Servicer's advance will be equal to the aggregate of all payments
of principal and interest, net of the Servicing Fee, that were due during the
related Due Period on the Mortgage Loans and that were delinquent on the related
Determination Date, plus amounts representing assumed payments not covered by
any current net income on the Mortgaged Properties acquired by foreclosure or
deed in lieu of foreclosure (any such advance, a "P&I Advance.")
P&I Advances are required to be made only to the extent they are deemed by
the Servicer to be recoverable from related late collections, insurance proceeds
or liquidation proceeds. The purpose of making the P&I Advances is to maintain a
regular cash flow to the certificateholders, rather than to guarantee or insure
against losses. The Servicer will not be required to make any P&I Advances with
respect to reductions in the amount of the monthly payments on the Mortgage
Loans due to bankruptcy proceedings or the application of the Relief Act.
All P&I Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which the unreimbursed P&I Advance was made. In addition, any P&I Advances
previously made in respect of any Mortgage Loan that are deemed by the Servicer
to be nonrecoverable from related late collections, insurance proceeds or
liquidation proceeds may be reimbursed to the Servicer out of any funds in the
distribution account prior to the distributions on the certificates. In the
event that the Servicer fails in its obligation to make any required advance,
the Trust Administrator or other successor servicer (which may be the Trustee)
will be obligated to make the advance, in each case, to the extent required in
the Pooling and Servicing Agreement.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trust Administrator will provide or make
available to each holder of a Certificate a statement (based on information
received from the Servicer) setting forth, among other things, the information
set forth
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in the prospectus under "Description of the Securities--Reports to
Securityholders." The Trust Administrator will make such statement (and, at its
option, any additional files containing the same information in an alternative
format) available each month to via the Trust Administrator's internet website.
The Trust Administrator's internet website shall initially be located at
"http:\\www- apps.gis.deutsche-bank.com/invr. Assistance in using the website
can be obtained by calling the Trust Administrator's customer service desk at
1-800-735-7777. Parties that are unable to use the above distribution options
are entitled to have a paper copy mailed to them via first class mail by calling
the customer service desk and indicating such. The Trust Administrator shall
have the right to change the way such statements are distributed in order to
make such distribution more convenient and/or more accessible to the above
parties and the Trust Administrator shall provide timely and adequate
notification to all above parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trust Administrator will prepare and deliver to each holder
of a Certificate of record during the previous calendar year a statement
containing information necessary to enable Certificateholders to prepare their
tax returns. Such statements will not have been examined and reported upon by an
independent public accountant.
THE ORIGINATOR
The information set forth in the following paragraphs has been provided by
the Originator. None of the Servicer, the Depositor, the Trustee, the Trust
Administrator or the Underwriter or any of their respective affiliates has made
or will make any representation as to the accuracy or completeness of this
information.
The Originator is a wholly-owned subsidiary of New Century Financial
Corporation ("NCFC"), a public company. The Originator is a consumer finance and
mortgage banking company that originates, sells and services first and second
mortgage loans and other consumer loans. The Originator emphasizes the
origination of mortgage loans that are commonly referred to as non-conforming
"B&C" loans. The Originator commenced lending operations on February 26, 1996.
It is headquartered in Irvine, California.
For the year ended December 31, 2000, the Originator originated and
purchased approximately $4.2 billion in mortgage loans. For the year ended
December 31, 2000, the Originator sold approximately $3.2 billion of mortgage
loans, mostly on a servicing-released basis, in whole loan sales and
approximately $1.0 billion of mortgage loans through securitization.
As of December 31, 2000, the Originator had retail and wholesale branch
offices in 30 states, and was originating mortgage loans through 5 regional
operating centers, 26 wholesale sales offices and 69 retail sales offices. As of
December 31, 2000, the Originator had approximately 1506 employees.
LOAN LOSS AND DELINQUENCY
THE ORIGINATOR COMMENCED LENDING OPERATIONS IN FEBRUARY 1996, COMMENCED ITS
DEFAULT RELATED SERVICING OPERATIONS IN SEPTEMBER 1997 AND AS OF JULY 1998 IS
DIRECTLY HANDLING SERVICING DUTIES THAT IT USED TO OUTSOURCE, INCLUDING LOAN
SETUP, ESCROW ADMINISTRATION, MONTHLY BILLINGS, CASHIERING AND LOCKBOX OPERATION
AND SWEEPS, DEMANDS AND PAYOFF REQUESTS, YEAR-END TAX REPORTING, ROUTINE
CUSTOMER CALLS AND CORRESPONDENCE AND MORTGAGE POOL DATA REPORTING. ACCORDINGLY,
THE ORIGINATOR HAS NO REPRESENTATIVE HISTORICAL DELINQUENCY, BANKRUPTCY,
FORECLOSURE OR DEFAULT EXPERIENCE THAT MAY BE REFERRED TO FOR PURPOSES OF
ESTIMATING FUTURE DELINQUENCY AND LOSS EXPERIENCE OF THE MORTGAGE LOANS.
However, the following table sets forth information regarding the loan loss
and delinquency experience of mortgage loans for which the Originator is
servicer or master servicer. The mortgage loans for which this information is
provided include those originated or acquired under the Originator's regular
lending program and either owned by the Originator or previously sold to trusts
in transactions in which the Originator was appointed as servicer or master
servicer.
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Because mortgage loans are continually being originated and added to the
group for which these statistics are compiled, the average seasoning of the
mortgage loans included in the statistics is considerably shorter. Because newly
originated mortgage loans will not be added to the Mortgage Pool after the
Closing Date, the Mortgage Pool will consist of a static group of mortgage
loans, and accordingly the actual loss and delinquency percentages with respect
to the mortgage pool are likely to be substantially higher than those indicated
in the tables contained in this section.
Certain of the mortgage loans in the statistics below are serviced by a
subservicer for the Originator. Accordingly, the performance statistics reflect
the servicing practices of that subservicer, as well as the quality and type of
mortgage loans. These servicing practices are not necessarily representative of
the practices employed by the Originator in its servicing and administrative
duties.
DELINQUENCY AND FORECLOSURE EXPERIENCE
OF THE ORIGINATOR'S SERVICING PORTFOLIO
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 2000
Percentage Percentage Percentage
of Total of Total of Total
Dollar Servicing Dollar Servicing Dollar Servicing
Amount Portfolio Amount Portfolio Amount Portfolio
------ --------- ------ --------- ------ ---------
Delinquency(1)
30-59 Days $ 66,305,256 1.80% $ 91,134,032 1.52% $ 119,297,992 1.79%
60-89 Days $ 13,690,073 0.37% $ 28,391,092 0.47% $ 34,618,378 0.52%
90 Days or $ 20,657,896 0.56% $ 75,083,913 1.25% $ 114,799,499 1.72%
more
Loans in $ 84,547,901 2.30% $ 181,811,560 3.03% $ 251,879,039 3.77%
Foreclosure(2)
REO $ 13,011,568 0.35% $ 50,631,760 0.84% $ 70,114,889 1.05%
Properties
Total
Servicing
Portfolio $3,676,504,202 $6,002,723,518 $6,678,476,537
- ------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) The percentage of loans in foreclosure and REO properties is based on the
dollar amount of loans in foreclosure and REO properties as a percentage
of the total dollar amount of the mortgage loans in the servicing
portfolio as of the date indicated.
With respect to the table above, there can be no assurance that the
delinquency and loss experience of the Mortgage Loans will correspond to the
loss experience of the Originator's mortgage portfolio set forth in the table.
The statistics shown represent the delinquency and loss experience for the
Originator's total servicing portfolio only for the time periods presented,
whereas the aggregate delinquency and loss experience on the Mortgage Loans will
depend on the results obtained over the life of the trust fund. The Originator's
portfolio includes mortgage loans with payment and other characteristics which
are not representative of the payment and other characteristics of the Mortgage
Loans. If the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies, foreclosures and
losses could be higher than those previously experienced by the Originator. In
addition, adverse economic conditions, which may or may not affect real property
values, may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the actual rates
of delinquencies, foreclosures and losses with respect to those Mortgage Loans.
The delinquency and loss experience percentages set forth above are
calculated on the basis of the total mortgage loans serviced as of the end of
the periods indicated. However, because the total outstanding principal balance
of
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residential loans serviced by the Originator has increased substantially, the
total outstanding principal balance of originated loans serviced as of the end
of any indicated period includes many loans that will not have been outstanding
long enough to give rise to some or all of the indicated periods of delinquency.
In the absence of substantial and continual additions of newly originated loans
to the total amount of loans serviced, the percentages indicated above would be
higher and could be substantially higher. The actual delinquency percentages
with respect to the Mortgage Loans may be expected to be substantially higher
than the delinquency percentages indicated above because the composition of the
Mortgage Loans will not change.
INVESTORS SHOULD NOTE THAT THE MORTGAGE LOANS WILL NOT BE SERVICED BY THE
ORIGINATOR. THE SERVICING WITH RESPECT TO THE MORTGAGE LOANS WILL BE TRANSFERRED
TO THE SERVICER SHORTLY BEFORE THE CLOSING DATE. FOR A DETAILED DESCRIPTION OF
THE SERVICER AS WELL AS THE SERVICER'S DELINQUENCY AND FORECLOSURE EXPERIENCE,
SEE "POOLING AND SERVICING AGREEMENT--THE SERVICER" IN THIS PROSPECTUS
SUPPLEMENT.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued under the Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement"), dated as of March 1, 2001 among the
Depositor, the Servicer, the Trustee and the Trust Administrator, a form of
which is filed as an exhibit to the registration statement. A Current Report on
Form 8-K relating to the certificates containing a copy of the Pooling and
Servicing Agreement as executed will be filed by the Depositor with the
Securities and Exchange Commission ("SEC") within fifteen days of the initial
issuance of the certificates. The trust fund created under the Pooling and
Servicing Agreement will consist of (i) all of the Depositor's right, title and
interest in the Mortgage Loans, the related mortgage notes, mortgages and other
related documents; (ii) all payments on or collections in respect of the
Mortgage Loans due after the Cut-off Date, together with any proceeds of the
Mortgage Loans; (iii) any Mortgaged Properties acquired on behalf of
certificateholders by foreclosure or by deed in lieu of foreclosure, and any
revenues received on these mortgaged properties; (iv) the rights of the Trustee
under all insurance policies required to be maintained under the Pooling and
Servicing Agreement; (v) the rights of the Depositor under the Mortgage Loan
Purchase Agreement; and (vi) the Reserve Fund and any amounts on deposit in the
Reserve Fund from time to time and any proceeds thereof. Reference is made to
the prospectus for important information in addition to that set forth in this
prospectus supplement regarding the trust fund, the terms and conditions of the
Pooling and Servicing Agreement and the Offered Certificates. The Depositor will
provide to a prospective or actual certificateholder without charge, on written
request, a copy, without exhibits, of the Pooling and Servicing Agreement.
Requests should be addressed to 6707 Fairview Road, Suite D, Charlotte, North
Carolina 28210.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the trust all of its
right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form to the Trustee and
other related documents (collectively, the "Related Documents"), including all
scheduled payments with respect to each such Mortgage Loan due after the Cut-off
Date. The Trust Administrator, concurrently with such transfer, will deliver the
certificates to the Depositor. Each Mortgage Loan transferred to the trust will
be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trust Administrator and the Trustee pursuant to the Pooling and Servicing
Agreement. The Mortgage Loan Schedule will include information such as the
principal balance of each Mortgage Loan as of the Cut-off Date, its Mortgage
Rate as well as other information with respect to each Mortgage Loan.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Depositor will deliver or cause to be delivered to
the Trustee (or a custodian, as the Trustee's agent for such purpose) the
mortgage notes endorsed to the Trustee on behalf of the certificateholders and
the Related Documents. In lieu of delivery of original mortgages or mortgage
notes, if such original is not available or lost, the Depositor may deliver or
cause to be delivered true and correct copies thereof, or, with respect to a
lost mortgage note, a lost note affidavit. The assignments
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of mortgage are generally required to be recorded by or on behalf of the
Depositor in the appropriate offices for real property records.
On or prior to the Closing Date, the Trustee will review the Mortgage Loans
and the Related Documents pursuant to the Pooling and Servicing Agreement and if
any Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to NC Capital by the Trustee, NC Capital will be obligated to either (i)
substitute for such Mortgage Loan a Qualified Substitute Mortgage Loan; however,
such substitution is permitted only within two years of the Closing Date and may
not be made unless an opinion of counsel is provided to the effect that such
substitution will not disqualify any of the REMICs (as defined in the Pooling
and Servicing Agreement) as a REMIC or result in a prohibited transaction tax
under the Code or (ii) purchase such Mortgage Loan at a price (the "Purchase
Price") equal to the outstanding principal balance of such Mortgage Loan as of
the date of purchase, plus all accrued and unpaid interest thereon, computed at
the Mortgage Rate through the end of the calendar month in which the purchase is
effected, plus the amount of any unreimbursed P&I Advances and servicing
advances made by the Servicer. The Purchase Price will be required to be
remitted to the Servicer for deposit in the Collection Account (as defined
herein) on or prior to the next succeeding Determination Date after such
obligation arises. The obligation of NC Capital to repurchase or substitute for
a Deleted Mortgage Loan (as defined herein) is the sole remedy regarding any
defects in the Mortgage Loans and Related Documents available to the
certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, NC Capital will be required to remit to the Servicer for deposit in the
Collection Account on or prior to the next succeeding Determination Date after
such obligation arises an amount (the "Substitution Shortfall Amount") equal to
the excess of the principal balance of the related Deleted Mortgage Loan over
the principal balance of such Qualified Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted for a
Deleted Mortgage Loan which must, on the date of such substitution, (i) have an
outstanding principal balance (or in the case of a substitution of more than one
Mortgage Loan for a Deleted Mortgage Loan, an aggregate principal balance), not
in excess of the principal balance of the Deleted Mortgage Loan; (ii) have a
Mortgage Rate not less than the Mortgage Rate of the Deleted Mortgage Loan and
not more than 1% in excess of the Mortgage Rate of such Deleted Mortgage Loan;
(iii) have a Maximum Mortgage Rate and Minimum Mortgage Rate not less than the
respective rate for the Deleted Mortgage Loan and have a Gross Margin equal to
or greater than the Deleted Mortgage Loan; (iv) have the same Due Date as the
Deleted Mortgage Loan; (v) have a remaining term to maturity not more than one
year earlier and not later than the remaining term to maturity of the Deleted
Mortgage Loan; (vi) comply with each representation and warranty as to the
Mortgage Loans set forth in the Mortgage Loan Purchase Agreement (deemed to be
made as of the date of substitution); (vii) be of the same or better credit
quality as the Mortgage Loan being replaced and (viii) satisfy certain other
conditions specified in the Pooling and Servicing Agreement.
NC Capital will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee and the Trust Administrator with respect to each Mortgage Loan. In
addition, NC Capital will represent and warrant, as of the Closing Date, that,
among other things: (i) at the time of transfer to the Mortgage Loan Seller, NC
Capital has transferred or assigned all of its right, title and interest in each
Mortgage Loan and the Related Documents, free of any lien, (ii) each Mortgage
Loan complied, at the time of origination, in all material respects with
applicable state and federal laws, (iii) the Mortgage Loans are not subject to
the requirements of the Home Ownership and Equity Protection Act of 1994 (the
"Homeownership Act"); (iv) no proceeds from any Mortgage Loan were used to
purchase single premium credit insurance policies as part of the origination of,
or as a condition to closing, such Mortgage Loan and (v) no Mortgage Loan has a
Prepayment Charge longer than five years after its date of origination. In
addition, the Servicer will represent that it will accurately and fully report
its mortgagor credit files to each of the credit repositories in a timely
manner. Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the certificateholders in the
related Mortgage Loan and Related Documents, NC Capital (or the Servicer, in the
event of a breach of the Servicer's representation) will have a period of 90
days after the earlier of discovery or receipt of written notice of the breach
to effect a cure. If the breach cannot be cured within the 90-day period, NC
Capital or the Servicer will be obligated to (i) substitute for such Deleted
Mortgage Loan a Qualified Substitute Mortgage Loan or (ii) purchase such Deleted
Mortgage Loan from the trust. The same
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procedure and limitations that are set forth above for the substitution or
purchase of Deleted Mortgage Loans as a result of deficient documentation
relating thereto will apply to the substitution or purchase of a Deleted
Mortgage Loan as a result of a breach of a representation or warranty in the
Mortgage Loan Purchase Agreement that materially and adversely affects the
interests of the certificateholders.
Mortgage Loans required to be transferred to NC Capital as described in the
preceding paragraphs are referred to as "Deleted Mortgage Loans."
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer shall establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the
certificateholders. The Collection Account will be an Eligible Account (as
defined in the Pooling and Servicing Agreement). Upon receipt by the Servicer of
amounts in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee or other servicing compensation, reimbursement for P&I Advances
and servicing advances and insurance proceeds to be applied to the restoration
or repair of a Mortgaged Property or similar items), the Servicer will deposit
such amounts in the Collection Account. Amounts so deposited may be invested in
Permitted Investments (as defined in the Pooling and Servicing Agreement)
maturing no later than one Business Day prior to the date on which the amount on
deposit therein is required to be deposited in the Distribution Account. The
Trust Administrator will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to certificateholders on a Distribution Date and payment of certain
fees and expenses of the trust. The Distribution Account will be an Eligible
Account. Amounts on deposit therein may be invested in Permitted Investments
maturing on or before the Business Day prior to the related Distribution Date
unless such Permitted Investments are invested in investments managed or advised
by the Trust Administrator or an affiliate thereof, in which case such Permitted
Investments may mature on the related Distribution Date.
THE SERVICER
The information set forth in the following paragraphs has been provided by
the Servicer. None of the Depositor, the Originator, the Trustee, the Trust
Administrator, the Underwriter or any of their respective affiliates has made or
will make any representation as to the accuracy or completeness of the
information. Any obligation specified to be performed by the master servicer in
the prospectus is an obligation to be performed by the Servicer with respect to
the Mortgage Loans.
Litton Loan Servicing LP, a Delaware limited partnership and a wholly-owned
subsidiary of Credit-Based Asset Servicing and Securitization LLC ("C-BASS"),
will act as the servicer of the Mortgage Loans pursuant to the Pooling and
Servicing Agreement. The Servicer was formed in December 1996.
C-BASS is approximately 46% owned by each of Mortgage Guaranty Insurance
Corporation ("MGIC") and Enhance Financial Services Group, Inc. ("EFSG") with
certain members of the management of C-BASS owning the remainder. On February
28, 2001, Radian Group Inc. acquired EFSG, including EFSG's 46% interest in
C-BASS. MGIC and Radian are publicly traded companies which file such periodic
reports with the SEC as are required by the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder.
The Servicer currently employs approximately 330 individuals. The main
office of the Servicer is located at 5373 W. Alabama, Houston, Texas 77056. The
Servicer is currently a Fannie Mae and Freddie Mac approved servicer and an
approved FHA and VA lender with a servicing portfolio in excess of $5.9 billion.
The Servicer specializes in servicing sub-performing mortgage loans and entering
into workouts with the related mortgagors. The Servicer is servicing
approximately 13 securitizations for C-BASS and 36 securitizations for third
parties.
Fitch, Inc. ("Fitch") assigned the Servicer its RSS1 residential special
servicer rating on November 16, 1999. The rating is based on the Servicer's
ability to manage and liquidate nonperforming residential mortgage loans and
real estate owned assets. This RSS1 rating is the highest special servicer
rating attainable from Fitch which reflects the
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Servicer's sophisticated proprietary default management technology, the
financial strength of its well-capitalized parent and its highly experienced
management and staff.
In January 2001, Fitch assigned the Servicer its RPS1 primary servicer
rating for sub-prime and high loan-to-value ratio product. The RPS1 rating is
currently the highest subprime primary servicer rating attainable from Fitch for
any subprime servicer, which is based on the strength of the Servicer's loan
administration processes including new loan set-up procedures and related
technology, loan accounting/cash management and loan reporting. The RPS1 rating
for high loan-to-value ratio product is based, in part, on the Servicer's
intensive focus on early collection and loss mitigation.
Also in January 2001, Standard & Poor's Rating Service ("S&P") raised the
Servicer's ranking from "Above Average" to "Strong" for both its residential
special and sub-prime servicing categories. The "Strong" rating is S&P's highest
possible rating for these categories. The rankings are based on the Servicer's
established history of servicing distressed assets for a diverse investor base,
technological improvements that have increased operational efficiencies,
superior management depth, and very good internal controls.
DELINQUENCY AND FORECLOSURE EXPERIENCE. The following table sets forth the
delinquency and foreclosure experience of the mortgage loans the Servicer
serviced as of the dates indicated. The Servicer's portfolio of mortgage loans
may differ significantly from the Mortgage Loans in terms of mortgage rates,
principal balances, geographic distribution, types of properties and other
possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the Mortgage Loans will be similar to that reflected in the table
below, nor is any representation made as to the rate at which losses may be
experienced on liquidation of defaulted Mortgage Loans. The actual delinquency
experience on the Mortgage Loans will depend, among other things, upon the value
of the real estate securing such Mortgage Loans and the ability of the related
mortgagor to make required payments. It should be noted that the Servicer's
business emphasizes to a certain degree the acquisition of servicing rights with
respect to non-performing and subperforming mortgage loans and the Servicer has
been an active participant in the market for such servicing rights since 1997.
The acquisition of such servicing rights may have affected the delinquency and
foreclosure experience of the Servicer.
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DELINQUENCY AND FORECLOSURE EXPERIENCE(1)
As of December 31, 2000 As of December 31, 1999
----------------------- -----------------------
% by % by
No. of Principal Principal No. of Principal Principal
Loans Balance(2) Balance Loans Balance(2) Balance
----- ---------- ------- ----- ---------- -------
Current Loans 49,371 $3,500,827,158 58.8% Current Loans 37,105 $2,580,776,677 69.98%
Period of Period of
Delinquency(3) Delinquency(3)
30-59 Days 9,285 $ 653,499,039 11.0% 30-59 Days 4,638 $ 323,122,291 8.76%
60-89 Days 3,545 $ 248,529,128 4.2% 60-89 Days 1,886 $ 133,339,006 3.62%
90-120 Days More 998 $ 71,141,544 1.2% 90+ Days 2,056 $ 127,745,979 3.46%
------ -------------- -------
120+ more Days 9,500 $ 593,198,719 10.0%
------ -------------- ------
TOTAL TOTAL
DELINQUENCIES 23,328 $1,566,368,430 26.3% DELINQUENCIES 8,580 $ 584,207,276 15.84%
Bankruptcies/ Bankruptcies/
Foreclosures(4) 9,686 $ 743,491,868 12.5% Foreclosures(4) 5,503 $ 433,109,387 11.74%
Real Estate
Real Estate Owned 2,135 $ 139,634,200 2.3% Owned 1,264 $ 89,691,707 2.43%
------ -------------- ------ ------ -------------- -------
TOTAL PORTFOLIO 84,520 $5,950,321,656 100.00% TOTAL PORTFOLIO 52,452 $3,687,785,047 100.00%
------ -------------- ------- ------ -------------- -------
- -------------------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the real estate owned properties, the principal balance is at the
time of foreclosure.
(3) No mortgage loan is included in this section of the table as delinquent
until it is 30 days past due.
(4) Exclusive of the number of loans and principal balance shown in Period
of Delinquency
It is unlikely that the delinquency experience of the Mortgage loans will
correspond to the delinquency experience of the Servicer's mortgage portfolio
set forth in the foregoing table. The statistics shown above represent the
delinquency experience on the Mortgage loans will depend on the results obtained
over the life of the Mortgage Pool. The Servicer does not have significant
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Mortgage Loans. There can be no assurance that the Mortgage
Loans will perform consistently with the delinquency or foreclosure experience
described herein. It should be noted that if the residential real estate market
should experience an overall decline in property values, the actual rates of
delinquencies and foreclosure could be higher than those previously experienced
by the Servicer. In addition, adverse economic conditions may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Pool.
THE TRUSTEE
U.S. Bank National Association, a national banking association, will act as
trustee for the certificates under the Pooling and Servicing Agreement. The
Trustee's offices for notices under the Pooling and Servicing Agreement are
located at 180 East Fifth Street, St. Paul, Minnesota 55101, and its telephone
number is (612) 973-5800. In the event the Trust Administrator advises the
Trustee that it is unable to continue to perform its obligations pursuant to the
terms of the Pooling and Servicing Agreement prior to the appointment of a
successor, the Trustee is obligated to perform such obligations until a new
trust administrator is appointed.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling and Servicing Agreement will be equal to the
related portion of accrued interest at the Administration Fee Rate of 0.0125%
per annum on the Scheduled Principal Balance of the Mortgage Loans (the
"Administration Fee"). The Pooling and Servicing
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Agreement will provide that the Trustee and any director, officer, employee or
agent of the Trustee will be indemnified by the trust fund and will be held
harmless against any loss, liability or expense (not including expenses,
disbursements and advances incurred or made by the Trustee, including the
compensation and the expenses and disbursements of its agents and counsel, in
the ordinary course of the Trustee's performance in accordance with the
provisions of the Pooling and Servicing Agreement), incurred by the Trustee in
connection with any pending or threatened claim or legal action arising out of
or in connection with the acceptance or administration of its obligations and
duties under the Pooling and Servicing Agreement, other than any loss, liability
or expense (i) for which the Trustee is indemnified by the Servicer or the Trust
Administrator under the Pooling and Servicing Agreement, (ii) that constitutes a
specific liability of the Trustee under the Pooling and Servicing Agreement or
(iii) incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trustee's duties under the Pooling and Servicing Agreement or
as a result of a breach, or by reason of reckless disregard, of the Trustee's
obligations and duties under the Pooling and Servicing Agreement.
THE TRUST ADMINISTRATOR
Bankers Trust Company of California, N.A., a national banking association,
will act as Trust Administrator for the certificates pursuant to the Pooling and
Servicing Agreement. The Trust Administrator's offices for notices under the
Pooling and Servicing Agreement are located at 1761 East St. Andrew Place, Santa
Ana, California 92705-4934, and its telephone number is (714) 247-6000. The
Trust Administrator will perform certain administrative functions on behalf of
the Trustee and will act as initial paying agent and certificate registrar.
The principal compensation to be paid to the Trust Administrator in respect
of its obligations under the Pooling and Servicing Agreement will be equal to
the related portion of the Administration Fee. The Pooling and Servicing
Agreement will provide that the Trust Administrator and any director, officer,
employee or agent of the Trust Administrator will be indemnified by the trust
fund and will be held harmless against any loss, liability or expense (not
including expenses, disbursements and advances incurred or made by the Trust
Administrator, including the compensation and the expenses and disbursements of
its agents and counsel, in the ordinary course of the Trust Administrator's
performance in accordance with the provisions of the Pooling and Servicing
Agreement) incurred by the Trust Administrator in connection with any pending or
threatened claim or legal action arising out of or in connection with the
acceptance or administration of its obligations and duties under the Pooling and
Servicing Agreement, other than any loss, liability or expense (i) for which the
Trust Administrator is indemnified by the Servicer or the Trustee under the
Pooling and Servicing Agreement, (ii) that constitutes a specific liability of
the Trust Administrator under the Pooling and Servicing Agreement or (iii)
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trust Administrator's duties under the Pooling and Servicing
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trust Administrator's obligations and duties under the Pooling and Servicing
Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Servicer in respect of its
servicing activities for the certificates will be equal to accrued interest at
the Servicing Fee Rate of 0.50% per annum with respect to each Mortgage Loan on
the Scheduled Principal Balance of each Mortgage Loan (the "Servicing Fee"). As
additional servicing compensation, the Servicer is entitled to retain all
assumption fees, late payment charges, and other miscellaneous servicing fees in
respect of the Mortgage Loans (with the exception of Prepayment Charges, which
will be distributed to the holders of the Class X/N Certificates), to the extent
collected from mortgagors, together with any interest or other income earned on
funds held in the collection account and any escrow accounts. The Servicer will
also be entitled to a "Special Servicing Fee" with respect to Mortgage Loans
which are delinquent 90 or more days. The Special Servicing Fee for each
Mortgage Loan of this type will be equal to $150 for each month that the
Mortgage Loan is delinquent, to a maximum of 18 consecutive months, and will be
payable only to the extent of the available Net Monthly Excess Cashflow and
according to the priorities as described in this prospectus supplement.
The Servicer is obligated to offset any Prepayment Interest Shortfall on
any Distribution Date, with Compensating Interest to the extent of one-half of
its Servicing Fee for each Distribution Date. The Servicer is obligated to pay
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insurance premiums and other ongoing expenses associated with the Mortgage Pool
incurred by the Servicer in connection with its responsibilities under the
Pooling and Servicing Agreement and is entitled to reimbursement for these
expenses as provided in the Pooling and servicing agreement. See "Description of
the Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Retained Interest; Servicing Compensation and
Payment of Expenses" in the prospectus for information regarding expenses
payable by the Servicer and "Federal Income Tax Consequences" in this prospectus
supplement regarding taxes payable by the Servicer.
EVENTS OF DEFAULT
In addition to those events of default described under "Description of the
Agreements --Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Events of Default under the Agreement and
- --Rights Upon Events of Default under the Agreements" in the prospectus, upon
the occurrence of loss triggers with respect to the Mortgage Loans, the Servicer
may be removed as Servicer of the Mortgage Loans in accordance with the terms of
the Pooling and Servicing Agreement. Furthermore, the Servicer has pledged all
of its right, title and interest in, to and under the Pooling and Servicing
Agreement to First Union National Bank. As a result of this pledge, the Servicer
may be removed as Servicer and may be replaced by First Union National Bank upon
receipt by the Trustee and the Trust Administrator of a letter of resignation
signed by the Servicer in accordance with the terms of the credit agreement
between the Servicer and First Union National Bank.
Any successor to the Servicer appointed under the Pooling and Servicing
Agreement must be a housing loan servicing institution, acceptable to each
rating agency, with a net worth at the time of the appointment of at least
$15,000,000. See "Description of the Agreements --Material Terms of the Pooling
and Servicing Agreements and Underlying Servicing Agreements--Events of Default
under the Agreement and --Rights Upon Events of Default under the Agreements" in
the prospectus.
VOTING RIGHTS
At all times, 100% of all voting rights will be allocated among the holders
of the Class A Certificates, the Mezzanine Certifictes and the Class X/N
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective certificates.
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the certificates are described
in"Description of the Securities--Termination" in the prospectus. The Servicer
will have the right to purchase all remaining Mortgage Loans and any properties
acquired in respect thereof and thereby effect early retirement of the
certificates on any Distribution Date following the Due Period during which the
aggregate principal balance of the Mortgage Loans and properties acquired in
respect thereof remaining in the trust fund at the time of purchase is reduced
to less than 10%of the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date. In the event the Servicer exercises the option, the purchase
price payable in connection with the option will be equal to the greater of par
or the fair market value of the Mortgage Loans and such properties, plus accrued
interest for each Mortgage Loan at the related Mortgage Rate to but not
including the first day of the month in which the repurchase price is
distributed, together with any amounts due to the Servicer for unpaid Servicing
Fees and any unreimbursed advances. In the event the Servicer exercises this
option, the portion of the purchase price allocable to the Offered Certificates
will be, to the extent of available funds, (i) 100% of the then outstanding
Certificate Principal Balance of the Offered Certificates, plus (ii) one month's
interest on the then outstanding Certificate Principal Balance of the Offered
Certificates at the then applicable Pass-Through Rate for the class, plus (iii)
any previously accrued but unpaid interest thereon to which the holders of the
Offered Certificates are entitled, together with the amount of any Basis Risk
Shortfalls and Unpaid Basis Risk Shortfalls, plus (iv) in the case of the
Mezzanine Certificates, any previously unpaid Allocated Realized Loss Amount.
The holders of the Residual Certificates shall pledge any amount received in a
termination in excess of par to the holders of the Class X/N Certificates. In no
event will the trust created by the Pooling and Servicing Agreement continue
beyond the expiration of 21 years from the death of the survivor of the
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persons named in the Pooling and Servicing Agreement. See "Description of the
Securities--Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Thacher Proffitt & Wood, counsel to the Depositor,
assuming compliance with the provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, each of the REMICs established under the
Pooling and Servicing Agreement will qualify as a REMIC under the Code.
For federal income tax purposes (i) the Residual Certificates will
represent the sole classes of "residual interests" in each REMIC elected by the
trust and (ii) the Offered Certificates (exclusive of any right of the holder of
such certificates to receive payments from the Reserve Fund in respect of Basis
Risk Shortfalls) and the Class X Certificates will represent the "regular
interests" of, and will be treated as debt instruments of, a REMIC. See
"Material Federal Income Tax Considerations --REMICs" in the prospectus.
For federal income tax purposes, the Offered Certificates will not be
treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that, subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to 28% of CPR. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Material Federal Income Tax Considerations--General" and
"--REMICs--Taxation of Owners of Regular Securities" in the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting.
The Internal Revenue Service (the "IRS") has issued original issue discount
regulations (the "OID Regulations") under sections 1271 to 1275 of the Code that
address the treatment of debt instruments issued with original issue discount.
Purchasers of the Offered Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered Certificates. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the Offered Certificates. Because of the uncertainty concerning the
application of Section 1272(a)(6) of the Code to such certificates and because
the rules of the OID Regulations relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Offered Certificates
should be treated as issued with original issue discount or should be governed
by the rules applicable to debt instruments having contingent payments or by
some other method not yet set forth in regulations. Prospective purchasers of
the Offered Certificates are advised to consult their tax advisors concerning
the tax treatment of such certificates.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, the holder of an Offered Certificate may
be able to select a method for recognizing original issue discount that differs
from that used by the Trust in preparing reports to the certificateholders and
the IRS.
Certain of the certificates may be treated for federal income tax purposes
as having been issued at a premium. Whether any holder of a certificate will be
treated as holding such certificate with amortizable bond premium will depend on
such certificateholder's purchase price and the distributions remaining to be
made on such certificate at the time of its acquisition by such
certificateholder. Holders of such certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Material Federal Income Tax Considerations-- REMICs--Taxation of
Owners of Regular Securities" in the Prospectus.
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Each holder of a Class A Certificate and a Mezzanine Certificate is deemed
to own an undivided beneficial ownership interest in two assets, a REMIC Regular
Interest and the right to receive payments from an outside Reserve Fund in
respect of Basis Risk Shortfalls. The Reserve Fund is not an asset of any REMIC.
The treatment of amounts received by a holder of Class A or Mezzanine
Certificate under that certificateholder's right to receive a Basis Risk
Shortfall will depend on the portion, if any, of the certificateholder's
purchase price allocable thereto. Under the REMIC Regulations, each holder of a
Class A or Mezzanine Certificate must allocate its purchase price for such
certificate between its undivided interest in the regular interest of a REMIC
and its undivided interest in the right to receive payments from the Reserve
Fund in respect of Basis Risk Shortfalls in accordance with the relative fair
market values of each property right. The Trust Administrator intends to treat
payments made to the holders of the Class A Certificates and the Mezzanine
Certificates with respect to a Basis Risk Shortfall as includible in income
based on the regulations relating to notional principal contracts. The OID
regulations provide that the trust's allocation of the issue price is binding on
all holders unless the holder explicitly discloses on its tax return that its
allocation is different from the trust's allocation. For tax reporting purposes,
the Trust Administrator intends to treat the right to receive payments from the
Reserve Fund in respect of Basis Risk Shortfalls as having a DE MINIMIS value.
However, this assignment of value is not binding on the IRS and the IRS could
argue that a greater value should have been allocated to the right to receive
payments from the Reserve Fund in respect of Basis Risk Shortfalls. If an
argument of this kind were to be sustained, the Class A Certificates and the
Mezzanine Certificates could be viewed as having been issued with original issue
discount. Under the REMIC Regulations, the Trust Administrator is required to
account for the REMIC Regular Interest and the right to receive payments from
the Reserve Fund in respect of Basis Risk Shortfalls as discrete property
rights. Holders of the Offered Certificates are advised to consult their own tax
advisors regarding the allocation of issue price, timing, character and source
of income and deductions resulting from the ownership of the Offered
Certificates. Treasury regulations have been promulgated under Section 1275 of
the Code generally providing for the integration of a "qualifying debt
instrument" with a hedge if the combined cash flows of the components are
substantially equivalent to the cash flows on a variable rate debt instrument.
