PROSPECTUS SUPPLEMENT
dated January 29, 2002 (to Prospectus dated September 25, 2001)
$200,000,000
[insert Impac logo]
IMPAC FUNDING CORPORATION
MASTER SERVICER
IMPAC SECURED ASSETS CORP.
COMPANY
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2002-1
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON
PAGE S-9 IN THIS PROSPECTUS SUPPLEMENT.
THE TRUST
The trust will consist primarily of a pool of one- to four-family fixed-rate
first lien residential mortgage loans divided into two loan groups. The trust
will be represented by fourteen classes of certificates, eleven of which are
offered under this prospectus supplement.
CREDIT ENHANCEMENT
The offered certificates will have credit enhancement in the form of
o excess interest and overcollateralization; and
o subordination of other classes of certificates.
The price to investors will vary from time to time and will be determined at the
time of sale. The proceeds to the company from the offering will be
approximately 101.43% of the aggregate certificate principal balance of the
offered certificates, plus accrued interest from the cut-off date on the offered
certificates, other than the Class A-I-1 Certificates, less expenses estimated
to be approximately $340,000. SEE "METHOD OF DISTRIBUTION" IN THIS PROSPECTUS
SUPPLEMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. 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.
BEAR, STEARNS & CO. INC.
UNDERWRITER
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY 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 provide progressively 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.
The company's principal offices are located at 1401 Dove Street, Newport Beach,
CA 92660 and its phone number is (949) 475-3600.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary of Prospectus Supplement................................................................................S-3
Risk Factors....................................................................................................S-9
The Mortgage Pool..............................................................................................S-18
Yield on the Certificates......................................................................................S-59
Description of the Certificates................................................................................S-77
Pooling and Servicing Agreement................................................................................S-86
Federal Income Tax Consequences................................................................................S-89
Method of Distribution.........................................................................................S-92
Secondary Market...............................................................................................S-93
Legal Opinions.................................................................................................S-93
Ratings........................................................................................................S-93
Legal Investment...............................................................................................S-94
ERISA Considerations...........................................................................................S-94
Glossary.......................................................................................................S-96
Annex I-- Global Clearance, Settlement
and Tax Documentation Procedures..............................................................................I-1
S-2
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE OFFERED
CERTIFICATES AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF
THE OFFERED CERTIFICATES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS. A GLOSSARY IS INCLUDED AT THE END OF THIS
PROSPECTUS SUPPLEMENT. CAPITALIZED TERMS USED BUT NOT DEFINED IN THE GLOSSARY AT
THE END OF THIS PROSPECTUS SUPPLEMENT HAVE THE MEANINGS ASSIGNED TO THEM IN THE
GLOSSARY AT THE END OF