However, these regulations specifically disallow integration of debt instruments
subject to Section 1272(a)(6) of the Code. Therefore, holders of the Offered
Certificates will be unable to use the integration method provided for under
these regulations with respect to the Offered Certificates. Ownership of the
right to Basis Risk Shortfalls will nevertheless entitle the owner to amortize
the separate price paid for the right to Basis Risk Shortfalls under the
regulations relating to notional principal contracts if this right is treated as
a "notional principal contract."
In the event that a certificateholder's right to receive Basis Risk
Shortfalls is characterized as a "Notional Principal Contract," upon the sale of
a Class A or Mezzanine Certificate the amount of the sale allocated to the
selling certificateholder's right to receive payments from the Reserve Fund in
respect of the Basis Risk Shortfalls would be considered a "termination payment"
under the regulations relating to Notional Principal Contracts allocable to the
related certificate. A certificateholder will have gain or loss from a
termination of the right to receive payments from the Reserve Fund in respect of
Basis Risk Shortfalls equal to (i) any termination payment it received or is
deemed to have received minus (ii) the unamortized portion of any amount paid
(or deemed paid) by the certificateholder upon entering into or acquiring its
interest in the right to receive payments from the Reserve Fund in respect of
Basis Risk Shortfalls.
Gain or loss realized upon the termination of the right to receive payments
from the Reserve Fund in respect of Basis Risk Shortfalls will generally be
treated as capital gain or loss. Moreover, in the case of a bank or thrift
institution, Code Section 582(c) would likely not apply to treat such gain or
loss as ordinary.
This paragraph applies to the Class A Certificates and the Mezzanine
Certificates exclusive of any rights in the Reserve Fund. The Offered
Certificates will be treated as assets described in Section 7701(a)(19)(C) of
the Code and "real estate assets" under Section 856(c)(4)(A) of the Code
generally in the same proportion that the assets of the trust would be so
treated. In addition, interest on the Offered Certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code to the extent that the Offered Certificates are treated
as "real estate assets" under Section 856(c)(4)(A) of the Code. Moreover, the
Offered Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, as mentioned
above, no portion of a Class A or Mezzanine Certificateholder's basis or income
allocable to a Basis Risk Arrangement will qualify for such treatment.
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As a result, those Certificates are not suitable investments for inclusion in
another REMIC. See "Pooling and Servicing Agreement--Termination" in this
prospectus supplement and "Material Federal Income Tax Considerations--REMICs--
Characterization of Investments in REMIC Securitiess" in the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting. As noted above, each holder of a Class A Certificate or a Mezzanine
Certificate will be required to allocate a portion of the purchase price paid
for such certificates to the right to receive payments from the Reserve Fund in
respect of Basis Risk Shortfalls. The value of the right to receive any Basis
Risk Shortfall is a question of fact which could be subject to differing
interpretations. Because Basis Risk Shortfalls are treated as a separate right
of the Class A Certificates and Mezzanine Certificates not payable by the REMIC,
this right will not be treated as a qualifying asset for any certificateholder
that is a mutual savings bank, domestic building and loan association, real
estate investment trust, or real estate mortgage investment conduit and any
amounts received from the reserve fund will not be qualifying real estate income
for real estate investment trusts.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see "Material Federal Income Tax
Considerationss--REMICs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated March 19, 2001 (the "Underwriting Agreement"), between the
Underwriter and the Depositor, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, the
Offered Certificates.
Distribution of the Offered Certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be 100%
of the aggregate initial Certificate Principal Balance of the Offered
Certificates. In connection with the purchase and sale of the Offered
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.
The Offered Certificates are offered subject to receipt and acceptance by
the Underwriter, to prior sale and to the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Offered Certificates will be made
through the facilities of DTC, Clearstream and the Euroclear System on or about
the Closing Date. The Offered Certificates will be offered in Europe and the
United States of America.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against those civil liabilities set forth in the Underwriting
Agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the Underwriter may be required to make in
respect of these liabilities.
SECONDARY MARKET
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue. The Underwriter
intends to establish a market in the Offered Certificates but it is not
obligated to do so. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the Depositor is not aware of any source through which price
information about the Offered Certificates will be available on an ongoing
basis. The limited nature of the information regarding the Offered Certificates
may adversely affect the liquidity of the Offered Certificates, even if a
secondary market for the Offered Certificates becomes available. The primary
source of information available to investors concerning the Offered Certificates
will be the monthly statements discussed in herein under "Description of the
Certificates--Reports to Certificateholders" which will include information as
to the outstanding principal balance of the Offered Certificates and the status
of the applicable form of credit enhancement.
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LEGAL OPINIONS
Legal matters relating to the Offered Certificates will be passed upon for
the Depositor and the Underwriter by Thacher Proffitt & Wood, New York, New
York.
RATINGS
It is a condition to the issuance of the certificates that the Class A
Certificates be rated "AAA" by Fitch, Inc. ("Fitch") and "AAA" by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), that the Class
M-1 Certificates be rated as least "AA" by Fitch and "AA" by S&P, that the Class
M-2 Certificates be rated at least "A" by Fitch and "A" by S&P and that the
Class B Certificates be rated at least"BBB" by Fitch and "BBB" by S&P.
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
the certificateholders are entitled. The rating process addresses structural and
legal aspects associated with the certificates, including the nature of the
underlying mortgage loans. The ratings assigned to mortgage pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments will differ from that originally anticipated. The ratings do not
address the possibility that certificateholders might suffer a lower than
anticipated yield due to non-credit events. In addition, the ratings on the
Class A Certificates and the Mezzanine Certificates do not address the
likelihood of receipt by the holders of such certificates of any amounts in
respect of Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Offered Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional credit support or credit
enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any other rating agency. A rating on the
Offered Certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Offered Certificates as stated in this section.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than
the second highest rating category by a rating agency, and, therefore, will be
legal investments for those entities to the extent provided in SMMEA. SMMEA,
however, provides for state limitation on the authority of entities to invest in
"mortgage related securities" provided that the restrictive legislation was
enacted prior to October 3, 1991. There are ten states that have enacted
legislation which overrides the preemption provisions of SMMEA. The Class M-2
Certificates and the Class B Certificates will not constitute "mortgage related
securities" for purposes of SMMEA.
The Depositor makes no representations as to the proper characterization
of any class of Offered Certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase any class of Offered
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of Offered Certificates constitutes a legal
investment or is subject to investment, capital or other restrictions. See
"Legal Investment" in the Prospectus.
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CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates by or on behalf
of, or with Plan assets of, a Plan may qualify for exemptive relief under the
Underwriters' Exemption, as currently in effect and as described under "ERISA
Considerations" in the prospectus. The Underwriters' Exemption relevant to the
Offered Certificates was granted by the Department of Labor as Prohibited
Transaction Exemption ("PTE") 97-34 at 62.F.R. 39021, and amended on November
13, 2000 by PTE 2000-58 at 65 F.R. 67765. However, the Underwriters' Exemption
contains a number of conditions which must be met for the exemption to apply,
including the requirements that the Offered Certificates be rated at least
"BBB-" (or its equivalent) by Fitch, Moody's or S&P at the time of the Plan's
purchase and that the investing Plan must be an "accredited investor" as defined
in Rule 501(a)(1) of Regulation D of the SEC under the Securities Act. A
fiduciary of a Plan contemplating purchasing an Offered Certificate must make
its own determination that the conditions set forth in the Underwriters'
Exemption will be satisfied with respect to the those certificates.
Each beneficial owner of a Mezzanine Certificates or any interest therein
shall be deemed to have represented, by virtue of its acquisition or holding of
that certificate or interest therein, that either (i) it is not a plan investor,
(ii) it has acquired and is holding such Mezzanine Certificates in reliance on
the Underwriters' Exemption, and that it understands that there are certain
conditions to the availability of the Underwriters' Exemption, including that
the Mezzanine Certificates must be rated, at the time of purchase, not lower
than "BBB-" (or its equivalent) by Fitch, Moody's or S&P or (iii) (1) it is an
insurance company, (2) the source of funds used to acquire or hold the
certificate or interest therein is an "insurance company general account," as
such term is defined in PTCE 95-60, and (3) the conditions in Sections I and III
of PTCE 95-60 have been satisfied.
If any Mezzanine Certificate or any interest therein is acquired or held in
violation of the conditions described in the preceding paragraph, the next
preceding permitted beneficial owner will be treated as the beneficial owner of
that Mezzanine Certificate, retroactive to the date of transfer to the purported
beneficial owner. Any purported beneficial owner whose acquisition or holding of
any such certificate or interest therein was effected in violation of the
conditions described in the preceding paragraph shall indemnify and hold
harmless the Depositor, the Trustee, the Trust Administrator, the Servicer, any
subservicer, and the trust fund from and against any and all liabilities,
claims, costs or expenses incurred by those parties as a result of that
acquisition or holding.
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Offered Certificates on behalf of or with Plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Offered Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. See "ERISA Considerations" in
the prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect a
representation by the Depositor or the related underwriter that an investment in
the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
S-76
ANNEX I
GLOBAL CLEARANCE AND SETTLEMENT AND DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will be
offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Clearstream or Euroclear. The Global Securities
will be tradable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream 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, Clearstream and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional eurobonds, except that there
will be no temporary global security and no "lock-up" or restricted period.
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 Clearstream 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.
I-1
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary market
trading between Clearstream Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective 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 respective Depositary of 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 Clearstream 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 Clearstream or Euroclear cash debt will be valued instead as
of the actual settlement date.
Clearstream 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 Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream 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 this result will depend
on each Clearstream 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 sending Global Securities to
the respective European Depositary for the benefit of Clearstream 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 Clearstream or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Clearstream 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 Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases
I-2
Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver 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 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. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream 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 Clearstream 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 Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Clearstream Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream 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 Clearstream 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 Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream 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, 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-8BEN). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding). If the information shown on
Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days of such
change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, 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
I-3
filing Form W-8ECI (Certificate of Foreign Person's Claim for Exemption from
Withholding 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 W-8BEN). Non-U.S. Persons that are Certificate Owners 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 W-8BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form W-8BEN may be filed by the Certificate Owners or his 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 Certificate Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date such form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (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 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 prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-4
PROSPECTUS
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
ACE Securities Corp.,
Depositor
The Trust Funds:
Each trust fund will be established to hold assets transferred to it by
Ace Securities Corp. The assets in each trust fund will generally consist of one
or more of the following:
o mortgage loans secured by one- to four-family residential
properties;
o mortgage loans secured by multi-family residential
properties;
o unsecured home improvement loan;
o manufactured housing installment sale contracts;
o mortgage pass-through securities issued or guaranteed by
Ginnie Mae, Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed
securities backed by mortgage loans secured by
residential properties or participations in those types
of loans.
The assets in your trust fund are specified in the prospectus supplement
for that particular trust fund, while the types of assets that may be included
in a trust fund, whether or not in your trust fund, are described in greater
detail in this prospectus.
THE SECURITIES:
Ace Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
is own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust fund that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is March 19, 2001.
TABLE OF CONTENTS
Page
----
Description of the Trust Funds...................................................................................4
Assets.........................................................................................................4
Mortgage Loans.................................................................................................5
General....................................................................................................5
Loan-to-Value Ratio........................................................................................6
Mortgage Loan Information in the
Prospectus Supplements..................................................................................6
Payment Provisions of the Mortgage
Loans...................................................................................................8
Revolving Credit Line Loans................................................................................8
Unsecured Home Improvement Loans...........................................................................8
Unsecured Home Improvement Loan
Information in Prospectus
Supplements.............................................................................................9
Contracts......................................................................................................9
General....................................................................................................9
Contract Information in Prospectus
Supplements............................................................................................10
Payment Provisions of the Contracts.......................................................................10
Agency Securities.............................................................................................11
Ginnie Mae................................................................................................11
Ginnie Mae Certificates...................................................................................11
Fannie Mae................................................................................................12
Fannie Mae Certificates...................................................................................12
Freddie Mac...............................................................................................13
Freddie Mac Certificates..................................................................................13
Stripped Agency Securities................................................................................14
Mortgage Securities...........................................................................................14
FHA Loans and VA Loans........................................................................................15
Pre-Funding Accounts..........................................................................................16
Accounts......................................................................................................16
Credit Support................................................................................................17
Cash Flow Agreements..........................................................................................17
Use of Proceeds.................................................................................................17
Yield Considerations............................................................................................17
General.......................................................................................................17
Interest Rate.................................................................................................17
Timing of Payment of Interest.................................................................................18
Payments of Principal; Prepayments............................................................................18
Prepayments--Maturity and Weighted
Average Life.............................................................................................19
Other Factors Affecting Weighted
Average Life..............................................................................................20
Type of Asset.............................................................................................20
Termination...............................................................................................21
Defaults..................................................................................................22
Foreclosures..............................................................................................22
Refinancing...............................................................................................22
Due-on-Sale Clauses.......................................................................................22
The Depositor...................................................................................................23
Description of the Securities...................................................................................23
General.......................................................................................................23
Distributions.................................................................................................24
Available Distribution Amount.................................................................................24
Distributions of Interest on the Securities...................................................................25
Distributions of Principal of the Securities..................................................................26
Components....................................................................................................27
Distributions on the Securities of
Prepayment Premiums.......................................................................................27
Allocation of Losses and Shortfalls...........................................................................27
Advances in Respect of Delinquencies..........................................................................27
Page
Reports to Securityholders....................................................................................28
Termination...................................................................................................30
Optional Purchases............................................................................................30
Book-Entry Registration and Definitive
Securities................................................................................................30
General...................................................................................................30
DTC.......................................................................................................31
Cedel.....................................................................................................31
Euroclear.................................................................................................31
Beneficial Ownership of Book-Entry
Securities.............................................................................................32
Definitive Securities.....................................................................................34
Description of the Agreements...................................................................................34
Agreements Applicable to a Series.............................................................................34
REMIC Securities, FASIT Securities,
Grantor Trust Securities...............................................................................34
Securities That Are Partnership
Interests for Tax Purposes and
Notes..................................................................................................35
Material Terms of the Pooling and
Servicing Agreements and
Underlying Servicing Agreements...........................................................................35
General...................................................................................................35
Assignment of Assets; Repurchases.........................................................................35
Representations and Warranties;
Repurchases............................................................................................37
Collection Account and Related
Accounts...............................................................................................39
Realization Upon Defaulted Assets.........................................................................43
Hazard Insurance Policies.................................................................................44
FHA Insurance and VA Guarantees...........................................................................46
Fidelity Bonds and Errors and
Omissions Insurance....................................................................................47
Due-on-Sale Clauses.......................................................................................47
Retained Interest; Servicing
Compensation and Payment of
Expenses...............................................................................................48
Evidence as to Compliance.................................................................................48
Certain Matters Regarding Servicers,
the Master Servicer and the
Depositor..............................................................................................49
Special Servicers.........................................................................................50
Events of Default under the Agreement.....................................................................50
Rights Upon Event of Default
under the Agreements...................................................................................50
Amendment.................................................................................................51
The Trustee...............................................................................................52
Duties of the Trustee.....................................................................................52
Certain Matters Regarding the
Trustee................................................................................................52
Resignation and Removal of the
Trustee................................................................................................52
Material Terms of the Indenture...............................................................................53
General...................................................................................................53
Events of Default.........................................................................................53
Discharge of Indenture....................................................................................55
Indenture Trustee's Annual Report.........................................................................55
The Indenture Trustee.....................................................................................55
Description of Credit Support...................................................................................56
General.......................................................................................................56
Subordinate Securities........................................................................................56
Cross-Support Provisions......................................................................................57
Limited Guarantee.............................................................................................57
2
Page
----
Financial Guaranty Insurance Policy
or Surety Bond............................................................................................57
Letter of Credit..............................................................................................57
Pool Insurance Policies.......................................................................................57
Special Hazard Insurance Policies.............................................................................57
Borrower Bankruptcy Bond......................................................................................57
Reserve Funds.................................................................................................58
Overcollateralization.........................................................................................58
Certain Legal Aspects of Mortgage Loans.........................................................................58
General.......................................................................................................59
Types of Mortgage Instruments.................................................................................59
Interest in Real Property.....................................................................................59
Cooperative Loans.............................................................................................60
Land Sale Contracts...........................................................................................61
Foreclosure...................................................................................................61
General...................................................................................................61
Judicial Foreclosure......................................................................................62
Equitable Limitations on Enforceability
of Certain Provisions..................................................................................62
Non-Judicial Foreclosure/Power of
Sale...................................................................................................62
Public Sale...............................................................................................63
Rights of Redemption......................................................................................63
Cooperative Loans.........................................................................................64
Year 2000 Legislation.....................................................................................65
Junior Mortgages..............................................................................................65
Anti-Deficiency Legislation and Other
Limitations on Lenders...................................................................................65
Environmental Considerations..................................................................................67
Due-on-Sale Clauses...........................................................................................69
Prepayment Charges............................................................................................69
Subordinate Financing.........................................................................................69
Applicability of Usury Laws...................................................................................70
Alternative Mortgage Instruments..............................................................................70
Soldiers' and Sailors' Civil Relief Act
of 1940...................................................................................................71
Forfeitures in Drug and RICO
Proceedings...............................................................................................71
Certain Legal Aspects of the Contracts..........................................................................71
General.......................................................................................................71
Security Interests in the
Manufactured Homes........................................................................................72
Enforcement of Security Interests in
Manufactured Homes........................................................................................73
Soldiers' and Sailors' Civil Relief Act
of 1940...................................................................................................74
Consumer Protection Laws......................................................................................74
Transfers of Manufactured Homes;
Enforceability of "Due-on-Sale"
Clauses...................................................................................................74
Applicability of Usury Laws...................................................................................75
Material Federal Income Tax Considerations......................................................................75
General.......................................................................................................75
Taxable Mortgage Pools....................................................................................76
REMICs........................................................................................................76
Classification of REMICs......................................................................................76
Characterization of Investments in
REMIC Securities.......................................................................................78
Tiered REMIC Structures...................................................................................79
Taxation of Owners of Regular
Securities.............................................................................................80
Taxation of Owners of Residual
Securities.............................................................................................87
Taxation of Certain Foreign Investors.....................................................................96
FASITs........................................................................................................98
Classification of FASITs..................................................................................98
Taxation of Owners of FASIT Regular
Securities............................................................................................100
Taxation of Owners of High-Yield
Interests.............................................................................................101
Taxation of FASIT Ownership Security.....................................................................101
Grantor Trust Funds..........................................................................................103
Classification of Grantor Trust Funds....................................................................103
Standard Securities..........................................................................................103
General..................................................................................................103
Stripped Securities..........................................................................................106
General..................................................................................................106
Status of Stripped Securities............................................................................107
Taxation of Stripped Securities..........................................................................108
Reporting Requirements and
Backup Withholding....................................................................................109
Taxation of Certain Foreign Investors....................................................................109
Partnership Trust Funds......................................................................................110
Classification of Partnership Trust
Funds.................................................................................................110
Characterization of Investments in
Partnership Securities and Debt
Securities............................................................................................110
Taxation of Debt Securityholders.........................................................................110
Taxation of Owners of Partnership
Securities............................................................................................111
Consequences for Particular Investors........................................................................115
State and Other Tax Considerations.............................................................................115
ERISA Considerations...........................................................................................115
General......................................................................................................115
Pre-Funding Accounts.........................................................................................119
Legal Investment...............................................................................................120
Methods of Distribution........................................................................................122
Additional Information.........................................................................................123
Incorporation of Certain Documents by
Reference....................................................................................................123
Legal Matters..................................................................................................124
Financial Information..........................................................................................124
Rating.........................................................................................................124
3
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund (the "Assets") will include some or all
of the following types of assets:
o single family and/or multifamily mortgage loans, which may
include Home Equity Loans, Home Improvement Contracts and
Land Sale Contracts (each as defined herein);
o home improvement installment sales contracts or
installment loans that are unsecured ("Unsecured Home
Improvement Loans");
o manufactured housing installment sale contracts or
installment loan agreements (the "Contracts");
o any combination of "fully modified pass-through"
mortgage-backed certificates guaranteed by the Government
National Mortgage Association ("Ginnie Mae"), guaranteed
mortgage pass-through securities issued by Fannie Mae
("Fannie Mae") and mortgage participation certificates
issued by the Federal Home Loan Mortgage Corporation
("Freddie Mac") (collectively, "Agency Securities");
o previously issued asset-backed certificates,
collateralized mortgage obligations or participation
certificates (each, and collectively, "Mortgage
Securities") evidencing interests in, or collateralized
by, mortgage loans, Unsecured Home Improvement Loans,
Contracts or Agency Securities; or
o a combination of mortgage loans, Unsecured Home
Improvement Loans, Contracts, Agency Securities and/or
Mortgage Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. or any of its affiliates. The mortgage loans will be guaranteed or insured
by a governmental agency or instrumentality or other person only if and to the
extent expressly provided in the prospectus supplement. The depositor will
select each Asset to include in a trust fund from among those it has purchased,
either directly or indirectly, from a prior holder (an "Asset Seller"), which
may be an affiliate of the depositor and which prior holder may or may not be
the originator of that mortgage loan, Unsecured Home Improvement Loan or
Contract.
The Assets included in the trust fund for your series may be subject to
various types of payment provisions:
o "Level Payment Assets," which may provide for the payment
of interest, and full repayment of principal, in level
monthly payments with a fixed rate of interest computed on
their declining
principal balances;
o "Adjustable Rate Assets," which may provide for periodic
adjustments to their rates of interest to equal the sum of
a fixed margin and an index;
o "Buy Down Assets," which are Assets for which funds have
been provided by someone other than the related borrowers
to reduce the borrowers' monthly payments during the early
period after origination of those Assets;
o "Increasing Payment Assets," as described below;
4
o "Interest Reduction Assets," which provide for the
one-time reduction of the interest rate payable thereon;
o "GEM Assets," which provide for (1) monthly payments
during the first year after origination that are at least
sufficient to pay interest due thereon, and (2) an
increase in those monthly payments in later years at a
predetermined rate resulting in full repayment over a
shorter term than the initial amortization terms of those
Assets;
o "GPM Assets," which allow for payments during a portion of
their terms which are or may be less than the amount of
interest due on their unpaid principal balances, and this
unpaid interest will be added to the principal balances of
those Assets and will be paid, together with interest on
the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates
that increase over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets
subject to provisions pursuant to which, subject to
certain limitations, the related borrowers may exercise an
option to convert the adjustable interest rate to a fixed
interest rate; and
o "Bi-weekly Assets," which provide for payments to be made
by borrowers on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the prospectus
supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the prospectus supplement from the date of origination, after
which the monthly payment is fixed at a level-payment amount so as to fully
amortize the Asset over its remaining term to maturity. The scheduled monthly
payment for an Increasing Payment Asset is the total amount required to be paid
each month in accordance with its terms and equals the sum of (1) the borrower's
monthly payments referred to in the preceding sentence and (2) payments made by
the respective servicers pursuant to buy-down or subsidy agreements. The
borrower's initial monthly payments for each Increasing Payment Asset are set at
the level-payment amount that would apply to an otherwise identical Level
Payment Asset having an interest rate a certain number of percentage points
below the Asset Rate of that Increasing Payment Asset. The borrower's monthly
payments on each Increasing Payment Asset, together with any payments made
thereon by the related servicers pursuant to buy-down or subsidy agreements,
will in all cases be sufficient to allow payment of accrued interest on the
Increasing Payment Asset at the related interest rate, without negative
amortization. A borrower's monthly payments on an Increasing Payment Asset may,
however, not be sufficient to result in any reduction of the principal balance
of that Asset until after the period when those payments may be increased.
The Securities (as defined herein) will be entitled to payment only from
the assets of the related trust fund and will not be entitled to payments from
the assets of any other trust fund established by the depositor. The assets of a
trust fund may consist of certificates representing beneficial ownership
interests in, or indebtedness of, another trust fund that contains the Assets,
if specified in the prospectus supplement.
MORTGAGE LOANS
GENERAL
Each mortgage loan will generally be secured by a lien on (1) a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single Family
Property") or (2) a primarily residential property that consists of five or more
residential dwelling units (a "Multifamily
5
Property"), which may include limited retail, office or other commercial space.
Single Family Properties and Multifamily Properties are sometimes referred to
herein collectively as "Mortgaged Properties." The mortgage loans will be
secured by first and/or junior mortgages or deeds of trust or other similar
security instruments creating a first or junior lien on Mortgaged Property.
The Mortgaged Properties may also include:
o Apartments owned by cooperative housing corporations
("Cooperatives"); and
o Leasehold interests in properties, the title to which is held by
third party lessors. The term of these leaseholds will exceed the
term of the related mortgage note by at least five years or some
other time period specified in the prospectus supplement.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans");
o Secured home improvement installment sales contracts and secured
installment loan agreements ("Home Improvement Contracts"); and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for
the sale of properties pursuant to which the borrower promises to
pay the amount due thereon to the holder thereof with fee title to
the related property held by that holder until the borrower has
made all of the payments required pursuant to that Land Sale
Contract, at which time fee title is conveyed to the borrower.
The originator of each mortgage loan will have been a person other than
the depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a mortgage loan at any particular time is
the ratio (expressed as a percentage) of the then outstanding principal balance
of the mortgage loan to the Value of the related Mortgaged Property. The "Value"
of a Mortgaged Property, other than for Refinance Loans, is generally the lesser
of (a) the appraised value determined in an appraisal obtained by the originator
at origination of that loan and (b) the sales price for that property.
"Refinance Loans" are loans made to refinance existing loans. Unless otherwise
specified in the prospectus supplement, the Value of the Mortgaged Property
securing a Refinance Loan is the appraised value thereof determined in an
appraisal obtained at the time of origination of the Refinance Loan. The value
of a Mortgaged Property as of the date of initial issuance of the related series
may be less than the Value at origination and will fluctuate from time to time
based upon changes in economic conditions and the real estate market.
MORTGAGE LOAN INFORMATION IN THE PROSPECTUS SUPPLEMENTS
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
6
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the mortgage loans as
of, unless otherwise specified in that prospectus supplement, the
close of business on the first day of the month of formation of the
related trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the
mortgage loans;
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"),
the index, the frequency of the adjustment dates, the range of
margins added to the index, and the maximum mortgage rate or
monthly payment variation at the time of any adjustment thereof and
over the life of the ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization provisions;
o the number of mortgage loans that are delinquent and the number of
days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report that will be
available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Securities and Exchange Commission (the "Commission") within fifteen days
after that initial issuance. The characteristics of the mortgage loans included
in a trust fund will not vary by more than five percent (by total principal
balance as of the Cut-off Date) from the characteristics thereof that are
described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans
include (1) Home Equity Loans, which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (2) Home Improvement
Contracts originated by a home improvement contractor and secured by a Mortgage
on the related Mortgaged Property that is junior to other liens on the Mortgaged
Property. The home improvements purchased with the Home Improvement Contracts
typically include replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods, solar heating panels,
patios, decks, room additions and garages. The prospectus supplement will
specify whether the Home Improvement Contracts are FHA loans and, if so, the
limitations on any FHA insurance. In addition, the prospectus supplement will
specify whether the mortgage loans contain some mortgage loans evidenced by Land
Sale Contracts.
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PAYMENT PROVISIONS OF THE MORTGAGE LOANS
All of the mortgage loans will provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly or semi-annually or
at some other interval as is specified in the prospectus supplement or for
payments in another manner described in the prospectus supplement. Each mortgage
loan may provide for no accrual of interest or for accrual of interest thereon
at a mortgage rate that is fixed over its term or that adjusts from time to
time, or that may be converted from an adjustable to a fixed mortgage rate or a
different adjustable mortgage rate, or from a fixed to an adjustable mortgage
rate, from time to time pursuant to an election or as otherwise specified in the
related mortgage note, in each case as described in the prospectus supplement.
Each mortgage loan may provide for scheduled payments to maturity or payments
that adjust from time to time to accommodate changes in the mortgage rate or to
reflect the occurrence of certain events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the prospectus supplement. Each
mortgage loan may be fully amortizing or require a balloon payment due on its
stated maturity date, in each case as described in the prospectus supplement.
Each mortgage loan may contain prohibitions on prepayment (a "Lock-out Period"
and, the date of expiration thereof, a "Lock-out Date") or require payment of a
premium or a yield maintenance penalty (a "Prepayment Premium") in connection
with a prepayment, in each case as described in the prospectus supplement. If
the holders of any class or classes of Offered Securities are entitled to all or
a portion of any Prepayment Premiums collected from the mortgage loans, the
prospectus supplement will specify the method or methods by which any of these
amounts will be allocated. See "--Assets" above.
REVOLVING CREDIT LINE LOANS
As more fully described in the prospectus supplement, the mortgage loans
may consist, in whole or in part, of revolving Home Equity Loans or certain
balances thereof ("Revolving Credit Line Loans"). Interest on each Revolving
Credit Line Loan, excluding introductory rates offered from time to time during
promotional periods, may be computed and payable monthly on the average daily
outstanding principal balance of that loan. From time to time before the
expiration of the related draw period specified in a Revolving Credit Line Loan,
principal amounts on that Revolving Credit Line Loan may be drawn down (up to a
maximum amount as set forth in the prospectus supplement) or repaid. If
specified in the prospectus supplement, new draws by borrowers under the
Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total balance of the
Revolving Credit Line Loans will fluctuate from day to day as new draws by
borrowers are added to the trust fund and principal payments are applied to
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some circumstances,
under a Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest that accrues on the loan during the
billing cycle, and may also elect to pay all or a portion of the principal. An
interest only payment option may terminate at the end of the related draw
period, after which the borrower must begin paying at least a minimum monthly
portion of the average outstanding principal balance of the loan.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans may consist of conventional
unsecured home improvement loans, unsecured installment loans and unsecured home
improvement loans that are FHA loans. See "--FHA Loans and VA Loans" below and
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees." Except as otherwise described in the prospectus supplement, the
Unsecured Home Improvement Loans will be fully amortizing and will bear interest
at a fixed or variable annual percentage rate.
8
UNSECURED HOME IMPROVEMENT LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain information, as of the dates
specified in the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to any Unsecured Home
Improvement Loans, including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Unsecured Home
Improvement Loans as of the applicable Cut-Off Date;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Unsecured Home Improvement
Loans;
o the earliest and latest origination date and maturity date of the
Unsecured Home Improvements Loans;
o the interest rates or range of interest rates and the weighted
average interest rates borne by the Unsecured Home Improvement
Loans;
o the state or states in which most of the Unsecured Home Improvement
Loans were originated;
o information regarding the prepayment provisions, if any, of the
Unsecured Home Improvement Loans;
o with respect to the Unsecured Home Improvement Loans with
adjustable interest rates ("ARM Unsecured Home Improvement Loans"),
the index, the frequency of the adjustment dates, the range of
margins added to the index, and the maximum interest rate or
monthly payment variation at the time of any adjustment thereof and
over the life of the ARM Unsecured Home Improvement Loan;
o information regarding the payment characteristics of the Unsecured
Home Improvement Loans;
o the number of Unsecured Home Improvement Loans that are delinquent
and the number of days or ranges of the number of days that
Unsecured Home Improvement Loans are delinquent; and
o the material underwriting standards used for the Unsecured Home
Improvement Loans.
If specific information respecting the Unsecured Home Improvement Loans
is unknown to the depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
prospectus supplement, and specific information will be set forth in a report
that will be available to purchasers of the related Securities at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Commission within fifteen days after the related initial issuance.
The characteristics of the Unsecured Home Improvement Loans included in a trust
fund will not vary by more than five percent (by total principal balance as of
the Cut-off Date) from the characteristics thereof that are described in the
prospectus supplement.
CONTRACTS
GENERAL
To the extent provided in the prospectus supplement, each Contract will
be secured by a security interest in a new or used manufactured home (each, a
"Manufactured Home"). The Contracts may include Contracts that are FHA loans.
See "--FHA Loans and VA Loans" below and "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--FHA Insurance and VA Guarantees." The method of
computing the "Loan-to-Value Ratio" of a Contract will be described in the
prospectus supplement.
9
CONTRACT INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement relating to a trust fund whose Assets include
a substantial proportion of Contracts will contain certain information, as of
the dates specified in that prospectus supplement and to the extent then
applicable and specifically known to the depositor, with respect to any
Contracts, including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Contracts as of
the applicable Cut-off Date;
o whether the Manufactured Homes were new or used as of the
origination of the related Contracts;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Contracts;
o the range of maturity dates of the Contracts;
o the range of the Loan-to-Value Ratios at origination of the
Contracts;
o the annual percentage rate on each Contract (a "Contract Rate") or
range of Contract Rates and the weighted average Contract Rate
borne by the Contracts;
o the state or states in which most of the Manufactured Homes are
located at origination;
o information regarding the prepayment provisions, if any, of the
Contracts;
o for Contracts with adjustable Contract Rates ("ARM Contracts"), the
index, the frequency of the adjustment dates, and the maximum
Contract Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Contract;
o the number of Contracts that are delinquent and the number of days
or ranges of the number of days those Contracts are delinquent;
o information regarding the payment characteristics of the Contracts;
and
o the material underwriting standards used for the Contracts.
If specific information respecting the Contracts is unknown to the
depositor at the time the Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report that will be
available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Commission within fifteen days after the related initial issuance. The
characteristics of the Contracts included in a trust fund will not vary by more
than five percent (by total principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the prospectus supplement.
The information described above regarding the Contracts in a trust fund
may be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the trust fund.
PAYMENT PROVISIONS OF THE CONTRACTS
All of the Contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at some other interval as is specified
in the prospectus supplement or for payments in another manner described in the
prospectus supplement. Each Contract may provide for no accrual of interest or
for accrual of interest thereon at a
10
Contract Rate that is fixed over its term or that adjusts from time to time, or
as otherwise specified in the prospectus supplement. Each Contract may provide
for scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Contract Rate as otherwise described in the
prospectus supplement. See "--Assets" above.
AGENCY SECURITIES
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
GINNIE MAE
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Section 306(g) of
Title III of the Housing Act authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates that are based on and
backed by a pool of FHA loans, VA loans or by pools of other eligible
residential loans.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts that may be
required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the "Housing Act"), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
GINNIE MAE CERTIFICATES
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by Ginnie
Mae or Fannie Mae as a seller-servicer of FHA loans or VA loans, except as
described below regarding Stripped Agency Securities (as defined below). The
loans underlying Ginnie Mae certificates may consist of FHA loans, VA loans and
other loans eligible for inclusion in loan pools underlying Ginnie Mae
certificates. Ginnie Mae certificates may be issued under either or both of the
Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates, your
prospectus supplement will include any material additional information regarding
the Ginnie Mae guaranty program, the characteristics of the pool underlying
those Ginnie Mae certificates, the servicing of the related pool, the payment of
principal and interest on Ginnie Mae certificates and other relevant matters
regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as
described below with respect to Stripped Agency Securities, each Ginnie Mae
certificate will provide for the payment, by or on behalf of the issuer, to the
registered holder of that Ginnie Mae certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the total
amount of the monthly principal and interest payments on each related FHA loan
or VA loan, minus servicing and guaranty fees totaling the excess of the
interest on that FHA loan or VA loan over the Ginnie Mae certificates' interest
rate. In addition, each payment to a holder of a Ginnie Mae certificate will
include proportionate pass-through payments to that holder of any prepayments of
principal of the FHA loans or VA loans underlying the Ginnie Mae certificate and
the holder's proportionate interest in the remaining principal balance in the
event of a foreclosure or other disposition of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or
evidence any recourse against, the issuer of the Ginnie Mae certificates, the
depositor or any affiliates thereof, and the only recourse of a registered
holder (for example, the trustee) is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a
11
servicer of FHA loans and VA loans, including collecting payments from borrowers
and remitting those collections to the registered holder, maintaining escrow and
impoundment accounts of borrowers for payments of taxes, insurance and other
items required to be paid by the borrower, maintaining primary hazard insurance,
and advancing from its own funds to make timely payments of all amounts due on
the Ginnie Mae certificate, even if the payments received by that issuer on the
loans backing the Ginnie Mae certificate are less than the amounts due thereon.
If the issuer is unable to make payments on a Ginnie Mae certificate as they
become due, it must promptly notify Ginnie Mae and request Ginnie Mae to make
that payment. Upon that notification and request, Ginnie Mae will make those
payments directly to the registered holder of the Ginnie Mae certificate. In the
event no payment is made by the issuer and the issuer fails to notify and
request Ginnie Mae to make that payment, the registered holder of the Ginnie Mae
certificate has recourse against only Ginnie Mae to obtain that payment. The
trustee or its nominee, as registered holder of the Ginnie Mae certificates
included in a trust fund, is entitled to proceed directly against Ginnie Mae
under the terms of the guaranty agreement or contract relating to the Ginnie Mae
certificates for any amounts that are unpaid when due under each Ginnie Mae
certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
FANNIE MAE
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing mortgage
loans from lenders. Fannie Mae acquires funds to purchase loans from many
capital market investors, thereby expanding the total amount of funds available
for housing. Operating nationwide, Fannie Mae helps to redistribute mortgage
funds from capital-surplus to capital-short areas. In addition, Fannie Mae
issues mortgage-backed securities primarily in exchange for pools of mortgage
loans from lenders. Fannie Mae receives fees for its guaranty of timely payment
of principal and interest on its mortgage-backed securities.
FANNIE MAE CERTIFICATES
Fannie Mae certificates are Guaranteed Mortgage Pass-Through
Certificates typically issued pursuant to a prospectus that is periodically
revised by Fannie Mae. Fannie Mae certificates represent fractional undivided
interests in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan
must meet the applicable standards of the Fannie Mae purchase program. Mortgage
loans comprising a pool are either provided by Fannie Mae from its own portfolio
or purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae certificates included in a trust fund will
consist of conventional mortgage loans, FHA loans or VA loans. If the trust fund
includes Fannie Mae certificates, your prospectus supplement will include any
material additional information regarding the Fannie Mae program, the
characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate that
it will distribute amounts representing that holder's proportionate share of
scheduled principal and interest at the applicable interest rate provided for by
that Fannie Mae certificate on the underlying mortgage loans, whether or not
received, and that holder's proportionate share of the full principal amount of
any prepayment or foreclosed or other finally liquidated mortgage loan, whether
or not the related principal amount is actually recovered.
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The obligations of Fannie Mae under its guarantees are obligations
solely of Fannie Mae and are not backed by, nor entitled to, the full faith and
credit of the United States. If Fannie Mae were unable to satisfy those
obligations, distributions to the holders of Fannie Mae certificates would
consist solely of payments and other recoveries on the underlying loans and,
accordingly, monthly distributions to the holders of Fannie Mae certificates
would be affected by delinquent payments and defaults on those loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions thereon will be made by wire, and for a fully
registered Fannie Mae certificate, distributions thereon will be made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as the
Fannie Mae certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus supplement.
FREDDIE MAC
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans and participation interests therein which it deems
to be of the quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FREDDIE MAC CERTIFICATES
Each Freddie Mac certificate represents an undivided interest in a pool
of residential loans that may consist of first lien conventional residential
loans, FHA loans or VA loans (the "Freddie Mac Certificate Group"). Each of
these mortgage loans must meet the applicable standards set forth in the Freddie
Mac Act. A Freddie Mac Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac Certificate Group. If the trust
fund includes Freddie Mac certificates, your prospectus supplement will include
any material additional information regarding the Freddie Mac guaranty program,
the characteristics of the pool underlying that Freddie Mac certificate, the
servicing of the related pool, payment of principal and interest on the Freddie
Mac certificate and any other relevant matters about the Freddie Mac
certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent of
the applicable interest rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share thereof, but does not, except if and to the extent
specified in the prospectus supplement, guarantee the timely payment of
scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due
13
on account of its guarantee of collection of principal at any time after default
on an underlying mortgage loan, but not later than 30 days following the latest
of
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any event
no later than one year after demand has been made upon the borrower for
accelerated payment of principal.
In taking actions regarding the collection of principal after default on the
mortgage loans underlying Freddie Mac certificates, including the timing of
demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
nor entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy those obligations, distributions to holders of Freddie
Mac certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as the
Freddie Mac certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Securities. The Freddie Mac certificates
and underlying mortgage loans will be described in the prospectus supplement.
STRIPPED AGENCY SECURITIES
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or certain other Ginnie
Mae certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie
Mae, Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped
Agency Security to the same extent as that entity guarantees the underlying
securities backing the Stripped Agency Securities or to the extent described
above for a Stripped Agency Security backed by a pool of mortgage loans, unless
otherwise specified in the prospectus supplement. If the trust fund includes
Stripped Agency Securities, your prospectus supplement will include any material
additional information regarding the characteristics of the assets underlying
the Stripped Agency Securities, the payments of principal and interest on the
Stripped Agency Securities and other relevant matters about the Stripped Agency
Securities.
MORTGAGE SECURITIES
The Mortgage Securities will represent beneficial interests in loans of
the type that would otherwise be eligible to be mortgage loans, Unsecured Home
Improvement Loans, Contract, or Agency Securities, or collateralized obligations
secured by mortgage loans, Unsecured Home Improvement Loans, Contracts or Agency
Securities. The Mortgage Securities will have been
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(1) issued by an entity other than the depositor or its
affiliates;
(2) acquired in bona fide secondary market transactions from
persons other than the issuer thereof or its affiliates; and
(3) (a) offered and distributed to the public pursuant to an
effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of
the issuer of those securities at the time of sale (nor an affiliate
thereof at any time during the preceding three months); provided a
period of two years elapsed since the later of the date the securities
were acquired from the issuer.
Although individual Underlying Loans may be insured or guaranteed by the United
States or an agency or instrumentality thereof, they need not be, and Mortgage
Securities themselves will not be so insured or guaranteed. Except as otherwise
set forth in the prospectus supplement, Mortgage Securities will generally be
similar to Securities offered hereunder.
The prospectus supplement for Securities of each series evidencing
interests in a trust fund including Mortgage Securities will include a
description of the Mortgage Securities and any related credit enhancement, and
the related mortgage loans, Unsecured Home Improvement Loans, Contracts or
Agency Securities will be described together with any other mortgage loans,
Unsecured Home Improvement Loans, Contracts or Agency Securities included in the
trust fund of that series. As used in this prospectus, the terms "mortgage
loans," "Unsecured Home Improvement Loans" and "Contracts" include the mortgage
loans, Unsecured Home Improvement Loans or Contracts, as applicable, underlying
the Mortgage Securities in your trust fund. References in this prospectus to
advances to be made and other actions to be taken by the master servicer in
connection with the Assets may include any advances made and other actions taken
pursuant to the terms of the applicable Mortgage Securities.
FHA LOANS AND VA LOANS
FHA loans will be insured by the FHA as authorized under the Housing
Act, and the United States Housing Act of 1937, as amended. One- to four-family
FHA loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of origination
of that FHA loan.
Mortgage loans, Unsecured Home Improvement Loans and Contracts that are
FHA loans are insured by the FHA (as described in the prospectus supplement, up
to an amount equal to 90% of the sum of the unpaid principal of the FHA loan, a
portion of the unpaid interest and certain other liquidation costs) pursuant to
Title I of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure multifamily loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of those loans made under Sections 221(d)(3) and
(d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of this type
of multifamily loan may be up to 40 years and the ratio of the loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily loans
made for the purchase or refinancing of existing apartment projects that are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project and a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan-to-value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
15
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in some instances the spouse
of a veteran) to obtain a mortgage loan guarantee 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 purchasers and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no VA loan will have an original principal
amount greater than five times the partial VA guarantee for that VA loan. The
maximum guarantee that may be issued by the VA under this program will be set
forth in the prospectus supplement.
PRE-FUNDING ACCOUNTS
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the trustee (a "Pre-Funding Account"). In that case, the
depositor will be obligated to sell at a predetermined price - and the trust
fund for the related series of Securities will be obligated to purchase -
additional Assets (the "Subsequent Assets") from time to time, and as frequently
as daily, within the period (not to exceed three months) specified in the
prospectus supplement (the "Pre-Funding Period") after the issuance of the
Securities having a total principal balance approximately equal to the amount on
deposit in the Pre-Funding Account (the "Pre-Funded Amount") for that series on
the date of its issuance. The Pre-Funded Amount for a series will be specified
in the prospectus supplement, and will not in any case exceed 50% of the total
initial Security Balance of the related Securities. Any Subsequent Assets will
be required to satisfy certain eligibility criteria more fully set forth in the
prospectus supplement, which criteria will be consistent with the eligibility
criteria of the Assets initially included in the trust fund, subject to those
exceptions that are expressly stated in the prospectus supplement. In addition,
certain conditions must be satisfied before the Subsequent Assets are
transferred into the trust fund, for example, the delivery to the rating
agencies and to the trustee of any required opinions of counsel. See "ERISA
Considerations--Pre-Funding Accounts" for additional information regarding
Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount
will be used only to purchase Subsequent Assets. Any portion of the Pre-Funded
Amount remaining in the Pre-Funding Account at the end of the Pre-Funding Period
will be used to prepay one or more classes of Securities in the amounts and in
the manner specified in the prospectus supplement. In addition, if specified in
the prospectus supplement, the depositor may be required to deposit cash into an
account maintained by the trustee (the "Capitalized Interest Account") for the
purpose of assuring the availability of funds to pay interest on the Securities
during the Pre-Funding Period. Any amount remaining in the Capitalized Interest
Account at the end of the Pre-Funding Period will be remitted as specified in
the prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts
will be permitted to be invested, pending application thereof, only in eligible
investments authorized by each applicable rating agency.
ACCOUNTS
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described herein and
in the prospectus supplement deposit all payments and collections received or
advanced with respect to the Assets and other assets in the trust fund. This
type of account may be maintained as an interest bearing or a non-interest
bearing account, and funds held in that account may be held as cash or invested
in certain short-term, investment grade obligations, in each case as described
in the prospectus supplement. See "Description of the Agreements--Material Terms
of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Collection Account and Related Accounts."
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CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full protection
against certain defaults and losses on the Assets in the related trust fund may
be provided to one or more classes of Securities in the related series in the
form of subordination of one or more other classes of Securities in that series
or by one or more other types of credit support, for example, a letter of
credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any of these types of coverage for the
Securities of any series, is referred to generally as "credit support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information for each type of credit
support, if any, will be described in the prospectus supplement for a series of
Securities. See "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the prospectus supplement, the trust fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series will be invested at a specified
rate. The trust fund may also include certain other agreements, for example,
interest rate swap agreements, interest rate cap or floor agreements, currency
swap agreements or similar agreements provided to reduce the effects of interest
rate or currency exchange rate fluctuations on the Assets or on one or more
classes of Securities. (Currency swap agreements might be included in the trust
fund if some or all of the Assets were denominated in a non-United States
currency.) The principal terms of any related guaranteed investment contract or
other agreement (any of these types of agreement, a "Cash Flow Agreement"),
including provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be described
in the prospectus supplement for the related series. In addition, the prospectus
supplement will provide certain information with respect to the borrower under
any Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the depositor to the purchase of Assets, or the repayment of the
financing incurred in that purchase, and to pay for certain expenses incurred in
connection with that purchase of Assets and sale of Securities. The depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the depositor, prevailing interest rates, availability of
funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
securityholder, the Interest Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Interest Rates, which may or may not be based upon the interest rates
borne by the Assets in the related trust fund. The prospectus supplement for any
series will specify the Interest Rate for each class of Securities or, in the
case of a variable or adjustable Interest Rate, the method of determining the
Interest Rate; the effect, if any, of the prepayment of any Asset on the
Interest Rate of one or more classes of Securities; and whether the
distributions of interest on the Securities of any class will be dependent, in
whole or in part, on the performance of any borrower under a Cash Flow
Agreement.
If specified in the prospectus supplement, the effective yield to
maturity to each holder of Securities entitled to payments of interest will be
below that otherwise produced by the applicable Interest Rate and purchase price
of that
17
Security because, while interest may accrue on each Asset during a certain
period (each, an "Accrual Period"), the distribution of that interest will be
made on a day that may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities entitled to distributions of
interest (or addition to the Security Balance of a class of Accrual Securities)
will be made by or on behalf of the trustee each month on the date specified in
the related prospectus supplement (each date, a "Distribution Date"), and will
include interest accrued during the Accrual Period for that Distribution Date.
As indicated above under "--Interest Rate," if the Accrual Period ends on a date
other than the day before a Distribution Date for the related series, the yield
realized by the holders of those Securities may be lower than the yield that
would result if the Accrual Period ended on the day before the Distribution
Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related thereto), including principal
prepayments resulting from both voluntary prepayments by the borrowers and
involuntary liquidations. The rate at which principal prepayments occur will be
affected by a variety of factors, including the terms of the Assets (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets related
thereto), the level of prevailing interest rates, the availability of mortgage
credit and economic, demographic, geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly
below the interest rates on the Assets in a particular trust fund (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets related
thereto), those assets are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by those
assets. However, you should note that some Assets (or, in the case of Mortgage
Securities and Agency Securities, the underlying assets related thereto) may
consist of loans with different interest rates. The rate of principal payment on
Mortgage Securities will also be affected by the allocation of principal
payments on the underlying assets among the Mortgage Securities or Agency
Securities and other Mortgage Securities or Agency Securities of the same
series. The rate of principal payments on the Assets in the related trust fund
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related thereto) is likely to be affected by the existence of any
Lock-out Periods and Prepayment Premium provisions of the mortgage loans
underlying or comprising those Assets, and by the extent to which the servicer
of any of these mortgage loans is able to enforce these provisions.
Mortgage loans with a Lock-out Period or a Prepayment Premium provision, to the
extent enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical mortgage loans without those
provisions, with shorter Lock-out Periods or with lower Prepayment Premiums.
Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal amounts
of manufactured housing contracts are generally shorter and smaller than the
terms and principal amounts of mortgage loans secured by site-built homes,
changes in interest rates have a correspondingly smaller effect on the amount of
the monthly payments on manufactured housing contracts than on the amount of the
monthly payments on mortgage loans secured by site-built homes. Consequently,
changes in interest rates may play a smaller role in prepayment behavior of
manufactured housing contracts than they do in the prepayment behavior of loans
secured by mortgage on site-built homes. Conversely, local economic conditions
and some of the other factors mentioned above may play a larger role in the
prepayment behavior of manufactured housing contracts than they do in the
prepayment behavior of loans secured by mortgages on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related thereto), the actual yield to maturity will be lower than that so
calculated. Conversely, if the purchaser of a Security offered at a premium
calculates its anticipated yield to maturity based on an assumed rate of
distributions of principal that is slower than that actually experienced on
18
the Assets (or, in the case of Mortgage Securities and Agency Securities, the
underlying assets related thereto), the actual yield to maturity will be lower
than that so calculated. In either case, if so provided in the prospectus
supplement for a series of Securities, the effect on yield on one or more
classes of the Securities of that series of prepayments of the Assets in the
related trust fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to those classes.
When a full prepayment is made on a mortgage loan or a Contract, the
borrower is charged interest on the principal amount of the mortgage loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or some other period specified in the prospectus
supplement. Generally, the effect of prepayments in full will be to reduce the
amount of interest paid in the following month to holders of Securities entitled
to payments of interest because interest on the principal amount of any mortgage
loan or Contract so prepaid will be paid only to the date of prepayment rather
than for a full month. A partial prepayment of principal is applied so as to
reduce the outstanding principal balance of the related mortgage loan or
Contract as of its due date in the month in which the partial prepayment is
received or some other date as is specified in the prospectus supplement.
The timing of changes in the rate of principal payments on the Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related thereto) may significantly affect an investor's actual yield to
maturity, even if the average rate of distributions of principal is consistent
with an investor's expectation. In general, the earlier a principal payment is
received on the mortgage loans and distributed on a Security, the greater the
effect on that investor's yield to maturity. The effect on an investor's yield
of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a particular period may not be offset by a
similar decrease (or increase) in the rate of principal payments at a later
time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising a trust fund and the rate at which payments are made
from any credit support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of that series. Prepayments on the mortgage loans or Contracts
comprising or underlying the Assets in a particular trust fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the Securities of the related series.
If so provided in the prospectus supplement for a series of Securities,
one or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or before which the Security Balance thereof is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable to
that series. 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 that security will be repaid to the investor. The weighted average life of a
class of Securities of a series will be influenced by the rate at which
principal on the Assets is paid to that class, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes prepayments, in whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected
by the varying maturities of the Assets in a trust fund. If any Assets in a
particular trust fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the classes of Securities of
the related series, one or more classes of these Securities may be fully paid
before their respective final scheduled Distribution Dates, even in the absence
of prepayments. Accordingly, the prepayment experience of the Assets will, to
some extent, be a function of the mix of mortgage rates or Contract Rates and
maturities of the mortgage loans or Contracts comprising or underlying those
Assets. See "Description of the Trust Funds."
19
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents a
constant assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans for the life of those loans. SPA represents
an assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans. A prepayment assumption of 100% of SPA
assumes prepayment rates of 0.2% per annum of the then outstanding principal
balance of those loans in the first month of the life of the loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Starting in the thirtieth month and in each month thereafter during the life of
the loans, 100% of SPA assumes a constant prepayment rate of 6% per annum each
month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of loans, including the
mortgage loans or Contracts underlying or comprising the Assets.
The prospectus supplement for each series of Securities may contain
tables, if applicable, setting forth the projected weighted average life of each
class of Offered Securities of that series and the percentage of the initial
Security Balance of each class that would be outstanding on specified
Distribution Dates based on the assumptions stated in the prospectus supplement,
including assumptions that prepayments on the mortgage loans comprising or
underlying the related Assets are made at rates corresponding to various
percentages of CPR, SPA or some other standard specified in the prospectus
supplement. These tables and assumptions are intended to illustrate the
sensitivity of the weighted average life of the Securities to various prepayment
rates and will not be intended to predict or to provide information that will
enable investors to predict the actual weighted average life of the Securities.
It is unlikely that prepayment of any mortgage loans or Contracts comprising or
underlying the Assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If specified in the prospectus supplement, a number of mortgage loans
may have balloon payments due at maturity (which, based on the amortization
schedule of those mortgage loans, may be a substantial amount), and because the
ability of a borrower to make a balloon payment typically will depend on its
ability either to refinance the loan or to sell the related Mortgaged Property,
there is a risk that a number of Balloon Payment Assets may default at maturity.
The ability to obtain refinancing will depend on a number of factors prevailing
at the time refinancing or sale is required, including real estate values, the
borrower's financial situation, prevailing mortgage loan interest rates, the
borrower's equity in the related Mortgaged Property, tax laws and prevailing
general economic conditions. Neither the depositor, the servicer, the master
servicer, nor any of their affiliates will be obligated to refinance or
repurchase any mortgage loan or to sell the Mortgaged Property except to the
extent provided in the prospectus supplement. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. To minimize
losses on defaulted mortgage loans, the servicer may modify mortgage loans that
are in default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan will tend to extend the weighted average life of the Securities
and may thereby lengthen the period of time elapsed from the date of issuance of
a Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. For some Contracts, the Contract
Rate may be "stepped up" during its term or may otherwise vary or be adjusted.
Under the applicable underwriting standards, the borrower under each mortgage
loan or Contract generally will be qualified on the basis of the mortgage rate
or Contract Rate in effect at origination. The repayment of any of these
mortgage loans or Contracts may therefore be dependent on the ability of the
borrower to make larger level monthly payments following the adjustment of the
mortgage rate or Contract Rate. In addition, some mortgage loans may be subject
to temporary buydown plans
20
("Buydown Mortgage Loans") pursuant to which the monthly payments made by the
borrower during the early years of the mortgage loan will be less than the
scheduled monthly payments thereon (the "Buydown Period"). The periodic increase
in the amount paid by the borrower of a Buydown Mortgage Loan during or at the
end of the applicable Buydown Period may create a greater financial burden for
the borrower, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default for the related mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing mortgage loans may be added to the principal balance
thereof and will bear interest at the applicable mortgage rate. The addition of
any deferred interest to the principal balance of any related class or classes
of Securities will lengthen the weighted average life thereof and may adversely
affect yield to holders thereof, depending on the price at which those
Securities were purchased. In addition, for some ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on this type of mortgage loan would
exceed the amount of scheduled principal and accrued interest on the principal
balance thereof, and since that excess will be applied to reduce the principal
balance of the related class or classes of Securities, the weighted average life
of those Securities will be reduced and may adversely affect yield to holders
thereof, depending on the price at which those Securities were purchased.
As may be described in the prospectus supplement, the related Agreement
may provide that all or a portion of the principal collected on or with respect
to the related mortgage loans may be applied by the related trustee to the
acquisition of additional mortgage loans during a specified period (rather than
used to fund payments of principal to securityholders during that period) with
the result that the related Securities possess an interest-only period, also
commonly referred to as a revolving period, which will be followed by an
amortization period. Any of these interest-only or revolving periods may, upon
the occurrence of certain events to be described in the prospectus supplement,
terminate before the end of the specified period and result in the earlier than
expected amortization of the related Securities.
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in certain temporary investments, including
mortgage loans) for a specified period before being used to fund payments of
principal to securityholders.
The result of the retention and temporary investment by the trustee of
this principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related mortgage loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time the Securities are issued. Any similar feature
applicable to any Securities may end on the occurrence of events to be described
in the prospectus supplement, resulting in the current funding of principal
payments to the related securityholders and an acceleration of the amortization
of these Securities.
TERMINATION
If specified in the prospectus supplement, a series of Securities may be
subject to optional early termination through the repurchase of the Assets in
the related trust fund by the party specified therein, on any date on which the
total Security Balance of the Securities of that series declines to a percentage
specified in the prospectus supplement (generally not to exceed 10%) of the
Initial Security Balance, under the circumstances and in the manner set forth
therein. In addition, if so provided in the prospectus supplement, certain
classes of Securities may be purchased or redeemed in the manner set forth
therein. See "Description of the Securities--Termination."
21
DEFAULTS
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Securities.
In general, defaults on mortgage loans or contracts are expected to occur with
greater frequency in their early years. The rate of default on mortgage loans
that are refinance or limited documentation mortgage loans, and on mortgage
loans with high Loan-to-Value Ratios, may be higher than for other types of
mortgage loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the mortgage loans and Contracts will be affected by the general
economic condition of the region of the country in which the related Mortgage
Properties or Manufactured Homes are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount of
the mortgage loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
mortgage loans or Contracts that are repaid in accordance with their terms will
affect the weighted average life of the mortgage loans or Contracts comprising
or underlying the Assets and that of the related series of Securities.
REFINANCING
At the request of a borrower, the servicer may allow the refinancing of
a mortgage loan or Contract in any trust fund by accepting prepayments thereon
and permitting a new loan secured by a mortgage on the same property. In the
event of that refinancing, the new loan would not be included in the related
trust fund and, therefore, that refinancing would have the same effect as a
prepayment in full of the related mortgage loan or Contract. A servicer may,
from time to time, implement programs designed to encourage refinancing. These
programs may include modifications of existing loans, general or targeted
solicitations, the offering of pre-approved applications, reduced origination
fees or closing costs, or other financial incentives. In addition, servicers may
encourage the refinancing of mortgage loans or Contracts, including defaulted
mortgage loans or Contracts, that would permit creditworthy borrowers to assume
the outstanding indebtedness of those mortgage loans or Contracts.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the mortgage loans comprising or underlying
the Assets, other than FHA loans and VA loans, may include "due-on-sale clauses"
that allow the holder of the mortgage loans to demand payment in full of the
remaining principal balance of the mortgage loans upon sale, transfer or
conveyance of the related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus
supplement, the servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale provision that would adversely affect or
jeopardize coverage under any applicable insurance policy. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale Clauses" and "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Due-on-Sale Provisions."
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the servicer and permit the
acceleration of the maturity of the Contracts by the servicer upon any sale or
transfer that is not consented to. It is expected that the servicer will permit
most transfers of Manufactured Homes and not accelerate the maturity of the
related Contracts. In some cases, the transfer may be made by a delinquent
borrower
22
to avoid a repossession of the Manufactured Home. In the case of a transfer of a
Manufactured Home after which the servicer desires to accelerate the maturity of
the related Contract, the servicer's ability to do so will depend on the
enforceability under state law of the "due-on-sale clause." See "Certain Legal
Aspects of the Contracts--Transfers of Manufactured Homes; Enforceability of
Due-on-Sale Clauses."
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections thereon and related
assets; and to engage in any acts that are incidental to, or necessary, suitable
or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by Altamont
Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE SECURITIES
GENERAL
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered hereby) will represent the
entire beneficial ownership interest in the trust fund created pursuant to the
related Agreement. If a series of Securities includes Asset-backed notes (the
"Notes," and together with the Certificates, the "Securities"), the Notes will
represent indebtedness of the related trust fund and will be issued and secured
pursuant to an indenture. Each series of Securities will consist of one or more
classes of Securities that may:
o provide for the accrual of interest thereon based on fixed,
variable or adjustable rates;
o be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other
classes of Securities in respect of certain distributions on the
Securities;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B)
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest thereon which begin
only following the occurrence of certain events, that as the
retirement of one or more other classes of Securities of that
series (collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust
fund, to the extent of available funds, in each case as described
in the prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics
described in this paragraph including a Strip Security component.
If specified in the prospectus supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the Assets in the related trust fund (each portion of the
Assets, an "Asset Group"). Any of these classes may include classes of Offered
Securities.
23
Each class of Securities offered by this prospectus and the related
prospectus supplement (the "Offered Securities") will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
classes of Strip Securities, notional amounts or percentage interests specified
in the prospectus supplement. The transfer of any Offered Securities may be
registered and those Securities may be exchanged without the payment of any
service charge payable in connection with that registration of transfer or
exchange, but the depositor or the trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in fully registered,
certificated form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the prospectus supplement. See "Description of the
Securities--Book-Entry Registration and Definitive Securities." Definitive
Securities will be exchangeable for other Securities of the same class and
series of a similar total Security Balance, notional amount or percentage
interest but of different authorized denominations.
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on
behalf of the trustee on each Distribution Date as specified in the prospectus
supplement from the Available Distribution Amount for that series and that
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close of
business on, unless a different date is specified in the prospectus supplement,
the last business day of the month preceding the month in which the Distribution
Date occurs (the "Record Date"), and the amount of each distribution will be
determined as of the close of business on the date specified in the prospectus
supplement (the "Determination Date"). All distributions for each class of
Securities on each Distribution Date will be allocated pro rata among the
outstanding securityholders in that class or by random selection or as described
in the prospectus supplement. Payments will be made either by wire transfer in
immediately available funds to the account of a securityholder at a bank or
other entity having appropriate facilities therefor, if that securityholder has
so notified the trustee or other person required to make those payments no later
than the date specified in the prospectus supplement (and, if so provided in the
prospectus supplement, holds Securities in the requisite amount specified
therein), or by check mailed to the address of the person entitled thereto as it
appears on the Security Register; provided, however, that the final distribution
in retirement of the Securities will be made only upon presentation and
surrender of the Securities at the location specified in the notice to
securityholders of that final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below,
subject to the terms described in the prospectus supplement. Generally, the
"Available Distribution Amount" for each Distribution Date equals the sum of the
following amounts:
(1) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date,
exclusive, unless otherwise specified in the prospectus supplement, of:
(a) all scheduled payments of principal and interest
collected but due on a date after the related Due Period
(unless a different period is specified in the prospectus
supplement, a "Due Period" for any Distribution Date will begin
on the second day of the month in which the immediately
preceding Distribution Date occurs, or the Cut-off Date in the
case of the first Due Period, and will end on the first day of
the month of the related Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds
of any FHA insurance, VA Guaranty Policy or insurance policies
to be maintained for each Asset (to the extent that proceeds
are not applied to the restoration of the Asset or released in
accordance with the normal servicing procedures of a servicer,
subject to the terms and conditions applicable to the related
Asset) (collectively, "Insurance Proceeds"), all other amounts
received and retained in connection with the liquidation of
Assets in default in the trust fund
24
("Liquidation Proceeds"), and other unscheduled recoveries
received after the related Due Period, or other period
specified in the prospectus supplement,
(c) all amounts in the Collection Account that are due or
reimbursable to the depositor, the trustee, an Asset Seller, a
servicer, the master servicer or any other entity as specified
in the prospectus supplement or that are payable in respect of
certain expenses of the related trust fund, and
(d) all amounts received for a repurchase of an Asset from
the trust fund for defective documentation or a breach of
representation or warranty received after the related Due
Period, or other period specified in the prospectus supplement;
(2) if the prospectus supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer or
any other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so provides,
amounts paid by a servicer or any other entity as specified in the
prospectus supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(5) to the extent not on deposit in the related Collection
Account as of the corresponding Determination Date, any amounts
collected under, from or in respect of any credit support for that
Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Securities (including any Securities not offered hereby) on each
Distribution Date, and accordingly will be released from the trust fund and will
not be available for any future distributions.
The prospectus supplement for a series of Securities will describe any
variation in the calculation or distribution of the Available Distribution
Amount for that series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Strip Securities which
have no Interest Rate) may have a different Interest Rate, which will be a
fixed, variable or adjustable rate at which interest will accrue on that class
or a component thereof (the "Interest Rate" in the case of Certificates). The
prospectus supplement will specify the Interest Rate for each class or component
or, in the case of a variable or adjustable Interest Rate, the method for
determining the Interest Rate. Interest on the Securities will be calculated on
the basis of a 360-day year consisting of twelve 30-day months unless the
prospectus supplement specifies a different basis.
Distributions of interest on the Securities of any class will be made on
each Distribution Date (other than any class of Accrual Securities, which will
be entitled to distributions of accrued interest starting only on the
Distribution Date, or under the circumstances, specified in the prospectus
supplement, and any class of Strip Securities that are not entitled to any
distributions of interest) based on the Accrued Security Interest for that class
and that Distribution Date, subject to the sufficiency of the portion of the
Available Distribution Amount allocable to that class on that Distribution Date.
Before any interest is distributed on any class of Accrual Securities, the
amount of Accrued Security Interest otherwise distributable on that class will
instead be added to the Security Balance of that class on each Distribution
Date.
25
For each class of Securities and each Distribution Date (other than
certain classes of Strip Securities), "Accrued Security Interest" will be equal
to interest accrued during the related Accrual Period on the outstanding
Security Balance thereof immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below.
Accrued Security Interest on certain classes of Strip Securities will be equal
to interest accrued during the related Accrual Period on the outstanding
notional amount thereof immediately before each Distribution Date, at the
applicable Interest Rate, reduced as described below, or interest accrual in the
manner described in the prospectus supplement.
The method of determining the notional amount for a particular class of Strip
Securities will be described in the prospectus supplement. Reference to notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal. Unless otherwise provided
in the prospectus supplement, the Accrued Security Interest on a series of
Securities will be reduced in the event of prepayment interest shortfalls, which
are shortfalls in collections of interest for a full accrual period resulting
from prepayments before the due date in that accrual period on the mortgage
loans or Contracts comprising or underlying the Assets in the trust fund for
that series. The particular manner in which these shortfalls are to be allocated
among some or all of the classes of Securities of that series will be specified
in the prospectus supplement. The prospectus supplement will also describe the
extent to which the amount of Accrued Security Interest that is otherwise
distributable on (or, in the case of Accrual Securities, that may otherwise be
added to the Security Balance of) a class of Offered Securities may be reduced
as a result of any other contingencies, including delinquencies, losses and
deferred interest on the mortgage loans or Contracts comprising or underlying
the Assets in the related trust fund. Unless otherwise provided in the
prospectus supplement, any reduction in the amount of Accrued Security Interest
otherwise distributable on a class of Securities by reason of the allocation to
that class of a portion of any deferred interest on the mortgage loans or
Contracts comprising or underlying the Assets in the related trust fund will
result in a corresponding increase in the Security Balance of that class. See
"Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Strip
Securities, will have a "Security Balance" which, at any time, will equal the
then maximum amount that the holder will be entitled to receive on principal out
of the future cash flow on the Assets and other assets included in the related
trust fund. The outstanding Security Balance of a Security will be reduced:
o to the extent of distributions of principal on that Security from
time to time and
o if and to the extent provided in the prospectus supplement, by the
amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus supplement
and
o in the case of Accrual Securities, will be increased by any related
Accrued Security Interest up until the Distribution Date on which
distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Securities of a series will be greater than the
outstanding total principal balance of the related Assets as of the applicable
Cut-off Date. The initial total Security Balance of a series and each class
thereof will be specified in the prospectus supplement. Distributions of
principal will be made on each Distribution Date to the class or classes of
Securities in the amounts and in accordance with the priorities specified in the
prospectus supplement. Certain classes of Strip Securities with no Security
Balance are not entitled to any distributions of principal.
26
COMPONENTS
To the extent specified in the prospectus supplement, distribution on a
class of Securities may be based on a combination of two or more different
components as described under "--General" above. To that extent, the
descriptions set forth under "--Distributions of Interest on the Securities" and
"--Distributions of Principal of the Securities" above also relate to components
of the component class of Securities. References in those sections to Security
Balance may refer to the principal balance, if any, of these components and
reference to the Interest Rate may refer to the Interest Rate, if any, on these
components.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the prospectus supplement, Prepayment Premiums that
are collected on the mortgage loans in the related trust fund will be
distributed on each Distribution Date to the class or classes of Securities
entitled thereto as described in the prospectus supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of those losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in the prospectus supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
trust fund against losses and shortfalls on Assets comprising that trust fund.
The prospectus supplement for a series of Securities will describe the
entitlement, if any, of a class of Securities whose Security Balance has been
reduced to zero as a result of distributions or the allocation of losses on the
related Assets to recover any losses previously allocated to that class from
amounts received on the Assets. However, if the Security Balance of a class of
Securities has been reduced to zero as the result of principal distributions,
the allocation of losses on the Assets, an optional termination or an optional
purchase or redemption, that class will no longer be entitled to receive
principal distributions from amounts received on the assets of the related trust
fund, including distributions in respect of principal losses previously
allocated to that class.
ADVANCES IN RESPECT OF DELINQUENCIES
If so provided in the prospectus supplement, the servicer or another
entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the related Collection Account that are not included in the
Available Distribution Amount for that Distribution Date, in an amount equal to
the total of payments of (1) principal (other than any balloon payments) and (2)
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in that trust fund during the related Due Period and were delinquent
on the related Determination Date, subject to a good faith determination that
the advances will be reimbursable from Related Proceeds (as defined below). In
the case of a series of Securities that includes one or more classes of
Subordinate Securities and if so provided in the prospectus supplement, the
servicer's (or another entity's) advance obligation may be limited only to the
portion of those delinquencies necessary to make the required distributions on
one or more classes of Senior Securities and/or may be subject to a good faith
determination that advances will be reimbursable not only from Related Proceeds
but also from collections on other Assets otherwise distributable on one or more
classes of those Subordinate Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets (including amounts received under any form of credit
support) respecting which those advances were made (as to any Assets, "Related
Proceeds") and from any other amounts specified in the prospectus supplement,
including out of any amounts otherwise distributable on one or more classes of
Subordinate Securities of that series; provided, however, that any advance will
be reimbursable from any amounts in the related Collection Account before any
distributions being made
27
on the Securities to the extent that the servicer (or some other entity)
determines in good faith that advance (a "Nonrecoverable Advance") is not
ultimately recoverable from Related Proceeds or, if applicable, from collections
on other Assets otherwise distributable on the Subordinate Securities. If
advances have been made by the servicer from excess funds in the related
Collection Account, the servicer is required to replace these funds in that
Collection Account on any future Distribution Date to the extent that funds in
that Collection Account on that Distribution Date are less than payments
required to be made to securityholders on that date. If specified in the
prospectus supplement, the obligations of the servicer (or another entity) to
make advances may be secured by a cash advance reserve fund, a surety bond, a
letter of credit or another form of limited guaranty. If applicable, information
regarding the characteristics of and the identity of any borrower on any surety
bond will be set forth in the prospectus supplement.
If and to the extent so provided in the prospectus supplement, the
servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay itself
this interest periodically from general collections on the Assets before any
payment to securityholders or as otherwise provided in the related Agreement and
described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Securities of a
series, the servicer, the master servicer or the trustee, as provided in the
prospectus supplement, will forward or cause to be forwarded to each holder, to
the depositor and to any other parties as may be specified in the related
Agreement, a statement containing the information specified in the prospectus
supplement, or if no such information is specified in the prospectus supplement,
generally setting forth, in each case to the extent applicable and available:
(1) the amount of that distribution to holders of Securities of
that class applied to reduce the Security Balance thereof;
(2) the amount of that distribution to holders of Securities of
that class allocable to Accrued Security Interest;
(3) the amount of that distribution allocable to Prepayment
Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to
prepare their tax returns;
(5) the total amount of advances included in that distribution,
and the total amount of unreimbursed advances at the close of business
on that Distribution Date;
(6) the total principal balance of the Assets at the close of
business on that Distribution Date;
(7) the number and total principal balance of mortgage loans or
Contracts in respect of which (a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent, (c) three or more scheduled
payments are delinquent and (d) foreclosure proceedings have begun;
(8) for any mortgage loan or Contract liquidated during the
related Due Period, (a) the portion of the related liquidation proceeds
payable or reimbursable to a servicer (or any other entity) in respect
of that mortgage loan and (b) the amount of any loss to securityholders;
28
(9) with respect to collateral acquired by the trust fund
through foreclosure or otherwise (an "REO Property") relating to a
mortgage loan or Contract and included in the trust fund as of the end
of the related Due Period, the date of acquisition;
(10) for each REO Property relating to a mortgage loan or
Contract and included in the trust fund as of the end of the related Due
Period, (a) the book value, (b) the principal balance of the related
mortgage loan or Contract immediately following that Distribution Date
(calculated as if that mortgage loan or Contract were still outstanding
taking into account certain limited modifications to the terms thereof
specified in the Agreement), (c) the total amount of unreimbursed
servicing expenses and unreimbursed advances in respect thereof and (d)
if applicable, the total amount of interest accrued and payable on
related servicing expenses and related advances;
(11) for any REO Property sold during the related Due Period
(a) the total amount of sale proceeds, (b) the portion of those sales
proceeds payable or reimbursable to the master servicer in respect of
that REO Property or the related mortgage loan or Contract and (c) the
amount of any loss to securityholders in respect of the related mortgage
loan;
(12) the total Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities
not offered hereby) at the close of business on that Distribution Date,
separately identifying any reduction in that Security Balance due to the
allocation of any loss and increase in the Security Balance of a class
of Accrual Securities if any Accrued Security Interest has been added to
that balance;
(13) the total amount of principal prepayments made during the
related Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of
the close of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on
each class of Securities at the close of business on that Distribution
Date;
(17) in the case of Securities with a variable Interest Rate,
the Interest Rate applicable to that Distribution Date, and, if
available, the immediately succeeding Distribution Date, as calculated
in accordance with the method specified in the prospectus supplement;
(18) in the case of Securities with an adjustable Interest
Rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Interest Rate applicable to that
Distribution Date, if available, and the immediately succeeding
Distribution Date as calculated in accordance with the method specified
in the prospectus supplement;
(19) as to any series that includes credit support, the amount
of coverage of each instrument of credit support included therein as of
the close of business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded
Amount and the portion of the Pre-Funding Amount used to acquire
Subsequent Assets since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of (a)
default interest, (b) late charges and (c) assumption and modification
fees collected during the related Due Period.
29
Within a reasonable period of time after the end of each calendar year,
the servicer, the master servicer or the trustee, as provided in the prospectus
supplement, will furnish to each securityholder of record at any time during the
calendar year the information required by the Code and applicable regulations
thereunder to enable securityholders to prepare their tax returns. See
"Description of the Securities--Book-Entry Registration and Definitive
Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Securities will terminate upon the payment to securityholders of that series of
all amounts held in the Collection Accounts or by a servicer, the master
servicer, if any, or the trustee and required to be paid to them pursuant to
that Agreement following the earlier of (1) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all property
acquired upon foreclosure of any mortgage loan or Contract subject thereto and
(2) the purchase of all of the assets of the trust fund by the party entitled to
effect that termination, under the circumstances and in the manner set forth in
the prospectus supplement. In no event, however, will the trust fund continue
beyond the date specified in the prospectus supplement. Written notice of
termination of the Agreement will be given to each securityholder, and the final
distribution will be made only upon presentation and surrender of the Securities
at the location to be specified in the notice of termination.
If specified in the prospectus supplement, a series of Securities may be
subject to optional early termination through the purchase of the Assets in the
related trust fund by the party specified therein, under the circumstances and
in the manner set forth therein. If so provided in the prospectus supplement,
upon the reduction of the Security Balance of a specified class or classes of
Securities by a specified percentage, the party specified therein will solicit
bids for the purchase of all assets of the trust fund, or of a sufficient
portion of those assets to retire that class or classes or purchase that class
or classes at a price set forth in the prospectus supplement, in each case,
under the circumstances and in the manner set forth therein. That price will at
least equal the outstanding Security Balances and any accrued and unpaid
interest thereon (including any unpaid interest shortfalls for prior
Distribution Dates). Any sale of the Assets of the trust fund will be without
recourse to the trust fund or the securityholders. Any purchase or solicitation
of bids may be made only when the total Security Balance of that class or
classes declines to a percentage of the Initial Security Balance of those
Securities (not to exceed 10%) specified in the prospectus supplement. In
addition, if so provided in the prospectus supplement, certain classes of
Securities may be purchased or redeemed in the manner set forth therein at a
price at least equal to the outstanding Security Balance of each class so
purchased or redeemed and any accrued and unpaid interest thereon (including any
unpaid interest shortfalls for prior Distribution Dates).
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the depositor,
the servicer or any other party specified in the prospectus supplement may, at
that party's option, repurchase any mortgage loan that is in default or as to
which default is reasonably foreseeable if, in the depositor's, the servicer's
or any other party's judgment, the related default is not likely to be cured by
the borrower or default is not likely to be averted, at a price equal to the
unpaid principal balance thereof plus accrued interest thereon and under the
conditions set forth in the prospectus supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
GENERAL
If provided for in the prospectus supplement, one or more classes of the
Offered Securities of any series will be issued as Book-Entry Securities, and
each of these classes will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC") and, if provided in the prospectus supplement, additionally
through Cedelbank ("Cedel") or the Euroclear System ("Euroclear"). Each class of
Book-Entry Securities will be issued in one or more certificates or notes, as
the case may be, that equal the initial principal amount of the related class of
Offered Securities and will initially be registered in the name of Cede & Co.
30
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except as
set forth below under "--Definitive Securities." Unless and until Definitive
Securities are issued for the Book-Entry Securities under the limited
circumstances described in the applicable prospectus supplement or this
prospectus, all references to actions by securityholders with respect to the
Book-Entry Securities will refer to actions taken by DTC, Cedel or Euroclear
upon instructions from their Participants (as defined below), and all references
herein to distributions, notices, reports and statements to securityholders with
respect to the Book-Entry Securities will refer to distributions, notices,
reports and statements to DTC, Cedel or Euroclear, as applicable, for
distribution to Beneficial Owners by DTC in accordance with the procedures of
DTC and if applicable, Cedel and Euroclear.
Beneficial Owners will hold their Book-Entry Securities through DTC in
the United States, or, if the Offered Securities are offered for sale globally,
through Cedel or Euroclear in Europe if they are participating organizations
("Participants") of those systems. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include some
other organizations. Indirect access to the DTC, Cedel and Euroclear systems
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").
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 Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thereby eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to record
the positions held by each of its Participants in the Book-Entry Securities,
whether held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Securities will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
CEDEL
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its Participants and facilitates the
clearance and settlement of securities transactions between its Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of securities. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars. Cedel
provides to its Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally-traded securities
and securities lending and borrowing. Cedel interfaces with domestic markets in
several countries. As a professional depository, Cedel is subject to regulation
by the Luxembourg Monetary Institute. Cedel Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to Cedel is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant of Cedel, either directly or
indirectly.
EUROCLEAR
Euroclear was created in 1968 to hold securities for its Participants
and to clear and settle transactions between its Participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for physical movement of securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels,
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Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative Corporation"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative Corporation. The Cooperative Corporation establishes policy
for Euroclear on behalf of its Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Participant of Euroclear, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of its
Participants, and has no record of or relationship with persons holding through
Participants of Euroclear.
Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold
positions in customers' securities accounts in the depositaries names on the
books of DTC. Citibank will act as depositary for Cedel and The Chase Manhattan
Bank will act as depositary for Euroclear (individually the "Relevant
Depositary" and collectively, the "European Depositaries").
BENEFICIAL OWNERSHIP OF BOOK-ENTRY SECURITIES
Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing a Certificate, or note representing
a Note. Unless and until Definitive Securities are issued, it is anticipated
that the only "securityholder" of the Offered Securities will be Cede & Co., as
nominee of DTC. Beneficial Owners will not be "Certificateholders" as that term
is used in any Agreement, nor "Noteholders" as that term is used in any
indenture. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants, DTC, Cedel or Euroclear, as applicable.
The Beneficial Owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and on
the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Securities from the trustee through DTC and its
Participants. While the Offered Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Securities and is required to receive and transmit
distributions of principal of, and interest on, the Offered Securities.
Participants and Indirect Participants with whom Beneficial Owners have accounts
with respect to Offered Securities are similarly required to make book-entry
transfers and receive and transmit distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates or notes, the Rules provide a mechanism by which Beneficial Owners
will receive distributions and will be able to transfer their interest.
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Beneficial Owners will not receive or be entitled to receive
certificates or notes representing their respective interests in the Offered
Securities, except under the limited circumstances described below. Unless and
until Definitive Securities are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Securities only through
Participants and Indirect Participants by instructing the Participants and
Indirect Participants to transfer Offered Securities, by book-entry transfer,
through DTC for the account of the purchasers of the Offered Securities, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfer of ownership of Book-Entry
Securities will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and Indirect Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, any credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Participants of Cedel or Euroclear on that business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Participant of
Cedel or Euroclear to a Participant of DTC will be received with value on the
DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC. For
information with respect to tax documentation procedures relating to the
Securities, see "Material Federal Income Tax Considerations -- Tax Treatment of
Foreign Investors" herein and, if the Book-Entry Securities are globally offered
and the prospectus supplement so provides, see "Global Clearance, Settlement and
Tax Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Cedel or Euroclear will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Participants of
Cedel or Euroclear, on the other, will be effected in DTC in accordance with the
DTC Rules on behalf of the relevant European international clearing system by
the Relevant Depositary; however, cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in that system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action to
effect final settlement on its behalf by delivering or receiving securities in
DTC, and making or receiving payment in accordance with normal procedures for
same day funds settlement applicable to DTC. Participants of Cedel or Euroclear
may not deliver instructions directly to the European Depositaries.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of each distribution to the accounts of the applicable Participants
of DTC in accordance with DTC's normal procedures. Each Participant of DTC will
be responsible for disbursing the distribution to the Beneficial Owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Securities that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Securities may experience some delay in their receipt of payments, because the
distributions will be forwarded by the Trustee to Cede & Co. Any distributions
on Securities held through Cedel or Euroclear will be credited to the cash
accounts of Participants of Cedel or Euroclear in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. These distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Material Federal
Income Tax Considerations -- REMICs -- Taxation of Certain Foreign Investors"
herein. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a Beneficial Owner to pledge Book-Entry Securities to persons or
entities that do not participate in the depository system, or otherwise take
actions in respect of Book-Entry Securities, may be limited due to the lack of
physical securities for the Book-Entry Securities. In addition, issuance of
33
the Book-Entry Securities in book-entry form may reduce the liquidity of the
securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
securities.
Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to Beneficial Owners upon request,
in accordance with the rules, regulations and procedures creating and affecting
the depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Securities of Beneficial Owners are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by the holders of the Book-Entry Securities under the Agreement or indenture, as
applicable, only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Securities are credited, to the extent that
actions are taken on behalf of Financial Intermediaries whose holdings include
the Book-Entry Securities. If the Book-Entry Securities are globally offered,
Cedel or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a securityholder under the Agreement or indenture, as
applicable, on behalf of a Participant of Cedel or Euroclear only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect those actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Offered Securities that conflict with actions taken with respect to other
Offered Securities.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Securities among
Participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform these procedures and the procedures may be
discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee,
any securities registrar or paying agent or any of their affiliates will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
DEFINITIVE SECURITIES
Securities initially issued in book-entry form will be issued as
Definitive Securities to Beneficial Owners or their nominees, rather than to DTC
or its nominee only (1) if the depositor advises the trustee in writing that DTC
is no longer willing or able to properly discharge its responsibilities as
depository for the Securities and the depositor is unable to locate a qualified
successor, (2) if the depositor, at its option, elects to end the book-entry
system through DTC or (3) in accordance with any other provisions described in
the prospectus supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Beneficial Owners.
Upon surrender by DTC of the security or securities representing the Book-Entry
Securities, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Securities to which they are entitled, and
thereafter the trustee will recognize the holders of those Definitive Securities
as securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC SECURITIES, FASIT SECURITIES, GRANTOR TRUST SECURITIES
Securities representing interests in a trust fund, or a portion thereof,
that the trustee will elect to have treated as a real estate mortgage investment
conduit under Sections 860A through 860G of the Code ("REMIC Securities"), FASIT
Securities (as defined herein), or Grantor Trust Securities (as defined herein)
will be issued, and the related trust
34
fund will be created, pursuant to a pooling and servicing agreement or trust
agreement (in either case, generally referred to in this prospectus as the
"pooling and servicing agreement") among the depositor, the trustee and the sole
servicer or master servicer, as applicable. The Assets of that trust fund will
be transferred to the trust fund and thereafter serviced in accordance with the
terms of the pooling and servicing agreement. In the event there are multiple
servicers of the Assets of that trust fund, or in the event the Securities
consist of Notes, each servicer will perform its servicing functions pursuant to
a related underlying servicing agreement.
SECURITIES THAT ARE PARTNERSHIP INTERESTS FOR TAX PURPOSES AND NOTES
Securities that are partnership interests for tax purposes will be
issued, and the related trust fund will be created, pursuant to the pooling and
servicing agreement or trust agreement.
A series of Notes issued by a trust fund will be issued pursuant to an
indenture between the related trust fund and an indenture trustee named in the
prospectus supplement. The trust fund will be established either as a statutory
business trust under the law of the State of Delaware or as a common law trust
under the law of the State of New York pursuant to a trust agreement between the
depositor and an owner trustee specified in the prospectus supplement relating
to that series of Notes. The Assets securing payment on the Notes will be
serviced in accordance with a sale and servicing agreement or servicing
agreement.
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
GENERAL
The following summaries describe the material provisions that may appear
in each pooling and servicing agreement, sale and servicing agreement or
servicing agreement (each, an "Agreement"). The prospectus supplement for a
series of Securities will describe any provision of the Agreement relating to
that series that materially differs from the description thereof contained in
this prospectus. The summaries do not purport to be complete and are subject to,
and are qualified by reference to, all of the provisions of the Agreement for
each trust fund and the description of those provisions in the prospectus
supplement. The provisions of each Agreement will vary depending on the nature
of the Securities to be issued thereunder and the nature of the related trust
fund. As used herein for any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the prospectus
supplement, unless the context otherwise requires. A form of a pooling and
servicing agreement has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
pooling and servicing agreement (without exhibits) relating to any series of
Securities without charge upon written request of a securityholder of that
series addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S. Eldridge.
The servicer or master servicer and the trustee for any series of
Securities will be named in the prospectus supplement. In the event there are
multiple servicers for the Assets in a trust fund, a master servicer will
perform certain administration, calculation and reporting functions for that
trust fund and will supervise the related servicers pursuant to a pooling and
servicing agreement. For a series involving a master servicer, references in
this prospectus to the servicer will apply to the master servicer where
non-servicing obligations are described. If specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the pooling
and servicing agreement for any trust fund to administer that trust fund.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the depositor will
assign (or cause to be assigned) to the designated trustee the Assets to be
included in the related trust fund, together with all principal and interest to
be received on or with respect to those Assets after the Cut-off Date, other
than principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The trustee will, concurrently with that assignment, deliver
the Securities to the depositor in exchange for the Assets and the other assets
comprising the trust fund for that series.
35
Each Asset will be identified in a schedule appearing as an exhibit to the
related Agreement. That schedule will include detailed information to the extent
available and relevant
(1) in respect of each mortgage loan included in the related
trust fund, including the city and state of the related Mortgaged
Property and type of that property, the mortgage rate and, if
applicable, the applicable index, margin, adjustment date and any rate
cap information, the original and remaining term to maturity, the
original and outstanding principal balance and balloon payment, if any,
the Loan-to-Value Ratio as of the date indicated and payment and
prepayment provisions, if applicable;
(2) in respect of each Contract included in the related trust
fund, including the outstanding principal amount and the Contract Rate;
and
(3) in respect of each Mortgage Security and Agency Security,
the original and outstanding principal amount, if any, and the interest
rate thereon.
For each mortgage loan, except as otherwise specified in the prospectus
supplement, the depositor will deliver or cause to be delivered to the trustee
(or to the custodian hereinafter referred to) certain loan documents, which will
generally include the original mortgage note endorsed, without recourse, in
blank or to the order of the trustee, the original Mortgage (or a certified copy
thereof) with evidence of recording indicated thereon and an assignment of the
Mortgage to the trustee in recordable form. However, a trust fund may include
mortgage loans where the original mortgage note is not delivered to the trustee
if the depositor delivers to the trustee or the custodian a copy or a duplicate
original of the mortgage note, together with an affidavit certifying that the
original thereof has been lost or destroyed. For those mortgage loans, the
trustee (or its nominee) may not be able to enforce the mortgage note against
the related borrower. The Asset Seller or other entity specified in the
prospectus supplement will be required to agree to repurchase, or substitute
for, each of these mortgage loans that is subsequently in default if the
enforcement thereof or of the related Mortgage is materially adversely affected
by the absence of the original mortgage note. The related Agreement will
generally require the depositor or another party specified in the prospectus
supplement to promptly cause each of these assignments of Mortgage to be
recorded in the appropriate public office for real property records, except in
the State of California or in other states where, in the opinion of counsel
acceptable to the trustee, recording is not required to protect the trustee's
interest in the related mortgage loan against the claim of any subsequent
transferee or any successor to or creditor of the depositor, the servicer, the
relevant Asset Seller or any other prior holder of the mortgage loan.
The trustee (or a custodian) will review the mortgage loan documents
within a specified period of days after receipt thereof, and the trustee (or a
custodian) will hold those documents in trust for the benefit of the
securityholders. If any of these documents are found to be missing or defective
in any material respect, the trustee (or that custodian) will immediately notify
the servicer and the depositor, and the servicer will immediately notify the
relevant Asset Seller or other entity specified in the prospectus supplement. If
the Asset Seller cannot cure the omission or defect within a specified number of
days after receipt of that notice, then the Asset Seller or other entity
specified in the prospectus supplement will be obligated, within a specified
number of days of receipt of that notice, to either (1) repurchase the related
mortgage loan from the trustee at a price equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest at the interest rate for
that Asset from the date as to which interest was last paid to the due date in
the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are payable to the servicer, or another price as
specified in the prospectus supplement (the "Purchase Price") or (2) substitute
a new mortgage loan. There can be no assurance that an Asset Seller or other
named entity will fulfill this repurchase or substitution obligation, and
neither the servicer nor the depositor will be obligated to repurchase or
substitute for that mortgage loan if the Asset Seller or other named entity
defaults on its obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
36
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans, Home Improvement Contracts and Unsecured Home Improvement Loans
will be delivered to the trustee (or a custodian) only to the extent specified
in the prospectus supplement. Generally these documents will be retained by the
servicer, which may also be the Asset Seller. In addition, assignments of the
related Mortgages to the trustee will be recorded only to the extent specified
in the prospectus supplement.
For each Contract, the servicer (which may also be the Asset Seller)
generally will maintain custody of the original Contract and copies of documents
and instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. To give notice of the right, title and
interest of the trustee in the Contracts, the depositor will cause UCC-1
financing statements to be executed by the related Asset Seller identifying the
depositor as secured party and by the depositor identifying the trustee as the
secured party and, in each case, identifying all Contracts as collateral. The
Contracts will be stamped or otherwise marked to reflect their assignment from
the depositor to the trust fund only to the extent specified in the prospectus
supplement. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Contracts without notice
of that assignment, the interest of the trustee in the Contracts could be
defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the trustee or the
servicer, if the servicer finds that any document is missing or defective in any
material respect, the servicer will be required to immediately notify the
depositor and the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller or some other entity cannot cure the
omission or defect within a specified number of days after receipt of this
notice, then the Asset Seller or that other entity will be obligated, within a
specified number of days of receipt of this notice, to repurchase the related
Contract from the trustee at the Purchase Price or substitute for that Contract.
There can be no assurance that an Asset Seller or any other entity will fulfill
this repurchase or substitution obligation, and neither the servicer nor the
depositor will be obligated to repurchase or substitute for that Contract if the
Asset Seller or any other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
securityholders or the trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the prospectus supplement, in
lieu of curing any omission or defect in the Asset or repurchasing or
substituting for that Asset, the Asset Seller may agree to cover any losses
suffered by the trust fund as a result of that breach or defect.
Mortgage Securities and Agency Securities will be registered in the name
of the trustee or its nominee on the books of the issuer or guarantor or its
agent or, in the case of Mortgage Securities and Agency Securities issued only
in book-entry form, through the depository with respect thereto, in accordance
with the procedures established by the issuer or guarantor for registration of
those certificates, and distributions on those securities to which the trust
fund is entitled will be made directly to the trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
To the extent provided in the prospectus supplement the depositor will,
for each Asset, assign certain representations and warranties, as of a specified
date (the person making those representations and warranties, the "Warranting
Party") covering, by way of example, the following types of matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related
Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan and, in the case of
a Contract, that the Contract creates a valid first security
interest in or lien on the related Manufactured Home;
o the authority of the Warranting Party to sell the Asset;
37
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary
provisions in the related mortgage note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the
security of the Mortgage; and
o the existence of hazard and extended perils insurance coverage on
the Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
any other person acceptable to the depositor and will be identified in the
prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date before the applicable Cut-off Date. A substantial period of
time may have elapsed between that date and the date of initial issuance of the
related series of Securities evidencing an interest in that Asset. In the event
of a breach of any of these representations or warranties, the Warranting Party
will be obligated to reimburse the trust fund for losses caused by that breach
or either cure that breach or repurchase or replace the affected Asset as
described below. Since the representations and warranties may not address events
that may occur following the date as of which they were made, the Warranting
Party will have a reimbursement, cure, repurchase or substitution obligation in
connection with a breach of that representation and warranty only if the
relevant event that causes that breach occurs before that date. That party would
have no obligations if the relevant event that causes that breach occurs after
that date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the prospectus supplement will be required to notify
promptly the relevant Warranting Party of any breach of any representation or
warranty made by it in respect of an Asset that materially and adversely affects
the value of that Asset or the interests therein of the securityholders. If the
Warranting Party cannot cure that breach within a specified period following the
date on which that party was notified of that breach, then the Warranting Party
will be obligated to repurchase that Asset from the trustee within a specified
period from the date on which the Warranting Party was notified of that breach,
at the Purchase Price therefor. If so provided in the prospectus supplement for
a series, a Warranting Party, rather than repurchase an Asset as to which a
breach has occurred, will have the option, within a specified period after
initial issuance of that series of Securities, to cause the removal of that
Asset from the trust fund and substitute in its place one or more other Assets,
as applicable, in accordance with the standards described in the prospectus
supplement. If so provided in the prospectus supplement for a series, a
Warranting Party, rather than repurchase or substitute an Asset as to which a
breach has occurred, will have the option to reimburse the trust fund or the
securityholders for any losses caused by that breach. This reimbursement,
repurchase or substitution obligation will constitute the sole remedy available
to securityholders or the trustee for a breach of representation by a Warranting
Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that the Warranting Parties will carry out those obligations with
respect to the Assets.
A servicer will make certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the related Agreement. A breach of any representation of the servicer that
materially and adversely affects the interests of the securityholders and which
continues unremedied for the number of days specified in the Agreement after the
discovery of the breach by the servicer or the receipt of written notice of that
breach by the servicer from the trustee, the depositor or the holders of
Securities evidencing not less than 25% of the voting rights or other percentage
specified in the related Agreement, will constitute an Event of Default under
that Agreement. See "Events of Default" and "Rights Upon Event of Default."
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COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured
deposits in which are otherwise secured so that the securityholders
have a claim with respect to the funds in the Collection Account or
a perfected first priority security interest against any collateral
securing those funds that is superior to the claims of any other
depositors or general creditors of the institution with which the
Collection Account is maintained, or
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Securities of that series.
Investment of amounts in the Collection Account is limited to United
States government securities and other investment grade obligations specified in
the Agreement ("Permitted Investments"). A Collection Account may be maintained
as an interest bearing or a non-interest bearing account and the funds held
therein may be invested pending each succeeding Distribution Date in certain
short-term Permitted Investments. Any interest or other income earned on funds
in the Collection Account will, unless otherwise specified in the prospectus
supplement, be paid to the servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution that
is an affiliate of the servicer, if applicable, provided that that institution
meets the standards imposed by the rating agency or agencies. If permitted by
the rating agency or agencies, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the servicer or
serviced or master serviced by it on behalf of others.
DEPOSITS. A servicer or the trustee will deposit or cause to be
deposited in the Collection Account for one or more trust funds on a daily
basis, or any other period provided in the related Agreement, the following
payments and collections received, or advances made, by the servicer or the
trustee or on its behalf after the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest), except as otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets,
including any default interest collected, in each case net of any
portion thereof retained by a servicer as its servicing compensation and
net of any Retained
Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together with
the net proceeds on a monthly basis with respect to any Assets acquired
for the benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any
fund that constitutes credit support for the related series of
Securities as described under "Description of Credit Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds--Cash Flow Agreements;"
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(7) all proceeds of any Asset or, with respect to a mortgage
loan, property acquired in respect thereof purchased by the depositor,
any Asset Seller or any other specified person as described above under
"--Assignment of Assets; Repurchases" and "--Representations and
Warranties; Repurchases," all proceeds of any defaulted mortgage loan
purchased as described below under "--Realization Upon Defaulted
Assets," and all proceeds of any Asset purchased as described under
"Description of the Securities--Termination;"
(8) any amounts paid by a servicer to cover certain interest
shortfalls arising out of the prepayment of Assets in the trust fund as
described below under "--Retained Interest; Servicing Compensation and
Payment of Expenses;"
(9) to the extent that any of these items do not constitute
additional servicing compensation to a servicer, any payments on account
of modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
(10) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket insurance
policy described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the
trustee in connection with losses realized on investments for the
benefit of the servicer or the trustee, as the case may be, of funds
held in the Collection Account; and
(12) any other amounts required to be deposited in the
Collection Account as provided in the related Agreement and described in
the prospectus supplement.
WITHDRAWALS. A servicer or the trustee may, from time to time as
provided in the related Agreement, make withdrawals from the Collection Account
for each trust fund for any of the following purposes, except as otherwise
provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts advanced
as described under "Description of the Securities--Advances in Respect
of Delinquencies," which reimbursement is to be made out of amounts
received that were identified and applied by the servicer as late
collections of interest (net of related servicing fees and Retained
Interest) on and principal of the particular Assets for which the
advances were made or out of amounts drawn under any form of credit
support with respect to those Assets;
(3) to reimburse a servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to
Assets and properties acquired in respect thereof, which reimbursement
is to be made out of amounts that represent Liquidation Proceeds and
Insurance Proceeds collected on the particular Assets and properties,
and net income collected on the particular properties, which fees were
earned or expenses were incurred or out of amounts drawn under any form
of credit support for those Assets and properties;
(4) to reimburse a servicer for any advances described in
clause (2) above and any servicing expenses described in clause (3)
above which, in the servicer's good faith judgment, will not be
recoverable from the amounts described in those clauses, which
reimbursement is to be made from amounts collected on other Assets or,
if and to the extent so provided by the related Agreement and described
in the prospectus supplement, just from that portion of amounts
collected on other Assets that is otherwise distributable on one or more
classes of Subordinate Securities, if any, remain outstanding, and
otherwise any outstanding class of Securities, of the related series;
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(5) if and to the extent described in the prospectus
supplement, to pay a servicer interest accrued on the advances described
in clause (2) above and the servicing expenses described in clause (3)
above while those advances and servicing expenses remain outstanding and
unreimbursed;
(6) to reimburse a servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the case may
be, for certain expenses, costs and liabilities incurred thereby, as and
to the extent described below under "--Certain Matters Regarding
Servicers, the Master Servicer and the Depositor;"
(7) if and to the extent described in the prospectus
supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs
and liabilities incurred thereby, as and to the extent described below
under "--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in the
Collection Account;
(10) to pay the person entitled thereto any amounts deposited
in the Collection Account that were identified and applied by the
servicer as recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with
the proper management and maintenance of any Mortgaged Property acquired
for the benefit of securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, which payments are to be made out of income
received on that property;
(12) if one or more elections have been made to treat the trust
fund or designated portions thereof as a REMIC, to pay any federal,
state or local taxes imposed on the trust fund or its assets or
transactions, as and to the extent described under "Material Federal
Income Tax Considerations--REMICs--Taxes That May Be Imposed on the
REMIC Pool" or in the prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price
for a defaulted mortgage loan or a property acquired in respect thereof
in connection with the liquidation of that mortgage loan or property;
(14) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
securityholders;
(15) to pay for the costs of recording the related Agreement if
that recordation materially and beneficially affects the interests of
securityholders, provided that the payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any
breach of representation or warranty under the
Agreement;
(16) to pay the person entitled thereto any amounts deposited
in the Collection Account in error, including amounts received on any
Asset after its removal from the trust fund whether by reason of
purchase or substitution as contemplated above under "--Assignment of
Assets; Repurchase" and "--Representations and Warranties; Repurchases"
or otherwise;
(17) to make any other withdrawals permitted by the related
Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
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OTHER COLLECTION ACCOUNTS. If specified in the prospectus supplement,
the Agreement for any series of Securities may provide for the establishment and
maintenance of a separate collection account into which the servicer will
deposit on a daily basis, or any other period as provided in the related
Agreement, the amounts described under "--Deposits" above for one or more series
of Securities. Any amounts on deposit in any of these collection accounts will
be withdrawn therefrom and deposited into the appropriate Collection Account by
a time specified in the prospectus supplement. To the extent specified in the
prospectus supplement, any amounts that could be withdrawn from the Collection
Account as described under "--Withdrawals" above may also be withdrawn from any
of these collection accounts. The prospectus supplement will set forth any
restrictions for any of these collection accounts, including investment
restrictions and any restrictions for financial institutions with which any of
these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made.
COLLECTION AND OTHER SERVICING PROCEDURES. The servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed those collection procedures that it would
follow with respect to assets that are comparable to the Assets and held for its
own account, provided that those procedures are consistent with (1) the terms of
the related Agreement and any related hazard insurance policy or instrument of
credit support, if any, included in the related trust fund described herein or
under "Description of Credit Support," (2) applicable law and (3) the general
servicing standard specified in the prospectus supplement or, if no standard is
so specified, its normal servicing practices (in either case, the "Servicing
Standard"). In connection therewith, the servicer will be permitted in its
discretion to waive any late payment charge or penalty interest in respect of a
late payment on an Asset.
Each servicer will also be required to perform other customary functions
of a servicer of comparable assets, including maintaining hazard insurance
policies as described herein and in any prospectus supplement, and filing and
settling claims thereunder; maintaining, to the extent required by the
Agreement, escrow or impoundment accounts of borrowers for payment of taxes,
insurance and other items required to be paid by any borrower pursuant to the
terms of the Assets; processing assumptions or substitutions in those cases
where the servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under some circumstances; and maintaining accounting records relating to
the Assets. The servicer or any other entity specified in the prospectus
supplement will be responsible for filing and settling claims in respect of
particular Assets under any applicable instrument of credit support. See
"Description of Credit Support."
The servicer may agree to modify, waive or amend any term of any Asset
in a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due thereon. The servicer also may agree to any modification,
waiver or amendment that would so affect or impair the payments on, or the
security for, an Asset if (1) in its judgment, a material default on the Asset
has occurred or a payment default is reasonably foreseeable and (2) in its
judgment, that modification, waiver or amendment is reasonably likely to produce
a greater recovery with respect to the Asset on a present value basis than would
liquidation. In the event of any modification, waiver or amendment of any Asset,
the servicer will furnish a copy of that modification, waiver or amendment to
the trustee (or its custodian).
In the case of multifamily loans, a borrower's failure to make required
mortgage loan payments may mean that operating income is insufficient to service
the mortgage loan debt, or may reflect the diversion of that income from the
servicing of the mortgage loan debt. In addition, a borrower under a multifamily
loan that is unable to make mortgage loan payments may also be unable to make
timely payment of all required taxes and otherwise to maintain and insure the
related Mortgaged Property. In general, the servicer will be required to monitor
any multifamily loan that is in default, evaluate whether the causes of the
default can be corrected over a reasonable period without significant
42
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the borrower if cure is likely, inspect the related
Multifamily Property and take those other actions as are consistent with the
related Agreement. A significant period of time may elapse before the servicer
is able to assess the success of any corrective action or the need for
additional initiatives. The time within which the servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose may vary considerably depending on the particular multifamily loan,
the Multifamily Property, the borrower, the presence of an acceptable party to
assume the multifamily loan and the laws of the jurisdiction in which the
Multifamily Property is located.
REALIZATION UPON DEFAULTED ASSETS
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the servicer
is able to assess the success of that corrective action or the need for
additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans or
Contracts may grant to the servicer and/or the holder or holders of some classes
of Securities a right of first refusal to purchase from the trust fund at a
predetermined purchase price any mortgage loan or Contract as to which a
specified number of scheduled payments thereunder are delinquent. Any right of
first refusal granted to the holder of an Offered Security will be described in
the prospectus supplement. The prospectus supplement will also describe any
similar right granted to any person if the predetermined purchase price is less
than the Purchase Price described above under "--Representations and Warranties;
Repurchases."
If specified in the prospectus supplement, the servicer may offer to
sell any defaulted mortgage loan or Contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect to that defaulted mortgage loan or Contract, if and when
the servicer determines, consistent with the Servicing Standard, so that a sale
would produce a greater recovery on a present value basis than would liquidation
through foreclosure, repossession or similar proceedings. The related Agreement
will provide that any offering be made in a commercially reasonable manner for a
specified period and that the servicer accept the highest cash bid received from
any person (including itself, an affiliate of the servicer or any
securityholder) that constitutes a fair price for that defaulted mortgage loan
or Contract. If there is no bid that is determined to be fair, the servicer will
proceed with respect to that defaulted mortgage loan or Contract as described
below. Any bid in an amount at least equal to the Purchase Price described above
under "--Representations and Warranties; Repurchases" will in all cases be
deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a mortgage loan by operation of law or otherwise and may at
any time repossess and realize upon any Manufactured Home, if that action is
consistent with the Servicing Standard and a default on that mortgage loan or
Contract has occurred or, in the servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a trust fund as to
which a REMIC election has been made, the servicer, on behalf of the trust fund,
will be required to sell the Mortgaged Property within three years of
acquisition, unless (1) the Internal Revenue Service grants an extension of time
to sell that property or (2) the trustee receives an opinion of independent
counsel to the effect that the holding of the property by the trust fund longer
than three years after its acquisition will not result in the imposition of a
tax on the trust fund or cause the trust fund to fail to qualify as a REMIC
under the Code at any time that any Securities are outstanding. Subject to the
foregoing, the servicer will be required to (A) solicit bids for any Mortgaged
Property so acquired in that manner as will be reasonably likely to realize a
fair price for that property and (B) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
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The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made for the related trust
fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the trust fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of credit
support is not available, the servicer nevertheless will be obligated to follow
or cause to be followed those normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the total amount of expenses
incurred by the servicer in connection with those proceedings and which are
reimbursable under the Agreement, the trust fund will realize a loss in the
amount of that difference. The servicer will be entitled to withdraw or cause to
be withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Asset, before the distribution of those Liquidation
Proceeds to securityholders, amounts representing its normal servicing
compensation on the Security, unreimbursed servicing expenses incurred with
respect to the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is
not required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders on
liquidation of the Asset after reimbursement of the servicer for its expenses
and (2) that its expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it has
not received a distribution for any Mortgage Security or Agency Security by the
fifth business day after the date on which that distribution was due and payable
pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution thereof to securityholders of the related series. If the proceeds
of any legal action are insufficient to reimburse the trustee for its legal fees
and expenses, the trustee will be entitled to withdraw from the Collection
Account an amount equal to its expenses, and the trust fund may realize a loss
in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the trustee
and the securityholders, will present claims to the borrower under each
instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery thereunder for defaulted
Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution thereof to securityholders, amounts representing
its normal servicing compensation on that Asset, unreimbursed servicing expenses
incurred for the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset. See "Hazard Insurance Policies" and "Description of
Credit Support."
HAZARD INSURANCE POLICIES
MORTGAGE LOANS. Generally, each Agreement for a trust fund composed of
mortgage loans will require the servicer to cause the borrower on each mortgage
loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent the property is located in a federally designated
flood area, in such amount as is required under applicable guidelines) providing
for the level of coverage that is required under the related Mortgage or, if any
Mortgage permits the holder thereof to dictate to the borrower the insurance
coverage to be maintained on the related Mortgaged Property, then the level of
coverage that is consistent with the Servicing Standard. That
44
coverage will be in general in an amount equal to the lesser of the principal
balance owing on that mortgage loan (but not less than the amount necessary to
avoid the application of any co-insurance clause contained in the hazard
insurance policy) and the amount necessary to fully compensate for any damage or
loss to the improvements on the Mortgaged Property on a replacement cost basis
or any other amount specified in the prospectus supplement. The ability of the
servicer to assure that hazard insurance proceeds are appropriately applied may
be dependent upon its being named as an additional insured under any hazard
insurance policy and under any other insurance policy referred to below, or upon
the extent to which information in this regard is furnished by borrowers. All
amounts collected by the servicer under any of these policies (except for
amounts to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with the servicer's normal servicing
procedures, subject to the terms and conditions of the related Mortgage and
mortgage note) will be deposited in the Collection Account in accordance with
the related Agreement.
The Agreement may provide that the servicer may satisfy its obligation
to cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will be
required to deposit in the Collection Account from its own funds all sums that
would have been deposited therein but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms, and therefore will not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most of these policies typically do not cover any physical damage resulting
from war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), wet or
dry rot, vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the mortgage loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, the coinsurance clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (1) the replacement cost of the improvements less physical
depreciation and (2) that proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of those
improvements.
Each Agreement for a trust fund composed of mortgage loans will require
the servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for the related Mortgaged Property as is consistent with the
terms of the related Mortgage and the Servicing Standard, which insurance may
typically include flood insurance (if the related Mortgaged Property was located
at the time of origination in a federally designated flood area).
Any cost incurred by the servicer in maintaining any insurance policy
will be added to the amount owing under the mortgage loan where the terms of the
mortgage loan so permit; provided, however, that the addition of that cost will
not be taken into account for purposes of calculating the distribution to be
made to securityholders. Those costs may be recovered by the servicer from the
Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the mortgage loans. However, the ability of the
servicer to present or cause to be presented those claims is dependent upon the
extent to which information in this regard is furnished to the servicer by
borrowers.
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CONTRACTS. Generally, the terms of the Agreement for a trust fund
composed of Contracts will require the servicer to maintain for each Contract
one or more hazard insurance policies that provide, at a minimum, the same
coverage as a standard form fire and extended coverage insurance policy that is
customary for manufactured housing, issued by a company authorized to issue
those policies in the state in which the Manufactured Home is located, and in an
amount that is not less than the maximum insurable value of that Manufactured
Home or the principal balance due from the borrower on the related Contract,
whichever is less; provided, however, that the amount of coverage provided by
each hazard insurance policy must be sufficient to avoid the application of any
co-insurance clause contained therein. When a Manufactured Home's location was,
at the time of origination of the related Contract, within a federally
designated special flood hazard area, the servicer must cause flood insurance to
be maintained, which coverage must be at least equal to the minimum amount
specified in the preceding sentence or any lesser amount as may be available
under the federal flood insurance program. Each hazard insurance policy caused
to be maintained by the servicer must contain a standard loss payee clause in
favor of the servicer and its successors and assigns. If any borrower is in
default in the payment of premiums on its hazard insurance policy or policies,
the servicer must pay those premiums out of its own funds, and may add
separately the premiums to the borrower's obligation as provided by the
Contract, but may not add the premiums to the remaining principal balance of the
Contract.
The servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained for each Manufactured Home, and must
maintain, to the extent that the related Contract does not require the borrower
to maintain a hazard insurance policy for the related Manufactured Home, one or
more blanket insurance policies covering losses on the borrower's interest in
the Contracts resulting from the absence or insufficiency of individual hazard
insurance policies. The servicer must pay the premium for that blanket policy on
the basis described therein and must pay any deductible amount for claims under
that policy relating to the Contracts.
FHA INSURANCE AND VA GUARANTEES
FHA loans will be insured by the FHA as authorized under the Housing
Act. Certain FHA loans will be insured under various FHA programs including the
standard FHA 203(b) program to finance the acquisition of one- to four-family
housing units, the FHA 245 graduated payment mortgage program and the FHA Title
I Program. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. The prospectus supplement for Securities of
each series evidencing interests in a trust fund including FHA loans will set
forth additional information regarding the regulations governing the applicable
FHA insurance programs. Except as otherwise specified in the prospectus
supplement, the following describes FHA insurance programs and regulations as
generally in effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved
by the Department of Housing and Urban Development ("HUD") or by the servicer
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 the United States of America or upon assignment of the defaulted
loan to the United States of America. For a defaulted FHA 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. Those plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with those payments to be made on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than FHA
loans originated under the FHA Title I Program, beyond the maturity date. In
addition, when a default caused by those 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 FHA loan (which payments
are to be repaid by the borrower to HUD) or by accepting assignment of the loan
from the servicer. With some exceptions, at least three full monthly
installments must be due and unpaid under the FHA loan, and HUD must have
rejected any request for relief from the borrower before the servicer may
initiate foreclosure proceedings.
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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
debentures interest rate. To the extent specified in the prospectus supplement,
the servicer of each single family FHA loan will be obligated to purchase any
debenture issued in satisfaction of that FHA loan upon default for an amount
equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted FHA 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 before that date but
in general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the FHA 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 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 mortgage 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.
VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA 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 guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the VA
loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned by
fraud, theft or other intentional misconduct of the officers, employees and
agents of the servicer. The related Agreement will allow the servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the servicer so long as certain criteria set forth in
the Agreement are met.
DUE-ON-SALE CLAUSES
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable
insurance policy or
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o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into an
assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The Contracts may also contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses. The servicer will generally permit that transfer so long as
the transferee satisfies the servicer's then applicable underwriting standards.
The purpose of those transfers is often to avoid a default by the transferring
borrower. See "Certain Legal Aspects of the Contracts--Transfers of Manufactured
Homes; Enforceability of "Due-on-Sale" Clauses."
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a series of Securities will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A "Retained Interest" in an Asset represents a specified portion of the interest
payable thereon. The Retained Interest will be deducted from borrower payments
as received and will not be part of the related trust fund.
The servicer's primary servicing compensation for a series of Securities
will come from the periodic payment to it of a portion of the interest payment
on each Asset or any other amount specified in the prospectus supplement.
Since any Retained Interest and a servicer's primary compensation are
percentages of the principal balance of each Asset, those amounts will decrease
in accordance with the amortization of the Assets. The prospectus supplement for
a series of Securities evidencing interests in a trust fund that includes
mortgage loans or Contracts may provide that, as additional compensation, the
servicer may retain all or a portion of assumption fees, modification fees, late
payment charges or Prepayment Premiums collected from borrowers and any interest
or other income that may be earned on funds held in the Collection Account or
any account established by a servicer pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement,
pay from its servicing compensation certain expenses incurred in connection with
its servicing and managing of the Assets, including payment of the fees and
disbursements of the trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to securityholders, and
payment of any other expenses described in the prospectus supplement. Some other
expenses, including certain expenses relating to defaults and liquidations on
the Assets and, to the extent so provided in the prospectus supplement, interest
thereon at the rate specified therein may be borne by the trust fund.
If and to the extent provided in the prospectus supplement, the servicer
may be required to apply a portion of the servicing compensation otherwise
payable to it in respect of any Due Period to certain interest shortfalls
resulting from the voluntary prepayment of any Assets in the related trust fund
during that period before their due dates.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets that include mortgage loans or
Contracts, unless otherwise provided in the prospectus supplement, will provide
that on or before a specified date in each year, beginning with the first of
these dates at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the trustee to the
effect that, on the basis of the examination by that firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or any other program used by the servicer, the servicing by or on behalf of the
servicer of mortgage loans under agreements substantially similar to each other
(including the related Agreement) was conducted in compliance with the terms of
those agreements or that program except for any significant exceptions or errors
in records that, in
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the opinion of the firm, either the Audit Program for Mortgages serviced for
Freddie Mac, or paragraph 4 of the Uniform Single Attestation Program for
Mortgage Bankers, or any other program, requires it to report.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an officer's certificate of the
servicer to the effect that the servicer has fulfilled its obligations under the
Agreement throughout the preceding calendar year or other specified twelve-month
period.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE
DEPOSITOR
The servicer or master servicer under each Agreement will be named in
the prospectus supplement. The entities serving as servicer or master servicer
may be affiliates of the depositor and may have other normal business
relationships with the depositor or the depositor's affiliates. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
o The servicer may resign from its obligations and duties thereunder
only upon a determination that its duties under the Agreement are
no longer permissible under applicable law or are in material
conflict by reason of applicable law with any other activities
carried on by it, the other activities of the servicer so causing
that conflict being of a type and nature carried on by the servicer
at the date of the Agreement. No resignation will become effective
until the trustee or a successor servicer has assumed the
servicer's obligations and duties under the Agreement.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a servicer or the depositor will be under any
liability to the related trust fund or securityholders for any
action taken, or for refraining from the taking of any action, in
good faith pursuant to the Agreement; provided, however, that
neither a servicer, the depositor nor any other person will be
protected against any breach of a representation, warranty or
covenant made in the related Agreement, or against any liability
specifically imposed thereby, or against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties
thereunder or by reason of reckless disregard of obligations and
duties thereunder.
o Any servicer, the depositor and any director, officer, employee or
agent of a servicer or the depositor will be entitled to
indemnification by 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;
provided, however, that that indemnification will not extend to any
loss, liability or expense (1) specifically imposed by that
Agreement or otherwise incidental to the performance of obligations
and duties thereunder, including, in the case of a servicer, the
prosecution of an enforcement action in respect of any specific
mortgage loan or mortgage loans or Contract or Contracts (except as
any loss, liability or expense will be otherwise reimbursable
pursuant to that Agreement); (2) incurred in connection with any
breach of a representation, warranty or covenant made in that
Agreement; (3) incurred by reason of misfeasance, bad faith or
gross negligence in the performance of obligations or duties
thereunder, or by reason of reckless disregard of those obligations
or duties; (4) incurred in connection with any violation of any
state or federal securities law; or (5) imposed by any taxing
authority if that loss, liability or expense is not specifically
reimbursable pursuant to the terms of the related Agreement.
o Neither any servicer nor the depositor will be under any obligation
to appear in, prosecute or defend any legal action that is not
incidental to its respective responsibilities under the Agreement
and which in its opinion may involve it in any expense or
liability. Any servicer or the depositor may, however, in its
discretion undertake any action which 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 securityholders
thereunder. In that event, the legal expenses and costs of that
action and any liability resulting therefrom will be expenses,
costs and liabilities of the securityholders, and the servicer or
the depositor, as the case may be, will be entitled to be
reimbursed therefor and to charge the Collection Account.
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Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the servicer or the depositor is a party, or any person succeeding to the
business of the servicer or the depositor, may be the successor of the servicer
or the depositor, as the case may be, under the terms of the related Agreement.
SPECIAL SERVICERS
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform certain
specified duties in respect of servicing the related mortgage loans that would
otherwise be performed by the servicer (for example, the workout and/or
foreclosure of defaulted mortgage loans). The rights and obligations of any
Special servicer will be specified in the prospectus supplement, and the
servicer will be liable for the performance of a Special servicer only if, and
to the extent, set forth in the prospectus supplement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for
distribution to securityholders, any required payment that
continues after a grace period, if any;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations under
the Agreement that continues unremedied for 30 days after written
notice of that failure has been given to the servicer by the
trustee or the depositor, or to the servicer, the depositor and the
trustee by securityholders evidencing not less than 25% of the
voting rights for that series;
o any breach of a representation or warranty made by the servicer
under the Agreement that materially and adversely affects the
interests of securityholders and which continues unremedied for 30
days after written notice of that breach has been given to the
servicer by the trustee or the depositor, or to the servicer, the
depositor and the trustee by the holders of Securities evidencing
not less than 25% of the voting rights for that series; and
o certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and certain actions
by or on behalf of the servicer indicating its insolvency or
inability to pay its obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in the
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after certain officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENTS
So long as an event of default under an Agreement remains unremedied,
the depositor or the trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or any other percentage specified in the
Agreement) of the voting rights for that series, the trustee will terminate all
of the rights and obligations of the servicer under the Agreement and in and to
the mortgage loans (other than as a securityholder or as the owner of any
Retained Interest), whereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the servicer under the Agreement
(except that if the trustee is prohibited by law from obligating itself to make
advances regarding delinquent
50
Assets, or if the prospectus supplement so specifies, then the trustee will not
be obligated to make those advances) and will be entitled to similar
compensation arrangements. If the trustee is unwilling or unable so to act, it
may or, at the written request of the holders of Securities entitled to at least
51% (or any other percentage specified in the Agreement) of the voting rights
for that series, it must appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the rating
agency with a net worth at the time of that appointment of at least $15,000,000
(or any other amount specified in the Agreement) to act as successor to the
servicer under the Agreement. Pending that appointment, the trustee is obligated
to act in that capacity. The trustee and any successor servicer may agree upon
the servicing compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
The holders of Securities representing at least 66 2/3% (or any other
percentage specified in the Agreement) of the voting rights allocated to the
respective classes of Securities affected by any event of default will be
entitled to waive that event of default; provided, however, that an Event of
Default involving a failure to distribute a required payment to securityholders
described in clause (1) under "Events of Default under the Agreements" may be
waived only by all of the securityholders. Upon any waiver of an event of
default, that event of default will cease to exist and will be deemed to have
been remedied for every purpose under the Agreement.
No securityholders will have the right under any Agreement to institute
any proceeding with respect thereto unless that holder previously has given to
the trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or any other percentage specified in the
Agreement) of the voting rights have made written request upon the trustee to
institute that proceeding in its own name as trustee thereunder and have offered
to the trustee reasonable indemnity, and the trustee for 60 days (or any other
number of days specified in the Agreement) has neglected or refused to institute
any proceeding. The trustee, however, is under no obligation to exercise any of
the trusts or powers vested in it by any 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 securityholders covered by that Agreement, unless those securityholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred therein or thereby.
The manner of determining the voting rights of a Security or class or
classes of Securities will be specified in the Agreement.
AMENDMENT
In general, each Agreement may be amended by the parties thereto,
without the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision therein that
may be inconsistent with any other provision therein or with the
prospectus supplement;
(3) make any other provisions with respect to matters or
questions arising under the Agreement that are not materially
inconsistent with the provisions thereof; or
(4) comply with any requirements imposed by the Code; provided
that, in the case of clause (3), that amendment will not adversely
affect in any material respect the interests of any securityholders
covered by the Agreement as evidenced either by an opinion of counsel to
that effect or the delivery to the trustee of written notification from
each rating agency that provides, at the request of the depositor, a
rating for the Offered Securities of the related series to the effect
that that amendment or supplement will not cause that rating agency to
lower or withdraw the then current rating assigned to those Securities.
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In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected thereby evidencing not less than 51% (or any other percentage specified
in the Agreement) of the voting rights, for any purpose; provided, however, no
amendment may (1) reduce in any manner the amount of, or delay the timing of,
payments received or advanced on Assets that are required to be distributed on
any Security without the consent of the securityholder or (2) reduce the consent
percentages described in this paragraph without the consent of all the
securityholders covered by the Agreement then outstanding. However, for any
series of Securities as to which a REMIC election is to be made, the trustee
will not consent to any amendment of the Agreement unless it has first have
received an opinion of counsel to the effect that that amendment will not result
in the imposition of a tax on the related trust fund or, if applicable, cause
the related trust fund to fail to qualify as a REMIC, at any time that the
related Securities are outstanding.
THE TRUSTEE
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking relationship
with the depositor and its affiliates, with any servicer and its affiliates and
with any master servicer and its affiliates. To the extent consistent with its
fiduciary obligations as trustee, the trustee may delegate its duties to one or
more agents as provided in the Agreement.
DUTIES OF THE TRUSTEE
The trustee will make no representations as to the validity or
sufficiency of any Agreement, the Securities or any Asset or related document
and is not accountable for the use or application by or on behalf of any
servicer of any funds paid to the master servicer or its designee in respect of
the Securities or the Assets, or deposited into or withdrawn from the Collection
Account or any other account by or on behalf of the servicer. If no Event of
Default has occurred and is continuing, the trustee is required to perform only
those duties specifically required under the related Agreement, as applicable.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the trustee is required to examine those
documents and to determine whether they conform to the requirements of the
Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The trustee and any director, officer, employee or agent of the trustee
will be entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the trustee's (1) enforcing its rights and remedies
and protecting the interests of the securityholders during the continuance of an
Event of Default, (2) defending or prosecuting any legal action in respect of
the related Agreement or series of Securities, (3) being the mortgagee of record
for the mortgage loans in a trust fund and the owner of record for any Mortgaged
Property acquired in respect thereof for the benefit of securityholders, or (4)
acting or refraining from acting in good faith at the direction of the holders
of the related series of Securities entitled to not less than 25% (or any other
percentage as is specified in the related Agreement for any particular matter)
of the voting rights for that series; provided, however, that this
indemnification will not extend to any loss, liability or expense that
constitutes a specific liability of the trustee pursuant to the related
Agreement, or to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence on the part of the trustee in the
performance of its obligations and duties thereunder, or by reason of its
reckless disregard of those obligations or duties, or as may arise from a breach
of any representation, warranty or covenant of the trustee made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may at any time resign from its obligations and duties under
an Agreement by giving written notice thereof to the depositor, the servicer, if
any, each rating agency, and all securityholders. Upon receiving that notice of
resignation, the depositor is required promptly to appoint a successor trustee
acceptable to the servicer, if any. If
52
no successor trustee has been so appointed and has accepted appointment within
30 days after the giving of that notice of resignation, the resigning trustee
may petition any court of competent jurisdiction for the appointment of a
successor trustee.
If at any time the trustee ceases to be eligible to continue as a
trustee under the related Agreement, or if at any time the trustee becomes
incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the
trustee or of its property is appointed, or any public officer takes charge or
control of the trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, or if a change in the financial
condition of the trustee has adversely affected or will adversely affect the
rating on any class of the Securities, then the depositor and/or a party
specified in the related Agreement may remove the trustee and appoint a
successor trustee acceptable to the master servicer, if any, according to the
terms of the related Agreement. Securityholders of any series entitled to at
least 51% (or any other percentage specified in the prospectus supplement) of
the voting rights for that series may at any time remove the trustee without
cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
MATERIAL TERMS OF THE INDENTURE
GENERAL
The following summary describes the material provisions that may appear
in each indenture. The prospectus supplement for a series of Notes will describe
any provision of the indenture relating to that series that materially differs
from the description thereof contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified by reference to,
all of the provisions of the indenture for a series of Notes. A form of an
indenture has been filed as an exhibit to the Registration Statement of which
this prospectus is a part. The depositor will provide a copy of the indenture
(without exhibits) relating to any series of Notes without charge upon written
request of a securityholder of that series addressed to ACE Securities Corp.,
6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211, Attention:
Elizabeth S. Eldridge.
EVENTS OF DEFAULT
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified in
the prospectus supplement) or more in the payment of any principal
of or interest on a Note of that series, to the extent specified in
the prospectus supplement;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture that continues for a period of sixty days (or
any other number of days specified in the prospectus supplement or
the indenture) after notice thereof is given in accordance with the
procedures described in the 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 thereto or in connection therewith with respect
to or affecting that series having been incorrect in a material
respect as of the time made, and that breach is not cured within
sixty days (or any other number of days specified in the prospectus
supplement) after notice thereof is given in accordance with the
procedures described in the prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o any other event of default provided with respect to Notes of that
series.
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If an event of default with respect to the Notes of any series at the
time outstanding occurs and is continuing, subject to and in accordance with the
terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under certain
circumstances, be rescinded and annulled by the securityholders of a majority in
total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes,
the Notes of that series have been declared to be due and payable, the indenture
trustee may, in its discretion, notwithstanding that acceleration, elect to
maintain possession of the collateral securing the Notes of that series and to
continue to apply distributions on that collateral as if there had been no
declaration of acceleration if that collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of that series
as they would have become due if there had not been that 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 or interest on any Note of that
series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in
the indenture) of the then total outstanding amount of the Notes of that
series consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to
pay in full the principal of and accrued interest, due and unpaid, on
the outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral would
not be sufficient on an ongoing basis to make all payments on the Notes
as those 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% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that
series.
If so specified in the prospectus supplement, only holders of certain
classes of Notes will have the right to declare the Notes of that series to be
immediately due and payable in the event of a payment default, as described
above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with an
event of default involving a default for thirty days (or any other number of
days specified in the indenture) 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 unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would 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 securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount thereof less
the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default occurs and continues for a series
of Notes, the indenture trustee will be under no obligation to exercise any of
the rights or powers under the indenture at the request or direction of any of
the securityholders of that series, unless those holders offer to the indenture
trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities that might be incurred by it in complying with that request or
direction. Subject to those provisions for
54
indemnification and certain limitations contained in the indenture, the holders
of a majority of the then total outstanding amount of the Notes of that series
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the indenture trustee or exercising any
trust or power conferred on the indenture trustee with respect to the Notes of
that series, and the holders of a majority of the then total outstanding amount
of the Notes of that series may, in some cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes of
that series affected thereby.
DISCHARGE OF INDENTURE
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for 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 that series.
With certain limitations, the indenture will provide that, if specified
for the Notes of any series, the related trust fund will be discharged from any
and all obligations in respect of the Notes of that series (except for certain
obligations specified in the indenture including obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of that series, to replace stolen, lost or mutilated Notes of that series,
to maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the indenture trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of that series on the maturity date
for those Notes and any installment of interest on those Notes in accordance
with the terms of the indenture and the Notes of that series. In the event of
any defeasance and discharge of Notes of that series, holders of Notes of that
series would be able to look only to that money and/or those direct obligations
for payment of principal and interest, if any, on their Notes until maturity.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee for each series of Notes will be required to mail
each year to all related securityholders a brief report, as provided in the
indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it under
the indenture, the amount, interest rate and maturity date of certain
indebtedness owing by that Trust to the applicable indenture trustee in its
individual capacity, the property and funds physically held by the indenture
trustee in its capacity as indenture trustee and any action taken by it that
materially affects the Notes and that has not been previously reported.
THE INDENTURE TRUSTEE
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the depositor
or the appropriate party designated in the indenture will be obligated to
appoint a successor trustee for that series. The depositor or the appropriate
party designated in the indenture may also remove any indenture trustee if that
indenture trustee ceases to be eligible to continue as the indenture trustee
under the related indenture, if that indenture trustee becomes insolvent or for
any other grounds specified in the indenture. In those circumstances the
depositor or the appropriate party designated in the indenture will be obligated
to appoint a successor trustee for the applicable series of Notes. Any
resignation or removal of the indenture trustee and appointment of a successor
trustee for any series of Notes does not become effective until acceptance of
the appointment by the successor trustee for that series.
The bank or trust company serving as indenture trustee may have a
banking relationship with the depositor or any of its affiliates, a servicer or
any of its affiliates or the master servicer or any of its affiliates. To the
extent consistent with its fiduciary obligations as indenture trustee, the
indenture trustee may delegate its duties to one or more agents as provided in
the indenture and the Agreement.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities, credit support may be provided for one or
more classes thereof or the related Assets. Credit support may be in the form
of:
o the subordination of one or more classes of Securities;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by
more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Securities and interest thereon. If losses or shortfalls
occur that exceed the amount covered by credit support or that are not covered
by credit support, securityholders will bear their allocable share of
deficiencies. Moreover, if a form of credit support covers more than one series
of Securities (each, a "Covered Trust"), securityholders evidencing interests in
any of those Covered Trusts will be subject to the risk that the credit support
will be exhausted by the claims of other Covered Trusts before that Covered
Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Securities of a
series, or the related Assets, the prospectus supplement will include a
description of (a) the nature and amount of coverage under that credit support,
(b) any conditions to payment thereunder not otherwise described herein, (c) the
conditions (if any) under which the amount of coverage under that credit support
may be reduced and under which that credit support may be terminated or replaced
and (d) the material provisions relating to that credit support. Additionally,
the prospectus supplement will set forth certain information with respect to the
obligor under any financial guaranty insurance policy, letter of credit,
guarantee or similar instrument of credit support, including (1) a brief
description of its principal business activities, (2) its principal place of
business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (3) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of its
business and (4) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the prospectus supplement.
SUBORDINATE SECURITIES
One or more classes of Securities of a series may be Subordinate
Securities if specified in the prospectus supplement. The rights of the holders
of Subordinate Securities to receive distributions of principal and interest
from the Collection Account on any Distribution Date will be subordinated to
those rights of the holders of Senior Securities.
The subordination of a class may apply only in the event of (or may be limited
to) certain types of losses or shortfalls. The prospectus supplement will set
forth information concerning the amount of subordination of a class or classes
of
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Subordinate Securities in a series, the circumstances in which that
subordination will be applicable and the manner, if any, in which the amount of
subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of mortgage loans before
distributions on Subordinate Securities evidencing interests in a different
group of mortgage loans within the trust fund. The prospectus supplement for a
series that includes a cross-support provision will describe the manner and
conditions for applying those provisions.
LIMITED GUARANTEE
If specified in the prospectus supplement for a series of Securities,
credit enhancement may be provided in the form of a limited guarantee issued by
a guarantor named therein.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named therein, if
specified in the prospectus supplement.
LETTER OF CREDIT
Alternative credit support for a series of Securities may be provided by
the issuance of a letter of credit by the bank or financial institution
specified in the prospectus supplement. The coverage, amount and frequency of
any reduction in coverage provided by a letter of credit issued for a series of
Securities will be set forth in the prospectus supplement relating to that
series.
POOL INSURANCE POLICIES
If specified in the prospectus supplement relating to a series of
Securities, a pool insurance policy for the mortgage loans in the related trust
fund will be obtained. The pool insurance policy will cover any loss (subject to
the limitations described in the prospectus supplement) by reason of default to
the extent a related mortgage loan is not covered by any primary mortgage
insurance policy. The amount and principal terms of any pool insurance coverage
will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
therein. The special hazard insurance policy will, subject to the limitations
described in the prospectus supplement, protect against loss by reason of damage
to Mortgaged Properties caused by certain hazards not insured against under the
standard form of hazard insurance policy for the respective states, in which the
Mortgaged Properties are located. The amount and principal terms of any special
hazard insurance coverage will be set forth in the prospectus supplement.
BORROWER BANKRUPTCY BOND
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Securities will, if
specified in the prospectus supplement, be covered under a borrower bankruptcy
bond (or any other instrument that will not result in a downgrading of the
rating of the Securities of a series by the rating agency or agencies that rate
that series). Any borrower bankruptcy bond or any other instrument will provide
for coverage in an amount meeting the criteria of the rating agency or agencies
rating the Securities of the related series,
57
which amount will be set forth in the prospectus supplement. The amount and
principal terms of any borrower bankruptcy coverage will be set forth in the
prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a series of Securities,
deficiencies in amounts otherwise payable on those Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in the prospectus supplement. The reserve
funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the prospectus supplement. A reserve fund
may be provided to increase the likelihood of timely distributions of principal
of and interest on the Securities. If specified in the prospectus supplement,
reserve funds may be established to provide limited protection against only
certain types of losses and shortfalls. Following each Distribution Date amounts
in a reserve fund in excess of any amount required to be maintained therein may
be released from the reserve fund under the conditions and to the extent
specified in the prospectus supplement and will not be available for further
application to the Securities.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any reinvestment income or other gain
from those investments will be credited to the related reserve fund for that
series, and any loss resulting from those investments will be charged to the
reserve fund. However, that income may be payable to any related servicer or
another service provider or other entity. To the extent specified in the
prospectus supplement, the reserve fund, if any, for a series will not be a part
of the trust fund.
Additional information concerning any reserve fund will be set forth in
the prospectus supplement, including the initial balance of the reserve fund,
the balance required to be maintained in the reserve fund, the manner in which
the required balance will decrease over time, the manner of funding the reserve
fund, the purposes for which funds in the reserve fund may be applied to make
distributions to securityholders and use of investment earnings from the reserve
fund, if any.
OVERCOLLATERALIZATION
If specified in the prospectus supplement, subordination provisions of a
trust fund may be used to accelerate to a limited extent the amortization of one
or more classes of Securities relative to the amortization of the related
Assets. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more classes of
Securities. This acceleration feature creates, for the Assets or groups thereof,
overcollateralization, which is the excess of the total principal balance of the
related Assets, or a group thereof, over the principal balance of the related
class or classes of Securities. This acceleration may continue for the life of
the related Security, or may be limited. In the case of limited acceleration,
once the required level of overcollateralization is reached, and subject to
certain provisions specified in the prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal aspects of loans secured by single-family or
multi-family residential properties. Because these legal aspects are governed
primarily by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the mortgage loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
mortgage loans. In this regard, the following discussion does not fully reflect
federal regulations for FHA loans and
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VA loans. See "Description of The Trust Funds--FHA Loans and VA Loans,"
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees" and "Description of the Trust Funds--Assets."
GENERAL
All of the mortgage loans are evidenced by a note or bond and secured by
instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending on
the prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages." Any of the foregoing types of mortgages
will create a lien upon, or grant a title interest in, the subject property, the
priority of which will depend on the terms of the particular security
instrument, as well as separate, recorded, contractual arrangements with others
holding interests in the mortgaged property, the knowledge of the parties to
that instrument as well as the order of recordation of the instrument in the
appropriate public recording office. However, recording does not generally
establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a borrower (usually the owner of the subject
property) and a mortgagee (the lender). In contrast, a deed of trust is a
three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale as security for
the indebtedness evidenced by the related note. A deed to secure debt typically
has two parties. By executing a deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until the underlying debt is repaid, generally with a power of sale as
security for the indebtedness evidenced by the related mortgage note.
In case the borrower under a mortgage is a land trust, there would be an
additional party because legal title to the property is held by a land trustee
under a land trust agreement for the benefit of the borrower. At origination of
a mortgage loan involving a land trust, the borrower executes a separate
undertaking to make payments on the mortgage note. The mortgagee's authority
under a mortgage, the trustee's authority under a deed of trust and the
grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including the Soldiers' and Sailors' Civil Relief
Act of 1940) and, in some cases, in deed of trust transactions, the directions
of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while retaining a revocable license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as a
tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by that lease. An
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instrument covering an interest in real property other than the fee estate
requires special provisions in the instrument creating that interest or in the
mortgage, deed of trust, security deed or deed to secure debt, to protect the
mortgagee against termination of that interest before the mortgage, deed of
trust, security deed or deed to secure debt is paid. The depositor, the Asset
Seller or other entity specified in the prospectus supplement will make certain
representations and warranties in the Agreement or certain representations and
warranties will be assigned to the trustee for any mortgage loans secured by an
interest in a leasehold estate. Those representation and warranties, if
applicable, will be set forth in the prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement, the mortgage loans may also
consist of cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. That lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property borrower, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations (1) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (2) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make that final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the mortgage loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy
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agreement and the cooperative shares is filed in the appropriate state and local
offices to perfect the lender's interest in its collateral. Subject to the
limitations discussed below, upon default of the tenant-stockholder, the lender
may sue for judgment on the promissory note, dispose of the collateral at a
public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of Cooperative shares. See "--Foreclosure--Cooperative Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the land sale contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in that situation does not have to foreclose to obtain title to the
property, although in some cases a quiet title action is in order if the
contract borrower has filed the land sale contract in local land records and an
ejectment action may be necessary to recover possession.
In a few states, particularly in cases of contract borrower default
during the early years of a land sale 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 land sale contracts from the harsh consequences of
forfeiture. Under those statues, a judicial 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
contract borrower with significant investment in the property under a land sale
contract for the sale of real estate to share 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 contract lender's
procedures for obtaining possession and clear title under a land sale contract
for the sale of real estate in a particular state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a mortgaged property.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from state
to state. Two primary methods of foreclosing a mortgage are judicial foreclosure
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. There are several other foreclosure procedures available in some
states that are either infrequently used or available only in some limited
circumstances, such as strict foreclosure.
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JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. 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 may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment.
Those sales are made in accordance with procedures that vary from state to
state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
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
and have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the borrower failed to
maintain the mortgaged property adequately or the borrower executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to it.
Finally, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the borrower.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
borrower under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust must
record a notice of default and notice of sale and send a copy to the borrower
and to any other party who has recorded a request for a copy of a notice of
default and notice of sale. In addition, in some states the trustee must provide
notice to any other party having an interest of record in the real property,
including junior lienholders. 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. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without acceleration) plus the expenses
incurred in enforcing the obligation. In other states, the borrower or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale. Generally,
the procedure for public sale, the parties entitled to notice, the method of
giving notice and the applicable time periods are governed by state law and vary
among the states. Foreclosure of a deed to secure debt is also generally
accomplished by a non-judicial sale similar to that required by a deed of trust,
except that the lender or its agent, rather than a trustee, is typically
empowered to perform the sale in accordance with the terms of the deed to secure
debt and applicable law.
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PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of that property
at the time of sale, due to, among other things, redemption rights that may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses that may be recovered by a lender. Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make those 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 on market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be recovered
by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, if the foreclosure of a junior mortgage
triggers the enforcement of a "due-on-sale" clause contained in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgage to avoid its foreclosure. Accordingly, for those mortgage loans,
if any, that are junior mortgage loans, if the lender purchases the property the
lender's title will be subject to all senior mortgages, prior liens and certain
governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by those holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest that is subordinate to that of the foreclosing mortgagee have
an equity of redemption and may redeem the property by paying the entire debt
with interest. In addition, in some states, when a foreclosure action has begun,
the redeeming party must pay certain costs of that action. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect
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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 from a foreclosure sale or sale under a deed of
trust. Consequently, the practical effect of the redemption right is to force
the lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. For a series
of Securities for which an election is made to qualify the trust fund or a part
thereof as a REMIC, the Agreement will permit foreclosed property to be held for
more than three years if the Internal Revenue Service grants an extension of
time within which to sell the property or independent counsel renders an opinion
to the effect that holding the property for that additional period is
permissible under the REMIC Provisions.
COOPERATIVE LOANS
The Cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement that establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under that proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender
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must account to the tenant-stockholder for the surplus. Conversely, if a portion
of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building that was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws that apply to certain
tenants who elected to remain in a building so converted.
YEAR 2000 LEGISLATION
In July 1999, a new federal law was passed to limit liability for losses
due to year 2000 computer-related errors. This law will, among other things,
protect borrowers from foreclosure if their residential mortgage loans become
delinquent because an actual year 2000 failure results in inability to
accurately or timely process their mortgage payments.
This law is not intended to extinguish or otherwise affect a borrower's
payment obligations but will instead delay the enforcement of obligations on an
otherwise defaulted mortgage loan. Borrowers seeking foreclosure protection
under this law must provide timely written notice and documentation of that
failure to the servicer. Absent an extension from the lender, borrowers will
then have four weeks to make up late payments on their loans. This law will not
apply to mortgage loans for which a default occurs before December 15, 1999, or
for which an imminent default is foreseeable before that date. This law will
also not protect borrowers who deliver notice of a year 2000 failure after March
15, 2000. Mortgage loans that remain in default after the applicable grace
period will be subject to foreclosure or other enforcement.
This law could delay the ability of a servicer to foreclose on some
mortgage loans during the first quarter of the year 2000. These delays could
affect the distributions on your Securities.
JUNIOR MORTGAGES
Some of the mortgage loans may be secured by junior mortgages or deeds
of trust, that are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the trust fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the borrower, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" above.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust and
the junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends these sums, these sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
65
judgment would be a personal judgment against the former borrower equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under a
mortgage by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In some other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting that 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. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial 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
lender from obtaining a large deficiency judgment against the former borrower as
a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. Under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a mortgage loan by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no foreclosure sale had
yet occurred) before the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the case, that affected the curing of a mortgage loan default by paying
arrearages over a number of years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These 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 property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
mortgage loan. Some courts have permitted these modifications when the mortgage
loan is secured both by the debtor's principal residence and by personal
property.
In the case of income-producing Multifamily Properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents and
leases related to the mortgaged property. Under Section 362 of the Bankruptcy
Code, the lender will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
Certain tax liens arising under the Code may in some circumstances
provide priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These 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. These
federal laws impose specific statutory liabilities
66
upon lenders who originate mortgage loans and who fail to comply with the
provisions of the law. In some cases this liability may affect assignees of the
mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things: emissions of air pollutants; discharges of wastewater or storm water;
generation, transport, storage or disposal of hazardous waste or hazardous
substances; operation, closure and removal of underground storage tanks; removal
and disposal of asbestos-containing materials; and/or management of electrical
or other equipment containing polychlorinated biphenyls ("PCBs"). Failure to
comply with these laws and regulations may result in significant penalties,
including civil and criminal fines. Under the laws of some states, environmental
contamination on a property may give rise to a lien on the property to ensure
the availability and/or reimbursement of cleanup costs. Generally all subsequent
liens on that property are subordinated to the environmentally-related lien and,
in some states, even prior recorded liens are subordinated to these liens
("Superliens"). In the latter states, the security interest of the trustee in a
property that is subject to a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These cleanup costs may be substantial. CERCLA
imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the total assets of the property owner.
Although certain provisions of the Asset Conservation Act (as defined
herein) apply to trusts and fiduciaries, the law is somewhat unclear as to
whether and under what precise circumstances cleanup costs, or the obligation to
take remedial actions, could be imposed on a secured lender, such as the trust
fund. Under the laws of some states and under CERCLA, a lender may be liable as
an "owner or operator" for costs of addressing releases or threatened releases
of hazardous substances on a mortgaged property if that lender or its agents or
employees have "participated in the management" of the operations of the
borrower, even though the environmental damage or threat was caused by a prior
owner or current owner or operator or other third party. Excluded from CERCLA's
definition of "owner or operator" is a person "who without participating in the
management of . . . [the] facility, holds indicia of ownership primarily to
protect his security interest" (the "secured-creditor exemption"). This
exemption for holders of a security interest such as a secured lender applies
only to the extent that a lender seeks to protect its security interest in the
contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of that facility or property, the lender faces
potential liability as an "owner or operator" under CERCLA. Similarly, when a
lender forecloses and takes title to a contaminated facility or property, the
lender may incur potential CERCLA liability in various circumstances, including
among others, when it holds the facility or property as an investment (including
leasing the
67
facility or property to a third party), fails to market the property in a timely
fashion or fails to properly address environmental conditions at the property or
facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"),
contains a similar secured-creditor exemption for those lenders who hold a
security interest in a petroleum underground storage tank ("UST") or in real
estate containing a UST, or that acquire title to a petroleum UST or facility or
property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under certain circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence these decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, however, Congress enacted, and on September 30,
1996, the President signed into law the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act").
The Asset Conservation Act was intended to clarify the scope of the secured
creditor exemption under both CERCLA and RCRA. The Asset Conservation Act more
explicitly defined the kinds of "participation in management" that would trigger
liability under CERCLA and specified certain activities that would not
constitute "participation in management" or otherwise result in a forfeiture of
the secured-creditor exemption before foreclosure or during a workout period.
The Asset Conservation Act also clarified the extent of protection against
liability under CERCLA in the event of foreclosure and authorized certain
regulatory clarifications of the scope of the secured-creditor exemption for
purposes of RCRA, similar to the statutory protections under CERCLA. However,
since the courts have not yet had the opportunity to interpret the new statutory
provisions, the scope of the additional protections offered by the Asset
Conservation Act is not fully defined. It also is important to note that the
Asset Conservation Act does not offer complete protection to lenders and that
the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the trust fund and occasion a loss to the trust fund and to securityholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws that may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan or
before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from
68
the Mortgaged Property; the impact on securityholders of any environmental
condition or presence of any substance on or near the Mortgaged Property; or the
compliance of any Mortgaged Property with any environmental laws. In addition,
no agent, person or entity otherwise affiliated with the depositor is authorized
or able to make any representation, warranty or assumption of liability relative
to any Mortgaged Property.
DUE-ON-SALE CLAUSES
The mortgage loans may contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan if the
borrower sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, for certain loans 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 limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of Thrift
Supervision, which preempt state law restrictions on the enforcement of those
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St. Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the mortgage loans and the number of mortgage loans which may
extend to maturity.
PREPAYMENT CHARGES
Under some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are paid
before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the mortgage
loans. The absence of a restraint on prepayment, particularly for fixed rate
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirement of those loans.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower (as
junior loans often do) and the senior loan does not, a borrower may
be more likely to repay sums due on the junior loan than those on
the senior loan.
o Acts of the senior lender that prejudice the junior lender or
impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the
senior lender agree to an increase in the principal amount of or
the interest rate payable on the senior loan, the senior lender may
lose its priority to the extent any existing junior lender is
harmed or the borrower is additionally burdened.
69
o If the borrower defaults on the senior loan and/or any junior loan
or loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and
can interfere with or delay the taking of action by the senior
lender. Moreover, the bankruptcy of a junior lender may operate to
stay foreclosure or similar proceedings by the senior lender.
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 will not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect for mortgage loans made during the first three months of 1980. The
Office of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision that expressly rejects application of
the federal law. 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. Some states have taken action to
reimpose interest rate limits and/or to limit discount points or other charges.
The depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of those
mortgage loans, any limitation under that state's usury law would not apply to
those mortgage loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of that state action will be eligible for
inclusion in a trust fund unless (1) the mortgage loan provides for the interest
rate, discount points and charges as are permitted in that state or (2) the
mortgage loan provides that the terms thereof will be construed in accordance
with the laws of another state under which the interest rate, discount points
and charges would not be usurious and the borrower's counsel has rendered an
opinion that the choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the borrower may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Those
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with
70
respect to origination of alternative mortgage instruments by federal savings
and loan associations. Title VIII provides that any state may reject
applicability of the provisions of Title VIII by adopting, before October 15,
1985, a law or constitutional provision expressly rejecting the applicability of
those provisions. Some states have taken that action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a borrower who enters military service after the
origination of the borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the mortgage
loan) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard and officers of the U.S. Public Health Service assigned to
duty with the military. Because the Relief Act applies to borrowers who enter
military service (including reservists who are called to active duty) after
origination of the related mortgage loan, no information can be provided as to
the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the servicer to collect full
amounts of interest on some of the mortgage loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
Securities, and would not be covered by advances. These shortfalls will be
covered by the credit support provided in connection with the Securities only to
the extent provided in the prospectus supplement. In addition, the Relief Act
imposes limitations that would impair the ability of the servicer to foreclose
on an affected mortgage loan during the borrower's period of active duty status,
and, under some circumstances, during an additional three month period
thereafter. Thus, if an affected mortgage loan goes into default, there may be
delays and losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction.
The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Contracts. Because these legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which Contracts
may be originated.
GENERAL
As a result of the assignment of the Contracts to the trustee, the
trustee will succeed collectively to all of the rights (including the right to
receive payment on the Contracts) of the obligee under the Contracts. Each
Contract
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evidences both (a) the obligation of the borrower to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of the loan. Certain aspects of both features of the Contracts
are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the Manufactured Homes initially were registered.
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 Agreement, the
servicer will transfer physical possession of the Contracts to the trustee or
its custodian or may retain possession of the Contracts as custodian for the
trustee. In addition, the servicer 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. The Contracts will be stamped or marked otherwise to
reflect their assignment from the depositor to the trustee only if provided in
the prospectus supplement. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of the assignment, the trustee's interest in Contracts
could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The Asset Seller may effect that
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the Asset Seller fails, due to clerical error, to
effect that notation or delivery, or files the security interest under the wrong
law (for example, under a motor vehicle title statute rather than under the UCC,
in a few states), the Asset Seller may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under some circumstances, may become subject to real estate
title and recording laws. As a result, a security interest in a manufactured
home could be rendered subordinate to the interests of other parties claiming an
interest in the home under applicable state real estate law.
To perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home that is prior to the security interest originally
retained by the Asset Seller and transferred to the depositor. For a series of
Securities and if so described in the prospectus supplement, the servicer may be
required to perfect a security interest in the Manufactured Home under
applicable real estate laws. The Warranting Party will represent that as of the
date of the sale to the depositor it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees for substantially all of the Manufactured Homes securing the Contracts.
The depositor will cause the security interests in the Manufactured
Homes to be assigned to the trustee on behalf of the securityholders. The
depositor or the trustee will amend the certificates of title (or file UCC-3
statements) to identify the trustee as the new secured party, and will deliver
the certificates of title to the trustee or note thereon the interest of the
trustee only if specified in the prospectus supplement. Accordingly, the Asset
Seller (or other originator of the Contracts) will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In some states, that assignment is an effective conveyance of the security
interest without
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amendment of any lien noted on the related certificate of title and the new
secured party succeeds to servicer's rights as the secured party. However, in
some states, in the absence of an amendment to the certificate of title (or the
filing of a UCC-3 statement), the assignment of the security interest in the
Manufactured Home may not be held effective or the security interests may not be
perfected and in the absence of that notation or delivery to the trustee, the
assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller (or any other originator of the
Contracts) or a trustee in bankruptcy of the Asset Seller (or any other
originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Asset Seller
(or other originator of the Contracts) on the certificate of title or delivery
of the required documents and fees will be sufficient to protect the
securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the trustee is not perfected, that security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests.
There also exists a risk in not identifying the trustee as the new secured party
on the certificate of title that, through fraud or negligence, the security
interest of the trustee could be released.
If the owner of a Manufactured Home moves it to a state other than the
state in which the Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after that relocation and thereafter only if and after
the owner re-registers the Manufactured Home in that state. If the owner were to
relocate a Manufactured Home to another state and not re-register the
Manufactured Home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the servicer must surrender possession if it holds the certificate
of title to the Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Asset Seller (or
other originator) would receive notice of surrender if the security interest in
the Manufactured Home is noted on the certificate of title. Accordingly, the
trustee would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states that do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing contracts, the servicer takes steps to effect re-perfection upon receipt
of notice of re-registration or information from the borrower as to relocation.
Similarly, when a borrower under a manufactured housing contract sells a
manufactured home, the servicer must surrender possession of the certificate of
title or, if it is noted as lienholder on the certificate of title, will receive
notice as a result of its lien noted thereon and accordingly will have an
opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the Agreement, the
servicer is obligated to take those steps, at the servicer's expense, as are
necessary to maintain perfection of security interests in the Manufactured
Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
Agreement that it has no knowledge of any of these liens for any Manufactured
Home securing payment on any Contract. However, these liens could arise at any
time during the term of a Contract. No notice will be given to the trustee or
securityholders if a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The servicer on behalf of the trustee, to the extent required by the
related Agreement, may take action to enforce the trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing those defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the
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ability to repossess without breach of the peace, by judicial process. The
holder of a Contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, before beginning 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 that sale. The law in most states also
requires that the debtor be given notice of any sale before resale of the unit
so that the debtor may redeem at or before that resale. In the event of
repossession and resale of a Manufactured Home, the trustee would be entitled to
be paid out of the sale proceeds before the proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing the debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
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 judgment.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
The terms of the Relief Act apply to a borrower on a Contract as
described for a borrower on a mortgage loan under "Certain Legal Aspects of
Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940."
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 which 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 that the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the borrower 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 the borrower. 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.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the servicer and permit the
acceleration of the maturity of the Contracts by the servicer upon any sale or
transfer that is not consented to. Generally, it is expected that the servicer
will permit most transfers of Manufactured Homes and not accelerate the maturity
of the related Contracts. In some cases, the transfer may be made by a
delinquent borrower to avoid a repossession proceeding for a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the
servicer desires to accelerate the maturity of the related Contract, the
servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St. Germain Depositary Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the Manufactured
Homes. Consequently, in some states the servicer may be prohibited from
enforcing a "due-on-sale" clause in respect of some Manufactured Homes.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations will not apply to any loan that is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period before instituting any action leading to repossession of or
foreclosure on the related unit.
Title V authorized any state to re-impose 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 a similar law before 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.
The related Asset Seller will represent that all of the Contracts comply with
applicable usury law.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of Brown & Wood LLP and
Thacher Proffitt & Wood as to the material federal income tax consequences of
the purchase, ownership and disposition of the Securities offered hereunder.
This opinion assumes compliance with all provisions of the Agreements pursuant
to which the Securities are issued. This discussion is directed solely to
securityholders that hold the Securities as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively.
In addition to the federal income tax consequences described herein,
potential investors should consider the state and local tax consequences, if
any, of the purchase, ownership and disposition of the Securities. See "State
and Other Tax Considerations." The depositor recommends that securityholders
consult their own tax advisors concerning the federal, state, local or other tax
consequences to them of the purchase, ownership and disposition of the
Securities offered hereunder.
The following discussion addresses securities of five general types:
o REMIC Securities representing interests in a trust fund, or a
portion thereof, that the trustee will elect to have treated as a
real estate mortgage investment conduit ("REMIC") under Sections
860A through 860G (the "REMIC Provisions") of the Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion thereof, that the trustee will elect to have
treated as a financial asset securitization investment trust
("FASIT") under Sections 860H through 860L (the "FASIT Provisions")
of the Code;
o securities ("Grantor Trust Securities") representing interests in a
trust fund (a "Grantor Trust Fund") as to which no election will be
made;
o securities ("Partnership Securities") representing interests in a
trust fund (a "Partnership Trust Fund") which is treated as a
partnership for federal income tax purposes; and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund for federal income tax purposes.
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The prospectus supplement for each series of Securities will indicate
which of the foregoing treatments will apply to that series and, if a REMIC
election (or elections) will be made for the related trust fund, will identify
all "regular interests" and "residual interests" in the REMIC or, if a FASIT
election will be made for the related trust fund, will identify all "regular
interests" and "ownership interests" in the FASIT. For purposes of this tax
discussion, (1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security, (2) references to "REMIC Pool" are to an entity
or portion thereof as to which a REMIC election will be made and (3) to the
extent specified in the prospectus supplement, references to "mortgage loans"
include Contracts. Except to the extent specified in the prospectus supplement,
no REMIC election will be made for Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
issued thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. The Treasury Department, on February 7, 2000, released proposed
regulations interpreting the FASIT Provisions and the proposed regulations,
subject to certain exceptions, would only become effective at the time they are
issued in final form. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of the holders of FASIT Securities.
In addition, the OID Regulations do not adequately address certain issues
relevant to, and in some instances provide that they are not applicable to,
securities such as the Securities.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of certain
entities issuing non-REMIC debt obligations secured by real estate mortgages
("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT (as defined
herein) will be considered a Taxable Mortgage Pool if (1) substantially all of
the assets of the entity consist of debt obligations and more than 50% of those
debt obligations consist of "real estate mortgages," (2) that entity is the
borrower under debt obligations with two or more maturities, and (3) under the
terms of the debt obligations on which the entity is the borrower, payments on
those obligations bear a relationship to payments on the obligations held by the
entity. Furthermore, a group of assets held by an entity can be treated as a
separate Taxable Mortgage Pool if the assets are expected to produce significant
cash flow that will support one or more of the entity's issues of debt
obligations. The depositor generally will structure offerings of non-REMIC
Securities to avoid the application of the Taxable Mortgage Pool rules.
REMICS
CLASSIFICATION OF REMICS
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Brown & Wood LLP and Thacher Proffitt & Wood, the related trust fund (or each
applicable portion thereof) will qualify as a REMIC and the REMIC Securities
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in the REMIC within the meaning of the REMIC Provisions. In
addition, to the extent provided in the applicable prospectus supplement,
Regular Securities may also evidence ownership of an interest in a notional
principal contract. See "Characterization of Investments in REMIC Securities"
below.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the total adjusted
basis of the nonqualified assets is less than 1% of the total adjusted basis of
all the REMIC Pool's assets. An entity that fails
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to meet the safe harbor may nevertheless demonstrate that it holds no more than
a de minimis amount of nonqualified assets. A REMIC Pool also must provide
"reasonable arrangements" to prevent its residual interests from being held by
"disqualified organizations" or agents thereof and must furnish applicable tax
information to transferors or agents that violate this requirement. The pooling
and servicing agreement for each series of REMIC Securities will contain
provisions meeting these requirements. See "--Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans and, generally, certificates of
beneficial interest in a grantor trust that holds mortgage loans and regular
interests in another REMIC, such as lower-tier regular interests in a tiered
REMIC. The REMIC Regulations specify that loans secured by timeshare interests,
shares held by a tenant stockholder in a cooperative housing corporation, and
manufactured housing that qualifies as a "single family residence" under Code
Section 25(e)(10) can be qualified mortgages. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a three-month
period thereafter; or
(2) in exchange for a "defective obligation" within a two-year
period thereafter.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or
warranty made at the time of transfer to the REMIC Pool has been
breached;
(3) a mortgage that was fraudulently procured by the borrower;
and
(4) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90 days of
discovery).
A mortgage loan that is "defective" as described in clause (4) above that is not
sold or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies.
The reserve fund will be disqualified if more than 30% of the gross income from
the assets in that fund for the year is derived from the sale or other
disposition of property held for less than three months, unless required to
prevent a default on the regular interests caused by a default on one or more
qualified mortgages. A reserve fund must be reduced "promptly and appropriately"
as payments on the mortgage loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally may not be held for more than
three taxable years after the taxable year of acquisition unless extensions are
granted by the Secretary of the Treasury.
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In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a REMIC
Pool must be either of the following: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions, if
any, are made pro rata.
o A regular interest is an interest in a REMIC Pool that is issued on
the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), and provides
that interest payments (or other similar amounts), if any, at or
before maturity either are payable based on a fixed rate or a
qualified variable rate, or consist of a specified, nonvarying
portion of the interest payments on qualified mortgages. That
specified portion may consist of a fixed number of basis points, a
fixed percentage of the total interest, or a qualified variable
rate, inverse variable rate or difference between two fixed or
qualified variable rates on some or all of the qualified mortgages.
The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion
of interest payments on qualified mortgages may be zero.
o A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is
designated as a residual interest.
An interest in a REMIC Pool may be treated as a regular interest even if
payments of principal for that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, in the opinion of Brown & Wood LLP and Thacher Proffitt
& Wood, the Regular Securities of a series will constitute one or more classes
of regular interests, and the Residual Securities for that series will
constitute a single class of residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may not
be accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, none of these
regulations have been issued. Any relief provided, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the trust fund's income for the period in which the requirements for that status
are not satisfied. The pooling and servicing agreement for each REMIC Pool will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES
To the extent provided in the applicable prospectus supplement, a
Regular Security could represent not only the ownership of a REMIC regular
interest, but also an interest a notional principal contract. This can occur,
for instance, when the applicable trust agreement provides that the rate of
interest payable by the REMIC on the regular interest is subject to a cap based
on the weighted average of the net interest rates payable on the qualified
mortgages held by the REMIC. In these instances, the trust agreement may provide
for a reserve fund that will be held as part of the trust fund but not as an
asset of any REMIC created pursuant to the trust agreement (an "outside reserve
fund"). The outside reserve fund would typically be funded from monthly excess
cashflow. If the interest payments on a regular interest were limited due to the
above-described cap, payments of any interest shortfall due to application of
that cap would be made to the regular interest holder to the extent of funds on
deposit in the outside reserve fund. For federal income tax purposes, payments
from the outside reserve fund will be treated as payments under a notional
principal contract written by the owner of the outsider reserve fund in favor of
the regular interest holders.
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In the opinion of Brown & Wood LLP and Thacher Proffitt & Wood, the
REMIC Securities (or the regular interest component of a Regular Security that
also represents ownership of an interest in a notional principal contract) will
be treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC Pool underlying these Securities would
be so treated. Moreover, if 95% or more of the assets of the REMIC Pool qualify
for either of the foregoing treatments at all times during a calendar year, the
REMIC Securities will qualify for the corresponding status in their entirety for
that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those assets constituting "loans . . . secured
by an interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "Buydown Funds"). No opinion is
expressed as to the treatment of those Buydown Funds because the law is unclear
as to whether the Buydown Funds represent an account held by the lender that
reduces the lender's investment in the mortgage loan. This reduction of a
holder's investment may reduce the assets qualifying for the 60% of assets test
for meeting the definition of a "domestic building and loan association."
Interest (including original issue discount) on the Regular Securities (or the
regular interest component of a Regular Security that also represents ownership
of an interest in a notional principal contract) and income allocated to the
class of Residual Securities will be interest described in Section 856(c)(3)(B)
of the Code to the extent that the Securities are treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code. In addition, in
the opinion of Brown & Wood LLP and Thacher Proffitt & Wood, the Regular
Securities generally will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its Startup Day in
exchange for regular or residual interests therein.
The determination as to the percentage of the REMIC Pool's assets that
constitute assets described in the foregoing sections of the Code will be made
for each calendar quarter based on the average adjusted basis of each category
of the assets held by the REMIC Pool during that calendar quarter. The REMIC
will report those determinations to securityholders in the manner and at the
times required by applicable Treasury regulations. The Small Business Job
Protection Act of 1996 (the "SBJPA of 1996") repealed the reserve method of bad
debts of domestic building and loan associations and mutual savings banks, and
thus has eliminated the asset category of "qualifying real property loans" in
former Code Section 593(d) for taxable years beginning after December 31, 1995.
The requirements in the SBJPA of 1996 that these institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a certain portion of
their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if those loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the mortgage loans of
any series meeting this requirement, and no representation is made in this
regard.
The assets of the REMIC Pool will include, in addition to mortgage
loans, payments on mortgage loans held pending distribution on the REMIC
Securities and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether those assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that payments
on mortgage loans held pending distribution are considered part of the mortgage
loans for purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure
property generally will qualify as "real estate assets" under Section
856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For some series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related trust fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any of
these series of REMIC Securities, Brown & Wood LLP and Thacher Proffitt & Wood
will deliver its opinion that, assuming compliance with all provisions of the
related pooling and servicing agreement, the Tiered REMICs will each qualify as
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a REMIC and the respective REMIC Securities issued by each Tiered REMIC will be
considered to evidence ownership of Regular Securities or Residual Securities in
the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on those Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
(1) General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by that
Regular Securityholder.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to that income. The following discussion is
based in part on the OID Regulations and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Regular Securityholders should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the Regular Securities. To the extent
that those issues are not addressed in the regulations, the Seller intends to
apply the methodology described in the Conference Committee Report to the 1986
Act. No assurance can be provided that the Internal Revenue Service will not
take a different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result because of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion therein and the appropriate
method for reporting interest and original issue discount for the Regular
Securities.
Each Regular Security (except to the extent described below for a
Regular Security on which principal is distributed in a single installment or by
lots of specified principal amounts upon the request of a securityholder or by
random lot (a "Non-Pro Rata Security")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Securityholder's income. The total amount of original issue discount
on a Regular Security is the excess of the "stated redemption price at maturity"
of the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this prospectus generally is the first
price at which a substantial amount of that Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the trustee will treat the issue price
of a Class as to which there is no substantial sale as of the issue date or that
is retained by the depositor as the fair market value of the Class as of the
issue date. The issue price of a Regular Security also includes any amount paid
by an initial Regular Securityholder for accrued interest that relates to a
period before the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude that amount
from the issue price and to recover it on the first Distribution Date.
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The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below), provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Security. Because there is no penalty or default remedy in the
case of nonpayment of interest for a Regular Security, it is possible that no
interest on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in the
prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the Regular Securities as qualified stated interest.
Distributions of interest on an Accrual Security, or on other Regular Securities
for which deferred interest will accrue, will not constitute qualified stated
interest, in which case the stated redemption price at maturity of those Regular
Securities includes all distributions of interest as well as principal thereon.
Likewise, it is anticipated that the trustee will treat an interest-only Class
or a Class on which interest is substantially disproportionate to its principal
amount (a so-called "super-premium" Class) as having no qualified stated
interest. Where the interval between the issue date and the first Distribution
Date on a Regular Security is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if the original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular 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 Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption for a series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and that income will
be capital gain if the Regular Security is held as a capital asset. Under the
OID Regulations, however, Regular Securityholders may elect to accrue all de
minimis original issue discount as well as market discount and market premium,
under the constant yield method. See "-Election to Treat All Interest Under the
Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. For each
Regular Security, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Security. The Conference Committee Report to the 1986 Act
states that the rate of accrual of original issue discount is intended to be
based on the Prepayment Assumption. The original issue discount accruing in a
full accrual period would be the excess, if any, of:
(1) the sum of:
(a) the present value of all of the remaining
distributions to be made on the Regular Security as of the end
of that accrual period and
(b) the distributions made on the Regular Security during
the accrual period that are included in the Regular Security's
stated redemption price at maturity, over
(2) the adjusted issue price of the Regular Security at the
beginning of the accrual period.
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The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the issue
date;
(2) events (including actual prepayments) that have occurred
before the end of the accrual period; and
(3) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular Security,
increased by the total amount of original issue discount for the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in those prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the mortgage loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the mortgage loans for a series of Regular Securities can result
in both a change in the priority of principal payments for certain Classes of
Regular Securities and either an increase or decrease in the daily portions of
original issue discount for those Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the
trustee will determine the yield to maturity of that Security based upon the
anticipated payment characteristics of the Class as a whole under the Prepayment
Assumption. In general, the original issue discount accruing on each Non-Pro
Rata Security in a full accrual period would be its allocable share of the
original issue discount for the entire Class, as determined in accordance with
the preceding paragraph. However, in the case of a distribution in retirement of
the entire unpaid principal balance of any Non-Pro Rata Security (or portion of
the unpaid principal balance), (a) the remaining unaccrued original issue
discount allocable to the Security (or to that portion) will accrue at the time
of the distribution, and (b) the accrual of original issue discount allocable to
each remaining Security of that Class will be adjusted by reducing the present
value of the remaining payments on that Class and the adjusted issue price of
that Class to the extent attributable to the portion of the unpaid principal
balance thereof that was distributed. The depositor believes that the foregoing
treatment is consistent with the "pro rata prepayment" rules of the OID
Regulations, but with the rate of accrual of original issue discount determined
based on the Prepayment Assumption for the Class as a whole. Investors are
advised to consult their tax advisors as to this treatment.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily portions
of the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over the
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
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(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (1) the issue price does not exceed the original principal balance by
more than a specified amount and (2) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds. A multiple of a qualified
floating rate is considered a qualified floating rate only if the rate is equal
to either (a) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (b) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate. That rate may also be subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that the information is not (1) within the control of the
issuer or a related party or (2) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
Class of Regular Securities may be issued under this prospectus that does not
have a variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding that it
is considered significantly "front-loaded" or "back-loaded" within the meaning
of the OID Regulations. It is possible that a Class may be considered to bear
"contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Securities. However, if final regulations
dealing with contingent interest for Regular Securities apply the same
principles as the OID Regulations, those regulations may lead to different
timing of income inclusion that would be the case under the OID Regulations.
Furthermore, application of those principles could lead to the characterization
of gain on the sale of contingent interest Regular Securities as ordinary
income. Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Security that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (1) bearing interest at
a rate that qualifies as a variable rate under the OID Regulations that is tied
to current values of a variable rate (or the highest, lowest or average of two
or more variable rates, including a rate based on the average cost of funds of
one or more financial institutions), or the product of that rate and a positive
or a negative multiple (plus or minus a specified number of basis points), or
that represents a weighted average of rates on some or all of the mortgage
loans, including a rate that is subject to one or more caps or floors, or (2)
bearing one or more variable rates for one or more periods, or one or more fixed
rates for one or more periods, and a different variable rate or fixed rate for
other periods, qualifies as a regular interest in a REMIC.
Accordingly, it is anticipated that the trustee will treat Regular Securities
that qualify as regular interests under this rule in the same manner as
obligations bearing a variable rate for original issue discount reporting
purposes.
The amount of original issue discount for a Regular Security bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount," with the yield to maturity and future payments on
that Regular Security generally to be determined by assuming that interest will
be payable for the life of the Regular Security based on the initial rate (or,
if different, the value of the applicable variable rate as of the pricing date)
for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the trustee will treat that variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class or a Class bearing interest at a rate equal
to the weighted average of the net rates on the mortgage loans, which will be
treated as non-qualified stated interest includible in the stated redemption
price at maturity. Ordinary income reportable for any period will be adjusted
based on subsequent changes in the applicable interest rate index.
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(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (2) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of that Regular Security at the time of purchase. The purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on that Regular Security as distributions includible in the stated
redemption price at maturity thereof are received, in an amount not exceeding
that distribution.
The market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until these
regulations are issued, the market discount would accrue either (1) on the basis
of a constant interest rate, or (2) in the ratio of stated interest allocable to
the relevant period to the sum of the interest for that period plus the
remaining interest as of the end of that period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for that period plus the remaining original issue discount as
of the end of that period. The purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. The purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable thereon. The deferred portion of the interest expense
in any taxable year generally will not exceed the accrued market discount on the
Regular Security for that year. Any deferred interest expense is, in general,
allowed as a deduction not later than the year in which the related market
discount income is recognized or the Regular Security is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on all market discount instruments acquired by
the Regular Securityholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
that election may be deemed to be made. A person who purchases a Regular
Security at a price lower than the remaining amounts includible in the stated
redemption price at maturity of the security, but higher than its adjusted issue
price, does not acquire the Regular Security with market discount, but will be
required to report original issue discount, appropriately adjusted to reflect
the excess of the price paid over the adjusted issue price.
Market discount for a Regular Security will be considered to be zero if
the market discount is less than 0.25% of the remaining stated redemption price
at maturity of the Regular Security (or, in the case of a Regular Security
having original issue discount, the adjusted issue price of that Regular
Security) multiplied by the weighted average maturity of the Regular Security
(determined as described above in the third paragraph under "--Original Issue
Discount" above) remaining after the date of purchase. It appears that de
minimis market discount would be reported in a manner similar to de minimis
original issue discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of the
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
Due to the substantial lack of regulatory guidance with respect to the
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market discount rules, it is unclear how those rules will affect any secondary
market that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities.
Investors should also consult Revenue Procedure 92-67 concerning the elections
to include market discount in income currently and to accrue market discount on
the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations as the
Regular Securities, although it is unclear whether the alternatives to the
constant interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (1) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (2) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election for
a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a Regular Security, particularly a
Subordinate Security, may have income, or may incur a diminution in cash flow as
a result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a subsequent
taxable year. In this regard, investors are cautioned that while they may
generally cease to accrue interest income if it reasonably appears that the
interest will be uncollectible, the Internal Revenue Service may take the
position that original issue discount must continue to be accrued in spite of
its
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uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in general,
Regular Securityholders that are not corporations and do not hold the Regular
Securities in connection with a trade or business should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, non-corporate Regular Securityholders should be
allowed a bad debt deduction at the time the principal balance of the Regular
Securities is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
losses only after all the mortgage loans remaining in the trust fund have been
liquidated or the applicable Class of Regular Securities has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer
those deductions for all holders, such as reducing future cashflow for purposes
of computing original issue discount. This may have the effect of creating
"negative" original issue discount that would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained for
their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Securities in connection with a trade or business. Special loss rules are
applicable to banks and thrift institutions, including rules regarding reserves
for bad debts. These taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income for the
Regular Security and reduced by amounts included in the stated redemption price
at maturity of the Regular Security that were previously received by the seller,
by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). That gain will be
treated as ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate
applicable federal rate in effect at the time the taxpayer entered into
the transaction minus any amount previously treated as ordinary income
for any prior disposition of property that was held as part of that
transaction;
(2) in the case of a non-corporate taxpayer, to the extent that
the taxpayer has made an election under Code Section 163(d)(4) to have
net capital gains taxed as investment income at ordinary income rates;
or
86
(3) to the extent that the gain does not exceed the excess, if
any, of (a) the amount that would have been includible in the gross
income of the holder if its yield on that Regular Security were 110% of
the applicable federal rate as of the date of purchase, over (b) the
amount of income actually includible in the gross income of the holder
for that Regular Security.
In addition, gain or loss recognized from the sale of a Regular Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Long-term capital gains of certain noncorporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income of those taxpayers (39.6%) for property held for more than one year.
Currently, the maximum tax rate for corporations is the same for both ordinary
income and capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("Residual Holders"), and will not be
taxed separately to the REMIC Pool. The daily portions of REMIC taxable income
or net loss of a Residual Holder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in that
quarter and by allocating that daily portion among the Residual Holders in
proportion to their respective holdings of Residual Securities in the REMIC Pool
on that day. REMIC taxable income is generally determined in the same manner as
the taxable income of an individual using the accrual method of accounting,
except that
(1) the limitations on deductibility of investment interest
expense and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and
expenses related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the mortgage loans, other administrative expenses
of the REMIC Pool and realized losses on the mortgage loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Securities of any class of
the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium for the mortgage loans, on the one hand, and the timing
of deductions for interest (including original issue discount) or income from
amortization of issue premium on the Regular Securities, on the other hand. If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these mortgage loans is prepaid, the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Securities, and (2) the discount on the mortgage loans that is
includible in income may exceed the deduction allowed upon those distributions
on those Regular Securities on account of any unaccrued original issue discount
relating to those Regular Securities. When there is more than one Class of
Regular Securities that distribute principal sequentially, this mismatching of
income and deductions is particularly likely to occur in the early years
following issuance of the Regular Securities when distributions in reduction of
principal are being made in respect of earlier Classes of Regular Securities to
the extent that those Classes are not issued with substantial discount or are
issued at a premium. If
87
taxable income attributable to that mismatching is realized, in general, losses
would be allowed in later years as distributions on the later maturing Classes
of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years
as a result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of that series of Regular
Securities, may increase over time as distributions in reduction of principal
are made on the lower yielding Classes of Regular Securities, whereas, to the
extent the REMIC Pool consists of fixed rate mortgage loans, interest income for
any particular mortgage loan will remain constant over time as a percentage of
the outstanding principal amount of that loan. Consequently, Residual Holders
must have sufficient other sources of cash to pay any federal, state, or local
income taxes due as a result of that mismatching or unrelated deductions against
which to offset that income, subject to the discussion of "excess inclusions"
below under "--Limitations on Offset or Exemption of REMIC Income." The timing
of mismatching of income and deductions described in this paragraph, if present
for a series of Securities, may have a significant adverse effect upon a
Residual Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated unfavorably
in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in
the 30% withholding tax otherwise available to a foreign Residual
Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during certain periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security is
the amount paid for that Residual Security. The adjusted basis will be increased
by the amount of taxable income of the REMIC Pool reportable by the Residual
Holder and will be decreased (but not below zero), first, by a cash distribution
from the REMIC Pool and, second, by the amount of loss of the REMIC Pool
reportable by the Residual Holder. Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Holder as to whom the loss was disallowed and may be used by the Residual Holder
only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in some respects, the recovery of basis by
the REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--Taxation
of REMIC Income," the period of time over which the issue price is effectively
amortized may be longer than the economic life of the Residual Securities.
A Residual Security may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of the residual
interest as zero rather than the negative amount for purposes of determining the
REMIC Pool's basis in its assets. The preamble to the REMIC Regulations states
that the Internal Revenue Service may provide future guidance on the proper tax
88
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders should consult
their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by the holder. The REMIC Regulations
currently in effect do not so provide. See "--Treatment of Certain Items of
REMIC Income and Expense--Market Discount" below regarding the basis of mortgage
loans to the REMIC Pool and "--Sale or Exchange of a Residual Security" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income
and expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and expense
are subject to differing interpretations. The depositor makes no representation
as to the specific method that will be used for reporting income with respect to
the mortgage loans and expenses for the Regular Securities, and different
methods could result in different timing or reporting of taxable income or net
loss to Residual Holders or differences in capital gain versus ordinary income.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
MARKET DISCOUNT. The REMIC Pool will have market discount income in
respect of mortgage loans if, in general, the basis of the REMIC Pool in those
mortgage loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in those mortgage loans is generally the fair market value of the mortgage
loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that the basis is equal to the total of the issue prices of
all regular and residual interests in the REMIC Pool. The accrued portion of the
market discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "--Taxation of Owners of
Regular Securities--Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the mortgage loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired those mortgage loans at a premium equal to the amount of that
excess. As stated above, the REMIC Pool's basis in mortgage loans is the fair
market value of the mortgage loans, based on the total of the issue prices of
the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "--Taxation of Owners of Regular Securities--Amortizable Premium," a
person that holds a mortgage loan as a capital asset under Code Section 1221 may
elect under Code Section 171 to amortize premium on mortgage loans originated
after September 27, 1985, under the constant yield method. Amortizable bond
premium will be treated as an offset to interest income on the mortgage loans,
rather than as a separate deduction item. Because substantially all of the
borrowers on the mortgage loans are expected to be individuals, Code Section 171
will not be available for premium on mortgage loans originated on or before
September 27, 1985. Premium for those mortgage loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of that premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that the premium should be allocated in a different manner, such as allocating
the premium entirely to the final payment of principal.
89
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for that quarterly period of (1) 120% of the
long-term applicable federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (2) the adjusted issue price of the Residual Security at
the beginning of the quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of those daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to the Residual Security before the beginning of
that quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
that income as the adjusted issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for certain persons who are not U.S.
Persons (as defined below under "--Tax-Related Restrictions on Transfer of
Residual Securities--Foreign Investors"), and the portion thereof attributable
to excess inclusions is not eligible for any reduction in the rate of
withholding tax (by treaty or otherwise). See "--Taxation of Certain Foreign
Investors--Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
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 Securities that
have "significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except for Residual
Securities continuously held by a thrift institution since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have those rules apply only to
taxable years beginning after August 20, 1996.
(5) Tax-Related Restrictions on Transfer of Residual Securities
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the transfer for a term ending with the last
calendar quarter in which excess inclusions are expected to accrue. That rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in
90
which they arise to the date of the transfer. That tax generally would be
imposed on the transferor of the Residual Security, except that where the
transfer is through an agent (including a broker, nominee, or other middleman)
for a Disqualified Organization, the tax would instead be imposed on the agent.
However, a transferor of a Residual Security would in no event be liable for the
tax for a transfer if the transferee furnished to the transferor an affidavit
stating that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that the
affidavit is false. The tax also may be waived by the Internal Revenue Service
if the Disqualified Organization promptly disposes of the Residual Security and
the transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Security is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income from a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for the
tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification number
and, during the period that person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by Section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished certain affidavits by record holders of interests in the entity and
that does not know those affidavits are false, is not available to an electing
large partnership.
o "Disqualified Organization" means the United States, any state or
political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of
the foregoing (provided, that the term does not include an
instrumentality if all of its activities are subject to tax and a
majority of its board of directors in not selected by any
governmental entity), any cooperative organization furnishing
electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any
organization (other than a farmers' cooperative described in Code
Section 531) that is exempt from taxation under the Code unless the
organization is subject to the tax on unrelated business income
imposed by Code Section 511.
o "Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis.
Except as may be provided in Treasury regulations, any person
holding an interest in a Pass-Through Entity as a nominee for
another will, with respect to that interest, be treated as a
Pass-Through Entity.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security and
is not a Disqualified Organization and is not purchasing the Residual Security
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (2) the transferor provides a statement in writing to the
trustee that it has no actual knowledge that the affidavit is false. Moreover,
the pooling and servicing agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Security for a
series will bear a legend referring to those restrictions on transfer, and each
Residual Holder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related pooling and servicing agreement
required under the Code or applicable Treasury regulations to effectuate the
foregoing restrictions. Information necessary to compute an applicable excise
tax must be furnished to the Internal Revenue Service and to the requesting
party within 60 days of the request, and the Seller or the trustee may charge a
fee for computing and providing that information.
91
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (1) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (1) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (2) the transferee represents to the transferor
that it understands that, as the holder of the non-economic residual interest,
the transferee may incur liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due. The pooling and servicing
agreement for each series of Certificates will require the transferee of a
Residual Security to certify to the matters in the preceding sentence as part of
the affidavit described above under the heading "--Disqualified Organizations."
The IRS has issued proposed changes to REMIC Regulations that would add
to the conditions necessary to assure that a transfer of a noneconomic residual
interest would be respected. The proposed additional condition would require
that the amount received by the transferee be no less on a present value basis
than the present value of the net tax detriment attributable to holding a
residual interest reduced by the present value of the projected payments to be
received on the residual interest. In Revenue Procedure 2001-12, pending
finalization of the new regulations, the IRS has expanded the "safe harbor" for
transfers of non-economic residual interests to include certain transfers to
domestic taxable corporations with large amounts of gross and net assets where
agreement is made that all future transfers will be to taxable domestic
corporations in transactions that qualify for one of the "safe harbor"
provisions. Eligibility for this safe harbor requires, among other things, that
the facts and circumstances known to the transferor at the time of transfer not
indicate to a reasonable person that the taxes with respect to the residual
interest will not be paid, with an unreasonably low cost for the transfer
specifically mentioned as negating eligibility. The changes would be effective
for transfers of residual interests occurring after February 4, 2000. Prior to
purchasing a Residual Security, prospective purchasers should consider the
possibility that a purported transfer of the Residual Security by such a
purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by the purchaser.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (1) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (2) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and before the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
92
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership
(except as provided in applicable Treasury regulations) or other entity treated
as a partnership or as a corporation created or organized in or under the laws
of the United States or of any state (including, for this purpose, the District
of Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, 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 U.S. Persons have the authority to control all substantial decisions of the
trust (or, to the extent provided in applicable Treasury regulations, certain
trusts in existence on August 20, 1996, which are eligible to elect to be
treated as U.S. Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Taxation of Owners of
Residual Securities--Basis and Losses") of the Residual Holder in the Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds that
adjusted basis on that Distribution Date. That income will be treated as gain
from the sale or exchange of the Residual Holder's Residual Security, in which
case, if the Residual Holder has an adjusted basis in its Residual Security
remaining when its interest in the REMIC Pool terminates, and if it holds the
Residual Security as a capital asset under Code Section 1221, then it will
recognize a capital loss at that time in the amount of the remaining adjusted
basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income for any prior disposition of property that was held as a part of
that transaction or (2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates. In addition,
gain or loss recognized from the sale of a Residual Security by certain banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash
sale rules of Code Section 1091 will apply to dispositions of Residual
Securities where the seller of the Residual Security, during the period
beginning six months before the sale or disposition of the Residual Security and
ending six months after the sale or disposition, acquires (or enters into any
other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Security.
(7) Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final
regulations (the "Mark to Market Regulations") under Code Section 475 relating
to the requirement that a securities dealer mark to market securities held for
sale to customers. This mark-to-market requirement applies to all securities of
a dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Mark to Market Regulations provide that,
for purposes of this mark to market requirement, a Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
93
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
(1) Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
(1) the disposition of a qualified mortgages other than for
(a) substitution within two years of the Startup Day for a
defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted)
obligation at any time) or for any qualified mortgage within
three months of the Startup Day;
(b) foreclosure, default, or imminent default of a
qualified mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow
investments other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction to sell a
qualified mortgage or cash flow investment held by a REMIC Pool to prevent a
default on Regular Securities as a result of a default on qualified mortgages or
to facilitate a clean-up call (generally, an optional termination to save
administrative costs when no more than a small percentage of the Securities is
outstanding). The REMIC Regulations indicate that the modification of a mortgage
loan generally will not be treated as a disposition if it is occasioned by a
default or reasonably foreseeable default, an assumption of the mortgage loan,
the waiver of a due-on-sale or due-on-encumbrance clause, or the conversion of
an interest rate by a borrower pursuant to the terms of a convertible adjustable
rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (1) during the
three months following the Startup Day, (2) made to a qualified reserve fund by
a Residual Holder, (3) in the nature of a guarantee, (4) made to facilitate a
qualified liquidation or clean-up call, and (5) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of 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. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross
94
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated that
the REMIC Pool will have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which that adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on that date, the REMIC Pool will not be subject to the
prohibited transaction rules on the sale of its assets, provided that the REMIC
Pool credits or distributes in liquidation all of the sale proceeds plus its
cash (other than amounts retained to meet claims) to holders of Regular
Securities and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for the income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The master servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, for the REMIC
Pool as agent of the Residual Holders holding the largest percentage interest in
the Residual Securities. If the Code or applicable Treasury regulations do not
permit the master servicer to act as tax matters person in its capacity as agent
of the Residual Holder, the Residual Holder or any other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
The tax matters person generally has responsibility for overseeing and providing
notice to the other Residual Holders of certain administrative and judicial
proceedings regarding the REMIC Pool's tax affairs, although other holders of
the Residual Securities of the same series would be able to participate in those
proceedings in appropriate circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser or (1) 3% of the excess, if any, of
adjusted gross income over $100,000 ($50,000 in the case of a married individual
filing a separate return) (subject to adjustment for inflation), or (2) 80% of
the amount of itemized deductions otherwise allowable for that year. In the case
of a REMIC Pool, those deductions may include deductions under Code Section 212
for the Servicing Fee and all administrative and other expenses relating to the
REMIC Pool, or any similar expenses allocated to the REMIC Pool for a regular
interest it holds in another REMIC. Those investors who hold REMIC Securities
either directly or indirectly through certain pass-through entities may have
their pro rata share of those expenses allocated to them as additional gross
income, but may be subject to that limitation on deductions. In addition, those
expenses are not deductible at all for purposes of computing the alternative
minimum tax, and may cause those investors to be subject to significant
additional tax liability. Temporary Treasury regulations provide that the
additional gross income and corresponding amount of expenses generally are to be
allocated entirely to the holders of Residual Securities in the case of a REMIC
Pool that would not qualify as a fixed investment trust in the absence of a
REMIC election. For a REMIC Pool that would be classified as an investment trust
in the absence of a REMIC election or that is substantially similar to an
investment trust, any holder of a Regular Security that is an individual, trust,
estate, or pass-through entity also will be allocated its pro rata share of
those expenses and a corresponding amount of income and will be subject to the
limitations or deductions imposed by Code Sections 67 and 68, as described
above. The prospectus supplement will indicate if all those expenses will not be
allocable to the Residual Securities.
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In general, the allocable portion will be determined based on the ratio
that a REMIC securityholder's income, determined on a daily basis, bears to the
income of all holders of Regular Securities and Residual Securities for a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing temporary Treasury regulations) may have taxable income in excess of
the interest income at the Interest Rate on Regular Securities that are issued
in a single class or otherwise consistently with fixed investment trust status
or in excess of cash distributions for the related period on Residual
Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder" within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (3) that Non-U.S. Person provides the
trustee, or the person who would otherwise be required to withhold tax from
those distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Security is a Non-U.S. Person. If that statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by that Non-U.S. Person. In the latter case,
the Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") that would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations require, in the case of Regular Certificates held by a foreign
partnership, that (x) the certification described above be provided by the
partners rather than by the foreign partnership and (y) the partnership provide
certain information, including a United States taxpayer identification number. A
look-through rule would apply in the case of tiered partnerships. Non-U.S.
Persons should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163 (f) (1). Generally,
mortgage loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, Residual Holders
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "--Taxation of Owners of Residual
Securities--Limitations on Offset or Exemption of REMIC Income" above. If the
amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
those Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to those Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, those
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amounts generally will be taken into account for purposes of withholding only
when paid or otherwise distributed (or when the Residual Security is disposed
of) under rules similar to withholding upon disposition of debt instruments that
have original issue discount. See "--Tax-Related Restrictions on Transfer of
Residual Securities--Foreign Investors" above concerning the disregard of
certain transfers having "tax avoidance potential." Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Securities.
(3) Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale
of the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under some
circumstances, principal distributions) unless the Regular Holder complies with
certain reporting and/or certification procedures, including the provision of
its taxpayer identification number to the trustee, its agent or the broker who
effected the sale of the Regular Security, or that Holder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Holder's federal
income tax liability.
(4) Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request that information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 for a particular series of Regular Securities. Holders
through nominees must request the information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence. Treasury
regulations require that, in addition to the foregoing requirements, information
must be furnished quarterly to Residual Holders, furnished annually, if
applicable, to holders of Regular Securities, and filed annually with the
Internal Revenue Service concerning Code Section 67 expenses (see "Limitations
on Deduction of Certain Expenses" above) allocable to those holders.
Furthermore, under these regulations, information must be furnished quarterly to
Residual Holders, furnished annually to holders of Regular Securities, and filed
annually with the Internal Revenue Service concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"--Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders
of the residual interest in a REMIC Pool, including the duty to account for
their shares of the REMIC Pool's income or loss on their returns, continue for
the life of the REMIC Pool, even after the principal and interest on their
Residual Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on its
returns consistently with their treatment on the REMIC Pool's return, unless the
Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Pool. The Internal Revenue Service may assess a deficiency resulting from
a failure to comply with the consistency requirement without instituting an
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administrative proceeding at the REMIC Pool level. A REMIC Pool typically will
not register as a tax shelter pursuant to Code Section 6111 because it generally
will not have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Security as a nominee for another
person may be required to furnish the related REMIC Pool, in a manner to be
provided in Treasury regulations, with the name and address of that person and
other specified information.
FASITS
CLASSIFICATION OF FASITS
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Brown & Wood LLP and Thacher Proffitt & Wood, the related trust fund (or each
applicable portion thereof) will qualify as a FASIT. The trust fund will qualify
under the Code as a FASIT in which FASIT regular securities (the "FASIT Regular
Securities") and the ownership interest security (the "FASIT Ownership
Security") will constitute the "regular interests" and the "ownership interest,"
respectively, if
(1) a FASIT election is in effect;
(2) certain tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the
FASIT are met on a continuing basis; and
(3) the trust fund is not a regulated investment company as
defined in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as
regular interests if issued by a REMIC as defined in Section 860D of the
Code (generally, instruments that provide for interest at a fixed rate,
a qualifying variable rate, or a qualifying interest-only type rate);
(3) foreclosure property;
(4) 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;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
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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. A debt instrument is a permitted asset only if the instrument is
indebtedness for federal income tax purposes, including regular interests in a
REMIC or regular interests issued by another FASIT and it bears (1) fixed
interest or (2) variable interest of a type that relates to qualified variable
rate debt (as defined in Treasury regulations prescribed under section
860G(a)(1)(B)). Permitted debt instruments must bear interest, if any, at a
fixed or qualified variable rate. Permitted hedges include interest rate or
foreign currency notional principal contracts, letters of credit, insurance,
guarantees of payment default and similar instruments to be provided in
regulations, and which are reasonably required to guarantee or hedge against the
FASIT's risks associated with being the obligor on interests issued by the
FASIT. Foreclosure property is real property acquired by the FASIT in connection
with the default or imminent default of a qualified mortgage, provided the
depositor had no knowledge or reason to know as of the date such asset was
acquired by the FASIT that such a default had occurred or would occur.
(2) 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:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an
Eligible Corporation (as defined herein).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of securities will indicate
which securities of such Series will be designated as regular interests, and
which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its
stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) 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 interests (i.e., certain qualified floating rates and weighted
average rates). Interest will be considered to be based on a permissible
variable rate if generally:
(1) such interest is unconditionally payable at least annually;
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(2) the issue price of the debt instrument does not exceed the
total noncontingent principal payments; and
(3) interest is based on a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on
such FASIT regular interest.
If an interest in a FASIT fails to meet one or more of the requirements
set out in clauses (3), (4), or (5) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "high-yield interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (6), but the
interest payable on the interest 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 interest will also qualify as a high-yield interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
it's FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and interests therein for U.S. federal
income tax purposes is uncertain. 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 the period of time in which
the requirements for FASIT status are not satisfied.
TAXATION OF OWNERS OF FASIT REGULAR SECURITIES
(1) General
Payments received by holders of FASIT Regular Securities generally will
be accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. 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 cash receipts and disbursements method. Except in
the case of FASIT Regular Securities issued with original issue discount,
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 securityholder's basis
is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or acquired
with market discount or acquisition premium generally will treat interest and
principal payments on such Securities in the same manner described for REMIC
Regular Securities. See "--REMICs - Taxation of Owners of Regular Securities"
above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
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TAXATION OF OWNERS OF HIGH-YIELD INTERESTS
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return continues
to have a corporate level tax. High-yield interests are subject to special rules
regarding the eligibility of holders of such interest, and the ability of such
holders to offset income derived from their FASIT Security with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory.
o An "Eligible Corporation" is a taxable domestic C corporation that
does not qualify as a regulated investment company, a real estate
investment trust, a REMIC, or a cooperative.
o A "Disqualified Holder" is any holder other than (1) an Eligible
Corporation, or (2) a dealer who acquires FASIT debt for resale to
customers in the ordinary course of business.
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 will continue to
be treated as the holder of the high-yield interest.
(2) Treatment of Losses
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 Interest that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Interest and that have the same features as high-yield interests.
TAXATION OF FASIT OWNERSHIP SECURITY
(1) General
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 Security will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Security 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, a holder of a FASIT Ownership Security is subject to the same
limitations on their ability to use losses to offset income from their FASIT
Regular Securities as are holders of high-yield interest. See "--Taxation of
Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. 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 that
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is economically comparable to a FASIT Ownership Security. In addition, if any
security that is sold or contributed to a FASIT by the holders of the related
FASIT Ownership Security was required to be marked-to-market under Section 475
of the Code by such holder, then Section 475 of the Code will continue to apply
to such securities, except that the amount realized under the mark-to-market
rules 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 semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted
disposition;
(3) any income attributable to loans originated by the FASIT;
and
(4) compensation for services (other than fees for a waiver,
amendment, or consent under permitted assets not acquired through
foreclosure).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular
interest (i.e., a qualified liquidation);
(2) incident to the foreclosure, default (or imminent default)
on an asset of the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a
FASIT attributable to a default (or imminent default) on an asset of the
FASIT;
(5) to facilitate a clean-up call;
(6) to substitute a permitted debt instrument for another such
instrument; or
(7) in order to reduce over-collateralization where a principal
purposes of the disposition was not to avoid recognition of gain arising
from an increase in its market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Securities for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent as holders of REMIC Securities. In addition, 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. See
"--REMICs" above.
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PROPOSED FASIT REGULATIONS
The Treasury Department filed proposed regulations interpreting the
FASIT Provisions ("proposed FASIT regulations") with the Federal Register on
Friday, February 4, 2000. The proposed FASIT regulations generally would be
effective on the date they are issued as final regulations. Certain anti-abuse
rules are, however, proposed to be effective on February 4, 2000. The proposed
FASIT regulations would, among other things, provide procedures for making a
FASIT election, refine the definition of certain terms used in the FASIT
provisions, provide penalties that would apply upon cessation of FASIT status,
provide rules for the tax treatment of transfers of assets to the FASIT, and
establish anti-abuse rules to preclude use of the FASIT vehicle for a
transaction that did not primarily concern the securitization of financial
assets.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
For each series of Grantor Trust Securities, assuming compliance with
all provisions of the related Agreement, in the opinion of Brown & Wood LLP and
Thacher Proffitt & Wood, the related Grantor Trust Fund will be classified as a
grantor trust under subpart E, part I of subchapter J of the Code and not as a
partnership, an association taxable as a corporation, or a "taxable mortgage
pool" within the meaning of Code Section 7701(i). Accordingly, each holder of a
Grantor Trust Security generally will be treated as the beneficial owner of an
undivided interest in the mortgage loans included in the Grantor Trust Fund.
STANDARD SECURITIES
GENERAL
Where there is no Retained Interest or "excess" servicing for the
mortgage loans underlying the Securities of a series, and where these Securities
are not designated as "Stripped Securities," the holder of each Security of that
series (referred to herein as "Standard Securities") will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the Grantor Trust Fund represented by its Standard Security and will
be considered the beneficial owner of a pro rata undivided interest in each of
the mortgage loans, subject to the discussion below under "--Recharacterization
of Servicing Fees." Accordingly, the holder of a Standard Security of a
particular series will be required to report on its federal income tax return
its pro rata share of the entire income from the mortgage loans represented by
its Standard Security, including interest at the coupon rate on those mortgage
loans, original issue discount (if any), prepayment fees, assumption fees, and
late payment charges received by the servicer, in accordance with that
securityholder's method of accounting. A securityholder generally will be able
to deduct its share of the Servicing Fee and all administrative and other
expenses of the trust fund in accordance with its method of accounting, provided
that those amounts are reasonable compensation for services rendered to the
Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own
Securities, either directly or indirectly through certain pass-through entities,
will be subject to limitations for certain itemized deductions described in Code
Section 67, including deductions under Code Section 212 for the Servicing Fee
and all administrative and other expenses of the Grantor Trust Fund, to the
extent that those deductions, in total, do not exceed two percent of an
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (1) 3% of the excess, if any, of
adjusted gross income over $100,000 ($50,000 in the case of a married individual
filing a separate return) (in each case, as adjusted for post-1991 inflation),
or (2) 80% of the amount of itemized deductions otherwise allowable for that
year. As a result, those investors holding Standard Securities, directly or
indirectly through a pass-through entity, may have total taxable income in
excess of the total amount of cash received on the Standard Securities with
respect to interest at the Interest Rate or as discount income on the Standard
Securities. In addition, those expenses are not deductible at all for purposes
of computing the alternative minimum tax, and may cause those investors to be
subject to significant additional tax liability.
Moreover, where there is Retained Interest for the mortgage loans underlying a
series of Securities the transaction will
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be subject to the application of the "stripped bond" rules of the Code as
described below under "--Stripped Securities." Where the servicing fees are in
excess of reasonable servicing compensation, the transaction will be subject to
the application of the "stripped coupon" rules of the Code, as described below
under "--Recharacterization of Servicing Fees."
Holders of Standard Securities, particularly any class of a series that
are Subordinate Securities, may incur losses of interest or principal with
respect to the mortgage loans. Those losses would be deductible generally only
as described above under "--REMICs--Taxation of Owners of Regular
Securities--Treatment of Losses," except that securityholders on the cash method
of accounting would not be required to report qualified stated interest as
income until actual receipt.
(1) Tax Status
For a series, in the opinion of Brown & Wood LLP and Thacher Proffitt &
Wood, except for that portion of a trust fund consisting of Unsecured Home
Improvement Loans, a Standard Security owned by a:
o "domestic building and loan association" within the meaning of Code
Section 7701(a)(19) will be considered to represent "loans ._._.
secured by an interest in real property which is . . . residential
real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the
mortgage loans represented by that Standard Security is of the type
described in that section of the Code.
o real estate investment trust will be considered to represent "real
estate assets" within the meaning of Code Section 856(c)(4)(A) to
the extent that the assets of the related Grantor Trust Fund
consist of qualified assets, and interest income on those assets
will be considered "interest on obligations secured by mortgages on
real property" to that extent within the meaning of Code Section
856(c)(3)(B).
o REMIC will be considered to represent an "obligation (including any
participation or certificate of beneficial ownership therein) which
is principally secured by an interest in real property" within the
meaning of Code Section 860G(a)(3)(A) to the extent that the assets
of the related Grantor Trust Fund consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be
characterized in their entirety under the Code provisions cited in clauses 1 and
2 of the immediately preceding paragraph or whether the amount qualifying for
that treatment must be reduced by the amount of the Buydown Mortgage Funds.
There is indirect authority supporting treatment of an investment in a Buydown
Mortgage Loan as entirely secured by real property if the fair market value of
the real property securing the loan exceeds the principal amount of the loan at
the time of issuance or acquisition, as the case may be. There is no assurance
that the treatment described above is proper. Accordingly, securityholders are
urged to consult their own tax advisors concerning the effects of those
arrangements on the characterization of the securityholder's investment for
federal income tax purposes.
(2) Premium and Discount
The depositor recommends that securityholders consult with their tax
advisors as to the federal income tax treatment of premium and discount arising
either upon initial acquisition of Standard Securities or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a
Standard Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities Premium."
ORIGINAL ISSUE DISCOUNT. The original issue discount rules of Code
Section 1271 through 1275 will be applicable to a securityholder's interest in
those mortgage loans as to which the conditions for the application of those
sections are met. Rules regarding periodic inclusion of original issue discount
income generally are applicable to mortgages
104
originated after March 2, 1984. The rules allowing for the amortization of
premium are available for mortgage loans originated after September 27, 1985.
Under the OID Regulations, original issue discount could arise by the charging
of points by the originator of the mortgages in an amount greater than the
statutory de minimis exception, including a payment of points that is currently
deductible by the borrower under applicable Code provisions or, under some
circumstances, by the presence of "teaser" rates on the mortgage loans. See
"--Stripped Securities" below regarding original issue discount on Stripped
Securities.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to that income.
No prepayment assumption will be assumed for purposes of that accrual except as
set forth in the prospectus supplement. However, Code Section 1272 provides for
a reduction in the amount of original issue discount includible in the income of
a holder of an obligation that acquires the obligation after its initial
issuance at a price greater than the sum of the original issue price and the
previously accrued original issue discount, less prior payments of principal.
Accordingly, if those mortgage loans acquired by a securityholder are purchased
at a price equal to the then unpaid principal amount of those mortgage loans, no
original issue discount attributable to the difference between the issue price
and the original principal amount of those mortgage loans (i.e., points) will be
includible by that holder.
MARKET DISCOUNT. securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the mortgage loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Securities--Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
mortgage loans, unless the constant yield method is elected. No prepayment
assumption will be assumed for purposes of that accrual except as set forth in
the prospectus supplement.
(3) Recharacterization of Servicing Fees
If the servicing fees paid to a servicer were deemed to exceed
reasonable servicing compensation, the amount of that excess would represent
neither income nor a deduction to securityholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of Standard
Securities, the reasonableness of servicing compensation should be determined on
a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that the amount would exceed reasonable servicing
compensation as to some of the mortgage loans would be increased. Internal
Revenue Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the mortgage loans to be treated
under the "stripped bond" rules. That guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of those amounts is not greater than the value
of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer who receives a servicing fee in excess of those amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
mortgage loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of those mortgage loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Securities," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Securities, and the original issue discount rules
of the Code would apply to the holder thereof. While securityholders would still
be treated as owners of beneficial interests in a grantor trust for federal
income tax purposes, the corpus of the trust could be viewed as excluding the
portion of the mortgage loans the ownership of which is attributed to the
servicer, or as including that portion as a second class of equitable interest.
Applicable Treasury regulations treat that arrangement as a fixed investment
trust, since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is
105
incidental to that purpose. In general, that recharacterization should not have
any significant effect upon the timing or amount of income reported by a
securityholder, except that the income reported by a cash method holder may be
slightly accelerated. See "--Stripped Securities" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
(4) Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its total adjusted basis in the mortgage loans and other assets
represented by the Security. In general, the total adjusted basis will equal the
securityholder's cost for the Standard Security, exclusive of accrued interest,
increased by the amount of any income previously reported for the Standard
Security and decreased by the amount of any losses previously reported for the
Standard Security and the amount of any distributions (other than accrued
interest) received thereon. Except as provided above with respect to market
discount on any mortgage loans, and except for certain financial institutions
subject to the provisions of Code Section 582(c), the gain or loss generally
would be capital gain or loss if the Standard Security was held as a capital
asset.
However, gain on the sale of a Standard Security will be treated as ordinary
income (1) if a Standard Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the securityholder's net investment in the conversion transaction at
120% of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income for any prior disposition of property that was held as part of
that transaction or (2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates. Long-term
capital gains of certain non-corporate taxpayers generally are subject to a
lower maximum tax rate (20%) than ordinary income or short-term capital gains of
those taxpayers (39.6%) for property held for more than one year. The maximum
tax rate for corporations currently is the same for both ordinary income and
capital gains.
STRIPPED SECURITIES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right
to receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" for principal payments and "stripped coupons" for
interest payments. For purposes of this discussion, Securities that are subject
to those rules will be referred to as "Stripped Securities." In the opinion of
Brown & Wood LLP and Thacher Proffitt & Wood, the Securities will be subject to
those rules if:
o the depositor or any of its affiliates retains (for its own account
or for purposes of resale), in the form of Retained Interest or
otherwise, an ownership interest in a portion of the payments on
the mortgage loans;
o the depositor or any of its affiliates is treated as having an
ownership interest in the mortgage loans to the extent it is paid
(or retains) servicing compensation in an amount greater than
reasonable consideration for servicing the mortgage loans (see
"--Standard Securities--Recharacterization of Servicing Fees"
above); and
o a Class of Securities are issued in two or more Classes or
Subclasses representing the right to non-pro-rata percentages of
the interest and principal payments on the mortgage loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" for its pro rata share of all or a portion of the principal
payments on each mortgage loan and/or "stripped coupons" for its pro rata share
of all or a portion of the interest payments on each mortgage loan, including
the Stripped Security's allocable share of the servicing fees paid to a
servicer, to the extent that those fees represent reasonable compensation for
services rendered. See the discussion above under "--Standard
Securities--Recharacterization of Servicing Fees." Although not free
106
from doubt, for purposes of reporting to securityholders of Stripped Securities,
the servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to those Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"--Standard Securities--General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as an obligation issued at an original issue discount on the date that the
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in some respects, particularly
where Stripped Securities are issued with respect to a Mortgage Pool containing
variable-rate mortgage loans, in the opinion of Brown & Wood LLP and Thacher
Proffitt & Wood, (1) the Grantor Trust Fund will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of Code
Section 7701(i), and (2) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286, Code Sections 1272 through 1275, and the OID Regulations.
Although it is possible that computations for Stripped Securities could be made
in one of the ways described below under "--Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more debt
instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for
original issue discount purposes, all payments on any Stripped Securities should
be totaled and treated as though they were made on a single debt instrument. The
pooling and servicing agreement will require that the trustee make and report
all computations described below using the approach described in this paragraph,
unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under these
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of that Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of that Stripped Security will be required to account for any discount
as market discount rather than original issue discount if either (1) the initial
discount for the Stripped Security was treated as zero under the de minimis
rule, or (2) no more than 100 basis points in excess of reasonable servicing is
stripped off the related mortgage loans. That market discount would be
reportable as described above under "--REMICs--Taxation of Owners of Regular
Securities--Market Discount," without regard to the de minimis rule therein,
assuming that a prepayment assumption is employed in that computation.
The holder of a Stripped Security will be treated as owning an interest
in each of the mortgage loans held by the Grantor Trust Fund and will recognize
an appropriate share of the income and expenses associated with the mortgage
loans. Accordingly, an individual, trust or estate that holds a Stripped
Security directly or through a pass-through entity will be subject to the
limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Stripped Security that
is a Subordinate Security, may deduct losses incurred for the Stripped Security
as described above under "--Standard Securities General."
STATUS OF STRIPPED SECURITIES
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the mortgage loans. Although the issue is not free from doubt, in the opinion
of Brown & Wood LLP and Thacher Proffitt & Wood, except for a trust fund
consisting of Unsecured Home Improvement Loans, Stripped Securities owned by
applicable holders should be considered to represent "real estate assets" within
the meaning of Code Section 856(c)(4)(A), "obligation [ s ] . . . principally
secured by an interest in real property which is . . . . residential real
estate" within the meaning of Code Section 860G(a)(3)(A), and "loans . . .
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount)
107
income attributable to Stripped Securities should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the mortgage
loans and interest on those mortgage loans qualify for that treatment. The
application of those Code provisions to Buydown Mortgage Loans is uncertain. See
"--Standard Securities--Tax Status" above.
TAXATION OF STRIPPED SECURITIES
ORIGINAL ISSUE DISCOUNT. Except as described above under "--General,"
each Stripped Security will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount for a
Stripped Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, which may be before the receipt of the cash attributable to that
income. Based in part on the issue discount required to be included in the
income of a holder of a Stripped Security in any taxable year likely will be
computed generally as described above under "--REMICs-- Taxation of Owners of
Regular Securities--Original Issue Discount" and "--Variable Rate Regular
Securities." However, with the apparent exception of a Stripped Security
qualifying as a market discount obligation as described above under "--General,"
the issue price of a Stripped Security will be the purchase price paid by each
holder thereof, and the stated redemption price at maturity will include the
total amount of the payments to be made on the Stripped Security to that
securityholder, presumably under the Prepayment Assumption, other than qualified
stated interest.
If the mortgage loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of that
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each mortgage loan represented
by that securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in the Stripped Security to recognize a
loss (which may be a capital loss) equal to that portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or
all of the interest payments with respect to the Stripped Securities will not be
made if the mortgage loans are prepaid could lead to the interpretation that
these interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, these regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of these principles could lead to the characterization of gain on
the sale of contingent interest Stripped Securities as ordinary income.
Investors should consult their tax advisors regarding the appropriate tax
treatment of Stripped Securities.
SALE OR EXCHANGE OF STRIPPED SECURITIES. Sale or exchange of a Stripped
Security before its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the securityholder's
adjusted basis in that Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code Section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, the subsequent
purchaser will be required for federal income tax purposes to accrue and report
that excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a securityholder other than an original securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
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PURCHASE OF MORE THAN ONE CLASS OF STRIPPED SECURITIES. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes those Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
POSSIBLE ALTERNATIVE CHARACTERIZATION. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the securityholder may be treated
as the owner of
(1) one installment obligation consisting of the Stripped
Security's pro rata share of the payments attributable to principal on
each mortgage loan and a second installment obligation consisting of the
Stripped Security's pro rata share of the payments attributable to
interest on each mortgage loan;
(2) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each mortgage loan;
or
(3) a separate installment obligation for each mortgage loan,
representing the Stripped Security's pro rata share of payments of
principal and/or interest to be made with respect thereto.
Alternatively, the holder of one or more Classes of Stripped Securities may be
treated as the owner of a pro rata fractional undivided interest in each
mortgage loan to the extent that a Stripped Security, or Classes of Stripped
Securities, represents the same pro rata portion of principal and interest on
each mortgage loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to the
remainder. Treasury regulations regarding original issue discount on stripped
obligations make the foregoing interpretations less likely to be applicable. The
preamble to these regulations states that they are premised on the assumption
that an aggregation approach is appropriate for determining whether original
issue discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Securities and the resultant differing treatment of income recognition,
securityholders are urged to consult their own tax advisors regarding the proper
treatment of Stripped Securities for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The trustee will furnish, within a reasonable time after the end of each
calendar year, to each securityholder at any time during that year, information
(prepared on the basis described above) necessary to enable the securityholder
to prepare its federal income tax returns. This information will include the
amount of original issue discount accrued on Securities held by persons other
than securityholders exempted from the reporting requirements. However, the
amount required to be reported by the trustee may not be equal to the proper
amount of original issue discount required to be reported as taxable income by a
securityholder, other than an original securityholder who purchased at the issue
price. In particular, in the case of Stripped Securities, the reporting will be
based upon a representative initial offering price of each Class of Stripped
Securities except as set forth in the prospectus supplement. The trustee will
also file the original issue discount information with the Internal Revenue
Service. If a securityholder fails to supply an accurate taxpayer identification
number or if the Secretary of the Treasury determines that a securityholder has
not reported all interest and dividend income required to be shown on his
federal income tax return, 31% backup withholding may be required in respect of
any reportable payments, as described above under "--REMICs--Backup
Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Security evidences ownership in mortgage loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States
109
withholding tax, or any applicable lower rate as may be provided for interest by
an applicable tax treaty. Accrued original issue discount recognized by the
securityholder on the sale or exchange of that Security also will be subject to
federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in mortgage loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and these persons will
be subject to the same certification requirements, described above under
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
For each series of Partnership Securities or Debt Securities, Brown &
Wood LLP and Thacher Proffitt & Wood will deliver its opinion that the trust
fund will not be a taxable mortgage pool or an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the related Agreement
and related documents will be complied with, and on counsel's opinion 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.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP SECURITIES AND DEBT
SECURITIES
For federal income tax purposes, (1) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans_._._. secured by an interest in real
property which is_._._. residual real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (2) interest on Debt Securities held by a real
estate investment trust will not be treated as "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), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund based on capital accounts.
TAXATION OF DEBT SECURITYHOLDERS
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Brown & Wood LLP and Thacher Proffitt & Wood
will deliver its opinion that the Debt Securities will be classified as
indebtedness for federal income tax purposes. The discussion below assumes this
characterization of the Debt Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
Partnership Trust, and the timing and amount of income allocable to holders of
those Debt Securities may be different than as described in the following
paragraph.
Debt Securities generally will be subject to the same rules of taxation
as Regular Securities issued by a REMIC, as described above, except that (1)
income reportable on Debt Securities is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (2) the
special rule treating a portion of the gain on sale or exchange of a Regular
Security as ordinary income is inapplicable to Debt Securities. See
"--REMICs--Taxation of Owners of Regular Securities" and "--Sale or Exchange of
Regular Securities."
110
TAXATION OF OWNERS OF PARTNERSHIP SECURITIES
(1) Treatment of the Partnership Trust Fund as a Partnership
If specified in the prospectus supplement, the depositor will agree, and
the securityholders will agree by their purchase of Securities, to treat the
Partnership 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 Partnership
Trust Fund, the partners of the partnership being the securityholders (including
the depositor), and the Debt Securities (if any) being debt of the partnership.
However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Securities, the Debt Securities, and the
depositor 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 one or more of the classes of Partnership Securities have some features
characteristic of debt, the Partnership Securities might be considered debt of
the depositor or the Partnership Trust Fund. This characterization would not
result in materially adverse tax consequences to securityholders as compared to
the consequences from treatment of the Partnership Securities as equity in a
partnership, described below. The following discussion assumes that the
Partnership Securities represent equity interests in a partnership.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each securityholder will be required to separately
take into account that holder's allocated share of income, gains, losses,
deductions and credits of the Partnership Trust Fund. It is anticipated that the
Partnership Trust Fund's income will consist primarily of interest earned on the
mortgage loans (including appropriate adjustments for market discount, original
issue discount and bond premium) as described above under "--Grantor Trust
Funds--Standard Securities--General," and "--Premium and Discount" and any gain
upon collection or disposition of mortgage loans.
The Partnership Trust Fund's deductions will consist primarily of interest
accruing with respect to the Debt Securities, servicing and other fees, and
losses or deductions upon collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Agreement and related documents). The Agreement will provide, in
general, that the securityholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of:
(1) the interest that accrues on the Partnership Securities in
accordance with their terms for that Due Period, including interest
accruing at the applicable Interest Rate for that Due Period and
interest on amounts previously due on the Partnership Securities but not
yet distributed;
(2) any Partnership Trust Fund income attributable to discount
on the mortgage loans that corresponds to any excess of the principal
amount of the Partnership Securities over their initial issue price; and
(3) any other amounts of income payable to the securityholders
for that Due Period.
This allocation will be reduced by any amortization by the Partnership
Trust Fund of premium on mortgage loans that corresponds to any excess of the
issue price of Partnership Securities over their principal amount. All remaining
taxable income of the Partnership Trust Fund will be allocated to the depositor.
Based on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the Internal Revenue
Service would not require a greater amount of income to be allocated to
securityholders. Moreover, even under the foregoing method of allocation,
securityholders may be allocated income equal to the entire Interest Rate plus
the other items described above even
111
though the trust fund might not have sufficient cash to make current cash
distributions of that amount. Thus, cash basis holders will in effect be
required to report income from the Partnership Securities on the accrual basis
and securityholders may become liable for taxes on Partnership Trust Fund income
even if they have not received cash from the Partnership Trust Fund to pay those
taxes.
Part or all of the taxable income allocated to a securityholder that is
a pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to that holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
master servicer but not interest expense) allocable to an individual, estate or
trust securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "--Grantor Trust Funds--Standard
Securities--General." Accordingly, those deductions might be disallowed to the
individual in whole or in part and might result in that holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to that
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization for each mortgage loan would be
calculated in a manner similar to the description above under "--Grantor Trust
Funds--Standard Securities--General" and "--Premium and Discount."
Notwithstanding that description, it is intended that the Partnership Trust Fund
will make all tax calculations relating to income and allocations to
securityholders on a total basis for all mortgage loans held by the Partnership
Trust Fund rather than on a mortgage loan-by-mortgage loan basis. If the
Internal Revenue Service were to require that these calculations be made
separately for each mortgage loan, the Partnership Trust Fund might be required
to incur additional expense, but it is believed that there would not be a
material adverse effect on securityholders.
(3) Discount and Premium
It is not anticipated that the mortgage loans will have been issued with
original issue discount and, therefore, the Partnership Trust Fund should not
have original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the mortgage loans may be greater or less than the
remaining principal balance of the mortgage loans at the time of purchase. If
so, the mortgage loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on a total basis, but might be required to recompute it on a
mortgage loan-by-mortgage loan basis.)
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include that
discount in income currently as it accrues over the life of the mortgage loans
or to offset that premium against interest income on the mortgage loans. As
indicated above, a portion of that market discount income or premium deduction
may be allocated to securityholders.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed
to terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If that termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "old partnership")
to a new Partnership Trust Fund (the "new partnership") in exchange for
interests in the new partnership. Those interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when the constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Partnership Trust Fund might
not be able to comply due to lack of data.
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(5) Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of
Partnership Securities in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Securities sold. A
securityholder's tax basis in an Partnership Security will generally equal the
holder's cost increased by the holder's share of Partnership Trust Fund income
(includible in income) and decreased by any distributions received with respect
to that Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single total adjusted tax basis in those
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of that total tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to those special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a securityholder is required to recognize a total amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the total cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the Partnership Securities.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will
be determined each Due Period and the tax items for a particular Due Period will
be apportioned among the securityholders in proportion to the principal amount
of Partnership Securities owned by them as of the close of the last day of that
Due Period. As a result, a holder purchasing Partnership Securities may be
allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the securityholders.
The depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
(7) Section 731 Distributions
In the case of any distribution to a securityholder, no gain will be
recognized to that securityholder to the extent that the amount of any money
distributed for that Security exceeds the adjusted basis of that
securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds that securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a securityholder, no
loss will be recognized except upon a distribution in liquidation of a
securityholder's interest. Any gain or loss recognized by a securityholder will
be capital gain or loss.
(8) Section 754 Election
If a securityholder sells its Partnership Securities at a profit (loss),
the purchasing securityholder will have a higher (lower) basis in the
Partnership Securities than the selling securityholder had. The tax basis of the
Partnership Trust Fund's assets would not be adjusted to reflect that higher (or
lower) basis unless the Partnership Trust Fund were
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to file an election under Section 754 of the Code. To avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Partnership
Trust Fund will not make that election. As a result, securityholder might be
allocated a greater or lesser amount of Partnership Trust Fund income than would
be appropriate based on their own purchase price for Partnership Securities.
(9) Administrative Matters
The trustee is required to keep or have kept complete and accurate books
of the Partnership Trust Fund. These books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The trustee will file a
partnership information return (Form 1065) with the Internal Revenue Service for
each taxable year of the Partnership Trust Fund and will report each
securityholder's allocable share of items of Partnership Trust Fund income and
expense to holders and the Internal Revenue Service on Schedule K-1. The trustee
will provide the Schedule K-1 information to nominees that fail to provide the
Partnership Trust Fund with the information statement described below and these
nominees will be required to forward that information to the beneficial owners
of the Partnership Securities. Generally, holders must file tax returns that are
consistent with the information return filed by the Partnership Trust Fund or be
subject to penalties unless the holder notifies the Internal Revenue Service of
all those inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership Securities
so held. This information includes (1) the name, address and taxpayer
identification number of the nominee and (2) as to each beneficial owner (a) the
name, address and identification number of that person, (b) whether that 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 Partnership Securities
that were held, bought or sold on behalf of that person throughout the year. In
addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish that
information statement to the Partnership Trust Fund. The information referred to
above for any calendar year must be furnished to the Partnership Trust Fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Partnership Trust Fund with the information described
above may be subject to penalties.
Unless another designation is made, the depositor will be designated as
the tax matters partner in the pooling and servicing agreement and, as the tax
matters partner, will be responsible for representing the securityholders in any
dispute with the Internal Revenue Service. 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 until three years after the date on which the partnership information
return is filed. Any adverse determination following an audit of the return of
the Partnership Trust Fund by the appropriate taxing authorities could result in
an adjustment of the returns of the securityholders, and, under certain
circumstances, a securityholder may be precluded from separately litigating a
proposed adjustment to the items of the Partnership Trust Fund. An adjustment
could also result in an audit of a securityholder's returns and adjustments of
items not related to the income and losses of the Partnership Trust Fund.
(10) Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership 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 Partnership Trust
Fund would be engaged in a trade or business in the United States for those
purposes, the Partnership Trust Fund will withhold as if it were so engaged to
protect the Partnership Trust Fund from possible adverse consequences of a
failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable
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income that is allocable to securityholders who are Non-U.S. Persons pursuant to
Section 1446 of the Code, as if that income were effectively connected to a U.S.
trade or business, at a rate of 35% for Non-U.S. Persons that are taxable as
corporations and 39.6% for all other foreign holders. Amounts withheld will be
deemed distributed to the Non-U.S. Person securityholders. Subsequent adoption
of Treasury regulations or the issuance of other administrative pronouncements
may require the Partnership Trust Fund to change its withholding procedures. In
determining a holder's withholding status, the Partnership Trust Fund may rely
on Form W-8, Form W-9 or the holder's certification of nonforeign status signed
under penalties of perjury.
Each Non-U.S. Person 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 Partnership Trust Fund's income. Each
Non-U.S. Person holder must obtain a taxpayer identification number from the
Internal Revenue Service and submit that number to the Partnership Trust Fund on
Form W-8 to assure appropriate crediting of the taxes withheld. A Non-U.S.
Person holder generally would be entitled to file with the Internal Revenue
Service a claim for refund for taxes withheld by the Partnership Trust Fund,
taking the position that no taxes were due because the Partnership Trust Fund
was not engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a securityholder who is a Non-U.S. Person generally will be
considered guaranteed payments to the extent that those payments are determined
without regard to the income of the Partnership Trust Fund. If these interest
payments are properly characterized as guaranteed payments, then the interest
may not be considered "portfolio interest." As a result, securityholders who are
Non-U.S. Persons may be subject to United States federal income tax and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable treaty. In that case, a Non-U.S. Person holder would only be entitled
to claim a refund for that portion of the taxes in excess of the taxes that
should be withheld for the guaranteed payments.
(11) Backup Withholding
Distributions made on the Partnership Securities and proceeds from the
sale of the Partnership Securities will be subject to a "backup" withholding tax
of 31% if, in general, the securityholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Securities and Debt
Securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local tax consequences of the acquisition, ownership, and
disposition of the Securities offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors for the various tax consequences of investments in the Securities
offered hereunder.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which these
115
plans, accounts or arrangements are invested, that are subject to Title I of
ERISA and Section 4975 of the Code ("Plans") and on persons who are fiduciaries
for those Plans in connection with the investment of Plan assets. Some 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 Section 3(33) of ERISA) are not subject to ERISA requirements.
Therefore, assets of these plans may be invested in Securities without regard to
the ERISA considerations described below, subject to the provisions of other
applicable federal, state and local law. Any of these plans that is qualified
and exempt from taxation under Sections 401(a) and 501(a) of the Code, however,
is subject to the prohibited transaction rules set forth in Section 503 of the
Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. 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, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the mortgage loans,
Contracts, Unsecured Home Improvement Loans, Agency Securities, Mortgage
Securities and other assets included in a related trust fund to be deemed Plan
assets. Section 2510.3-101 of the regulations of the United States Department of
Labor ("DOL") provides that when a Plan acquires an equity interest in an
entity, the Plan's assets include both an equity interest and an undivided
interest in each of the underlying assets of the entity, unless certain
exceptions not applicable here apply, or unless the equity participation in the
entity by "benefit plan investors" (i.e., Plans and certain employee benefit
plans not subject to ERISA) is not "significant," both as defined therein. For
this purpose, in general, equity participation by benefit plan investors will be
"significant" on any date if 25% or more of the value of any class of equity
interests in the entity is held by benefit plan investors. To the extent the
Securities are treated as equity interests for purposes of DOL regulations
Section 2510.3-101, equity participation in a trust fund will be significant on
any date if immediately after the most recent acquisition of any Security, 25%
or more of any class of Securities is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice for those assets for a fee, is a fiduciary of the investing Plan. If the
mortgage loans, Contracts, Unsecured Home Improvement Loans, Agency Securities,
Mortgage Securities and other assets included in a trust fund constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets, such as the servicer or master servicer, may be deemed to be a
Plan "fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code for the investing Plan.
In addition, if the mortgage loans, Contracts, Unsecured Home Improvement Loans,
Agency Securities, Mortgage Securities and other assets included in a trust fund
constitute Plan assets, the purchase of Securities by a Plan, as well as the
operation of the trust fund, may constitute or involve a prohibited transaction
under ERISA and the Code.
The DOL issued an individual exemption to DBSI (Prohibited Transaction
Exemption ("PTE") 97-34, Exemption Application No. D-10245 and D-10246, 62 Fed.
Reg. 39021 (1997) as amended by PTE 2000- 58, Exemption Application No. D-10829,
65 Fed. Reg. 67765 (2000)) (the "Exemption") that generally exempts from the
application of the prohibited transaction provisions of Sections 406(a) and 407
of ERISA, and the excise taxes imposed on those prohibited transactions pursuant
to Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase, sale
and holding of Securities underwritten by an underwriter, that (1) represent a
beneficial ownership interest in the assets of an issuer and entitle the holder
to pass-through payments of principal, interest and/or other payments made with
respect to the assets of the issuer or (2) are denominated as a debt instrument
and represent an interest in the issuer, provided that certain conditions set
forth in the Exemption are satisfied.
116
For purposes of this Section "ERISA Considerations," the term
"underwriter" will include (a) DBSI, (b) any person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with DBSI, and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager for a
class of Securities.
The Exemption sets forth six general conditions that must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder:
(1) The acquisition of Securities by a Plan must be on terms
that are at least as favorable to the Plan as they would be in an
arm's-length transaction with an unrelated party.
(2) The Exemption only applies to Securities evidencing rights
and interests not subordinated to the rights and interests evidenced by
the other Securities of the same series unless none of the mortgage
loans has a loan-to-value ratio or combined loan-to-value ratio at the
date of issuance of the Securities that exceeds 100%.
(3) The Securities at the time of acquisition by the Plan must
be rated in one of the four highest generic rating categories by
Standard & Poor's Ratings Services, a division of the McGraw-Hill
Companies, Inc.
("S&P"), Moody's Investors Service ("Moody's") or Fitch, Inc. ("Fitch").
(4) The trustee cannot be an affiliate of any member of the
"Restricted Group," which consists of the underwriter, the depositor,
the trustee, the master servicer, any servicer, any insurer and any
obligor on Assets constituting more than 5% of the total unamortized
principal balance of the Assets in the related trust fund as of the date
of initial issuance of the Securities.
(5) The sum of all payments made to and retained by the
underwriter(s) must represent not more than reasonable compensation for
underwriting the Securities; the sum of all payments made to and
retained by the depositor pursuant to the assignment of the Assets to
the related trust fund must represent not more than the fair market
value of those obligations; and the sum of all payments made to and
retained by the servicer must represent not more than reasonable
compensation for that person's services under the related Agreement and
reimbursement of that person's reasonable expenses in connection
therewith.
(6) The investing Plan must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended.
In addition, the trust fund must meet the following requirements: (1)
the assets of the trust fund must consist solely of assets of the type that have
been included in other investment pools; (2) securities evidencing interests in
those other investment pools must have been rated in one of the four highest
generic rating categories by S&P, Moody's or Fitch for at least one year before
the Plan's acquisition of the securities; and (3) securities evidencing
interests in those other investment pools must have been purchased by investors
other than Plans for at least one year before any Plan's acquisition of the
Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its
own determination that the general conditions set forth above will be satisfied
for that Security. However, to the extent Securities are subordinate, the
Exemption will not apply to an investment by a Plan. In addition, any Securities
representing a beneficial ownership interest in Unsecured Home Improvement Loans
or Revolving Credit Line Loans will not satisfy the general conditions of the
Exemption.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407 of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c) (1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Securities by Plans. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
117
the acquisition or holding of a Security on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of that Excluded Plan. For purposes of the Securities, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (2) of ERISA and the taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of
Securities in the initial issuance of Securities between the depositor
or an underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of
Plan assets in the Securities is (a) an obligor with respect to 5% or
less of the fair market value of the Assets or (b) an affiliate of that
person;
(2) the direct or indirect acquisition or disposition in the
secondary market of Securities by a Plan; and
(3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the issuer. The
depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied for the Securities so that the Exemption would
provide an exemption from the restrictions imposed by Sections 406(a) and (b) of
ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Section 4975(c) of the Code) for transactions in connection
with the servicing, management and operation of the Mortgage Pools, provided
that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if those restrictions are deemed to otherwise apply merely because a
person is deemed to be a "party in interest" (within the meaning of Section
3(14) of ERISA) or a "disqualified person" (within the meaning of Section
4975(e)(2) of the Code) with respect to an investing Plan by virtue of providing
services to the Plan (or by virtue of having certain specified relationships to
that person) solely as a result of the Plan's ownership of Securities.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations Section 2510.3-101, a Plan's investment in those
Securities ("Non-Equity Securities") would not cause the assets included in a
related trust fund to be deemed Plan assets. However, the depositor, the
servicer, the trustee, or underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because these parties may receive
certain benefits in connection with the sale of Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any of these
parties 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, Non-Equity Securities may not be purchased using the
assets of any Plan if any of the depositor, the servicer, the trustee or
underwriter has investment authority for those assets.
In addition, certain affiliates of the depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, 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 that holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
that Plan could be considered to give rise to an indirect prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
statutory or administrative 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,
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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. It should be noted,
however, that even if the conditions specified in one or more of these
exemptions are met, the scope of relief provided by these exemptions may not
necessarily cover all acts that might be construed as prohibited transactions.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to that investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary that proposes to cause a Plan to purchase Securities representing a
beneficial ownership interest in a pool of single-family residential first
mortgage loans, a Plan fiduciary should consider the applicability of PTCE 83-1,
which provides exemptive relief for certain transactions involving mortgage pool
investment trusts. The prospectus supplement for a series of Securities may
contain additional information regarding the application of the Exemption, PTCE
83-1 or any other exemption, with respect to the Securities offered thereby. In
addition, any Plan fiduciary that proposes to cause a Plan to purchase Strip
Securities should consider the federal income tax consequences of that
investment.
Any Plan fiduciary considering whether to purchase a Security on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to that investment.
The sale of Securities to a Plan is in no respect a representation by
the depositor or the underwriter that this investment meets all relevant legal
requirements for investments by Plans generally or any particular Plan, or that
this investment is appropriate for Plans generally or any particular Plan.
PRE-FUNDING ACCOUNTS
The Exemption also 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 Assets
supporting payments to securityholders, and having a value equal to no more than
25% of the total initial Security Balance of the related Securities, to be
transferred to the trust fund within the Pre-Funding Period, instead of
requiring that all the Assets 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 PreFunding Account
to the total principal amount of the Securities being offered (the
"Pre-Funding Limit") must not exceed 25%.
(2) All Subsequent Assets must meet the same terms and
conditions for eligibility as the original Assets used to create the
trust fund, which terms and conditions have been approved by at least
one rating agency.
(3) The transfer of the Subsequent Assets to the trust fund
during the Pre-Funding Period must not result in the Securities that are
to be covered by the Exemption receiving a lower credit rating from a
rating agency upon termination of the Pre-Funding Period than the rating
that was obtained at the time of the initial issuance of the Securities
by the trust fund.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Assets in the
trust fund at the end of the Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the Assets
transferred to the trust fund on the Closing Date.
(5) In order to ensure that the characteristics of the
Subsequent Assets are substantially similar to the original Assets that
were transferred to the trust fund,
119
o the characteristics of the Subsequent Assets must be
monitored by an insurer or other credit support provider
that is independent of the depositor; or
o an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided
to each rating agency rating the Securities, the
underwriter and the trustee) stating whether or not the
characteristics of the Subsequent Assets conform to the
characteristics described in the related prospectus
supplement and/or pooling and servicing agreement. In
preparing this letter, the independent accountant must use
the same type of procedures as were applicable to the
Assets transferred to the trust fund as of the Closing
Date.
(6) The Pre-Funding Period 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 the 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 prospectus or prospectus supplement must describe:
o the Pre-Funding Account and/or Capitalized Interest
Account used in connection with the Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the Pre-Funding
Limit for the trust fund; and o that the amounts remaining
in the Pre-Funding Account at the end of the Pre-Funding
Period will be remitted to securityholders as repayments
of principal.
(9) The Agreement must prescribe the Permitted Investments for
the Pre-Funding Account and/or Capitalized Interest Account and, if not
disclosed in the prospectus supplement, the terms and conditions for
eligibility of Subsequent Assets.
LEGAL INVESTMENT
The prospectus supplement will specify which classes of the Securities,
if any, will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA").
Generally, only classes of Offered Securities that (1) are rated in one of the
two highest rating categories by one or more rating agencies and (2) are part of
a series representing interests in, or secured by, a trust fund consisting of
loans secured by first liens on real property and originated by certain types of
originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA.
Those classes of Offered Securities qualifying as "mortgage related
securities" will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including,
but not limited to, state chartered savings banks, commercial banks, savings and
loan associations and insurance companies, as well as trustees and state
government employee retirement systems) created pursuant to or existing under
the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for those entities.
Pursuant to SMMEA, a number of states enacted legislation, on or before the
October 3, 1991 cut-off for those enactments, limiting to varying extents the
ability of certain entities (in particular, insurance companies) to invest in
mortgage related securities secured by liens on residential, or mixed
residential and commercial, properties, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA.
120
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage related
securities" without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in these securities, and national
banks may purchase these securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
ss.24 (Seventh), subject in each case to regulations that the applicable federal
regulatory authority may prescribe. In this connection, the Office of the
Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. ss.1.5), certain "Type IV
securities," defined in 12 C.F.R. ss.1.2(l) to include certain "residential
mortgage related securities." As so defined, "residential mortgage-related
security" means, in relevant part, "mortgage related security" within the
meaning of SMMEA. The National Credit Union Administration ("NCUA") has adopted
rules, codified at 12 C.F.R. Part 703, which permit federal credit unions to
invest in "mortgage related securities" under certain limited circumstances,
other than stripped mortgage related securities, residual interests in mortgage
related securities, and commercial mortgage related securities, unless the
credit union has obtained written approval from the NCUA to participate in the
"investment pilot program" described in 12 C.F.R. ss.703.140. Thrift
institutions that are subject to the jurisdiction of the Office of Thrift
Supervision (the "OTS") should consider the OTS' Thrift Bulletin 13a (December
1, 1998), "Management of Interest Rate Risk, Investment Securities, and
Derivatives Activities," before investing in any of the Offered Securities.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council ("FFIEC"), which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and
by the NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth
general guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
If specified in the prospectus supplement, other classes of Offered
Securities offered pursuant to this prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
classes under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase these Offered Securities,
may be subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any Offered
Securities, as certain classes or subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under those rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits provisions that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying," and with regard to any Offered Securities issued in
book-entry form, provisions that may restrict or prohibit investments in
securities that are issued in book-entry form.
Except as to the status of certain classes of Offered Securities as
"mortgage related securities," no representation is made as to the proper
characterization of the Offered Securities for legal investment, financial
institution regulatory, or other purposes, or as to the ability of particular
investors to purchase any Offered Securities under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity of
the Offered Securities.
121
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Securities of any class
constitute legal investments for them or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to that investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the supplements to this prospectus
will be offered in series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If
specified in the prospectus supplement, the Securities will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Bank Securities Inc. ("DBSI") acting as
underwriter with other underwriters, if any, named therein. In that event, the
prospectus supplement may also specify that the underwriters will not be
obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the depositor. In connection with
the sale of the Securities, underwriters may receive compensation from the
depositor or from purchasers of the Securities in the form of discounts,
concessions or commissions. The prospectus supplement will describe any
compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the Securities
will be distributed by DBSI acting as agent or in some cases as principal with
respect to Securities that it has previously purchased or agreed to purchase.
If DBSI acts as agent in the sale of Securities, DBSI will receive a selling
commission for each series of Securities, depending on market conditions,
expressed as a percentage of the total principal balance of the related mortgage
loans as of the Cut-off Date. The exact percentage for each series of Securities
will be disclosed in the prospectus supplement. To the extent that DBSI elects
to purchase Securities as principal, DBSI may realize losses or profits based
upon the difference between its purchase price and the sales price. The
prospectus supplement for any series offered other than through underwriters
will contain information regarding the nature of that offering and any
agreements to be entered into between the depositor and purchasers of Securities
of that series.
The depositor will indemnify DBSI and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments DBSI and any underwriters may be required to make in
respect thereof.
In the ordinary course of business, DBSI and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of those mortgage loans or interests therein, including the Securities. DBSI
performs management services for the depositor.
The depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of those purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. securityholders should consult
with their legal advisors in this regard before any reoffer or sale of
Securities.
As to each series of Securities, only those classes rated in one of the
four highest rating categories by any rating agency will be offered hereby. Any
lower rated or unrated class may be initially retained by the depositor, and may
be sold by the depositor at any time to one or more institutional investors.
122
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement on
Form S-3 under the Securities Act of 1933, as amended, with respect to the
Securities (the "Registration Statement"). This prospectus, which forms a part
of the Registration Statement, omits certain information contained in the
Registration Statement pursuant to the rules and regulations of the Commission.
The Registration Statement and the exhibits thereto can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices in
the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of these materials can also be
obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Depositor has filed the Registration Statement, including all exhibits
thereto, through the EDGAR system and therefore such materials should be
available by logging onto the Commission's web site. The Commission maintains
computer terminals providing access to the EDGAR system at each of the offices
referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7115). The Depositor did not participate in the preparation of
Fannie Mae's prospectus or its annual or quarterly reports or other financial
information and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac certificates
as well as Freddie Mac's most recent Information Statement and Information
Statement supplement and any quarterly report made available by Freddie Mac may
be obtained by writing or calling the Investor Inquiry Department of Freddie Mac
at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside Washington, D.C.
metropolitan area, telephone 800-336-3672; within Washington, D.C.
metropolitan area, telephone 703-759-8160). The Depositor did not participate in
the preparation of Freddie Mac's Offering Circular, Information Statement or any
supplement thereto or any quarterly report thereof and, accordingly, makes no
representation as to the accuracy or completeness of the information in those
documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund
referred to in the prospectus supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus
and prior to the termination of any offering of the Securities issued by that
trust fund will be deemed to be incorporated by reference in this prospectus and
to be a part of this prospectus from the date of the filing of those documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein will be deemed to be modified or superseded for all purposes
of this prospectus to the extent that a statement contained herein (or in the
prospectus supplement) or in any other subsequently filed document that also is
or is deemed to be incorporated by reference modifies or replaces that
statement. Any statement so modified or superseded will not be deemed, except as
so modified or superseded, to constitute a part of this prospectus.
The Trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, upon request, a copy of any or
all of the documents referred to above that have been or may be incorporated by
reference in this prospectus (not including exhibits to the information that is
incorporated by reference unless the
123
exhibits are specifically incorporated by reference into the information that
this prospectus incorporates). Requests for information should be directed to
the corporate trust office of the Trustee specified in the prospectus
supplement.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
securityholders of an investment in the Securities of a series, will be passed
upon for the depositor by Brown & Wood LLP, Washington D.C. or Thacher Proffitt
& Wood, New York, New York.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of Securities and no
trust fund will engage in any business activities or have any assets or
obligations before the issuance of the related series of Securities.
Accordingly, financial statements for a trust fund will generally not be
included in this prospectus or in the prospectus supplement.
RATING
As a condition to the issuance of any class of Offered Securities, they
must not be rated lower than investment grade; that is, they must be rated in
one of the four highest rating categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
address the likelihood of receipt by securityholders of all distributions on the
underlying mortgage loans. These ratings address the structural, legal and
issuer-related aspects associated with the securities, the nature of the
underlying assets and the credit quality of the guarantor, if any. Ratings on
mortgage pass-through certificates, mortgage-backed notes and other asset backed
securities do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which prepayments might differ from
those originally anticipated. As a result, securityholders might suffer a lower
than anticipated yield, and, in addition, holders of stripped interest
certificates in extreme cases might fail to recoup their initial investments.
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.
124
INDEX OF DEFINED TERMS
1986 Act ....................................................................................................80
1998 Policy Statement...........................................................................................121
Accrual Period...................................................................................................18
Accrual Securities...............................................................................................23
Accrued Security Interest........................................................................................26
Adjustable Rate Assets............................................................................................4
Agency Securities.................................................................................................4
Agreement ....................................................................................................35
ARM Contracts....................................................................................................10
ARM Loans .....................................................................................................7
ARM Unsecured Home Improvement Loans..............................................................................9
Asset Conservation Act...........................................................................................68
Asset Group ....................................................................................................23
Asset Seller .....................................................................................................4
Assets .....................................................................................................4
Available Distribution Amount....................................................................................24
Balloon Payment Assets............................................................................................5
Bankruptcy Code..................................................................................................66
Beneficial Owner.................................................................................................31
Bi-weekly Assets..................................................................................................5
Book-Entry Securities............................................................................................24
borrower ....................................................................................................59
Buy Down Assets...................................................................................................4
Buydown Funds....................................................................................................79
Buydown Mortgage Loans...........................................................................................21
Buydown Period...................................................................................................21
Capitalized Interest Account.....................................................................................16
Cash Flow Agreement..............................................................................................17
Cedel ....................................................................................................30
CERCLA ....................................................................................................67
Certificates ....................................................................................................23
Charter Act ....................................................................................................12
Code ....................................................................................................75
Collection Account...............................................................................................39
Commission .....................................................................................................7
contract borrower................................................................................................61
contract lender..................................................................................................61
Contract Rate....................................................................................................10
Contracts .....................................................................................................4
Convertible Assets................................................................................................5
Cooperative ....................................................................................................60
Cooperative Corporation..........................................................................................32
Cooperative Loans................................................................................................60
Cooperatives .....................................................................................................6
Covered Trust....................................................................................................56
CPR ....................................................................................................20
credit support...................................................................................................17
Crime Control Act................................................................................................71
Cut-off Date .....................................................................................................7
DBSI ...................................................................................................122
Debt Securities..................................................................................................75
Definitive Securities............................................................................................24
Determination Date...............................................................................................24
disqualified organization........................................................................................91
Distribution Date................................................................................................18
DOL ...................................................................................................116
DTC ....................................................................................................30
Due Period ....................................................................................................24
due-on-sale ................................................................................................22, 63
EDGAR ...................................................................................................123
equity of redemption.............................................................................................63
ERISA ...................................................................................................115
ERISA Considerations............................................................................................117
Euroclear Operator...............................................................................................32
European Depositaries............................................................................................32
excess servicing................................................................................................105
Exchange Act ....................................................................................................31
Excluded Plan...................................................................................................118
Exemption ...................................................................................................116
Fannie Mae .....................................................................................................4
FASIT ....................................................................................................75
FASIT Ownership Security.........................................................................................98
FASIT Provisions.................................................................................................75
FASIT Regular Securities.........................................................................................98
FASIT Securities.................................................................................................75
FDIC ....................................................................................................39
FFIEC ...................................................................................................121
FHA .....................................................................................................6
Financial Intermediary...........................................................................................32
Fitch ...................................................................................................117
Freddie Mac .....................................................................................................4
Freddie Mac Act..................................................................................................13
Freddie Mac Certificate Group....................................................................................13
Garn-St. Germain Act.............................................................................................69
GEM Assets .....................................................................................................5
Ginnie Mae .....................................................................................................4
GPM Assets .....................................................................................................5
Grantor Trust Fund...............................................................................................75
Grantor Trust Securities.........................................................................................75
Holder-in-Due-Course.............................................................................................74
Home Equity Loans.................................................................................................6
Home Improvement Contracts........................................................................................6
Housing Act ....................................................................................................11
HUD ....................................................................................................46
Increasing Payment Asset..........................................................................................5
Increasing Payment Assets.........................................................................................4
Indirect Participants............................................................................................31
Insurance Proceeds...............................................................................................24
Interest Rate....................................................................................................25
Interest Reduction Assets.........................................................................................5
land sale contract...............................................................................................61
Land Sale Contracts...............................................................................................6
125
Level Payment Assets..............................................................................................4
Liquidation Proceeds.............................................................................................25
Loan-to-Value Ratio...............................................................................................6
Lock-out Date.....................................................................................................8
Lock-out Period...................................................................................................8
Manufactured Home.................................................................................................9
Mark to Market Regulations.......................................................................................93
Moody's ...................................................................................................117
Mortgage Securities...............................................................................................4
Mortgaged Properties..............................................................................................6
Mortgages .....................................................................................................6
Multifamily Property..............................................................................................5
NCUA ...................................................................................................121
new partnership.................................................................................................112
New Regulations..................................................................................................96
Non-Equity Securities...........................................................................................118
Non-Pro Rata Security............................................................................................80
Non-U.S. Person..................................................................................................96
Nonrecoverable Advance...........................................................................................28
Notes ....................................................................................................23
OCC ...................................................................................................121
Offered Securities...............................................................................................24
OID Regulations..................................................................................................76
old partnership.................................................................................................112
Participants ....................................................................................................31
Parties in Interest.............................................................................................116
Partnership Securities...........................................................................................75
Partnership Trust Fund...........................................................................................75
Pass-Through Entity..............................................................................................91
PCBs ....................................................................................................67
Permitted Investments............................................................................................39
Plans ...................................................................................................116
pooling and servicing agreement..................................................................................35
Pre-Funded Amount................................................................................................16
Pre-Funding Account..............................................................................................16
Pre-Funding Limit...............................................................................................119
Pre-Funding Period...............................................................................................16
prepayment ....................................................................................................19
Prepayment Assumption............................................................................................81
Prepayment Premium................................................................................................8
PTCE ...................................................................................................118
Purchase Price...................................................................................................36
RCRA ....................................................................................................68
Record Date ....................................................................................................24
Refinance Loans...................................................................................................6
Regular Securities...............................................................................................76
Regular Securityholder...........................................................................................80
Related Proceeds.................................................................................................27
Relevant Depositary..............................................................................................32
Relief Act ....................................................................................................71
REMIC ....................................................................................................75
REMIC Pool ....................................................................................................76
REMIC Provisions.................................................................................................75
REMIC Regulations................................................................................................76
REMIC Securities.................................................................................................34
REO Property ....................................................................................................29
Residual Holders.................................................................................................87
Residual Securities..............................................................................................76
Restricted Group................................................................................................117
Retained Interest................................................................................................48
Revolving Credit Line Loans.......................................................................................8
RICO ....................................................................................................71
Rules ....................................................................................................32
S&P ...................................................................................................117
SBJPA of 1996....................................................................................................79
secured-creditor exemption.......................................................................................67
Securities ................................................................................................23, 26
Security ....................................................................................................35
Senior Securities................................................................................................23
Servicemen's Readjustment Act....................................................................................16
Servicing Standard...............................................................................................42
Single Family Property............................................................................................5
SMMEA ...................................................................................................120
SPA ....................................................................................................20
Special servicer.................................................................................................50
Standard Securities.............................................................................................103
Startup Day ....................................................................................................76
Step-up Rate Assets...............................................................................................4
Strip Securities.................................................................................................23
Stripped Agency Securities.......................................................................................14
Stripped Securities.............................................................................................106
Subordinate Securities...........................................................................................23
Subsequent Assets................................................................................................16
Superliens ....................................................................................................67
Taxable Mortgage Pools...........................................................................................76
Terms and Conditions.............................................................................................32
thrift institutions..............................................................................................90
Tiered REMICs....................................................................................................79
Title V ....................................................................................................70
Title VIII ....................................................................................................70
Type IV securities..............................................................................................121
U.S. Person ....................................................................................................93
UCC ....................................................................................................31
underwriter ...................................................................................................117
Unsecured Home Improvement Loans..................................................................................4
UST ....................................................................................................68
VA .....................................................................................................6
VA Guaranty Policy...............................................................................................47
Value .....................................................................................................6
Warranting Party.................................................................................................37
126
$161,593,000 (APPROXIMATE)
ACE SECURITIES CORP.
DEPOSITOR
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2001-NC1
ASSET BACKED PASS-THROUGH CERTIFICATES
PROSPECTUS SUPPLEMENT
DATED MARCH 19, 2001
LITTON LOAN SERVICING LP
SERVICER
DEUTSCHE BANC ALEX. BROWN
UNDERWRITER
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 CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered by this prospectus supplement
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Offered Certificates, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
until June 19, 2001.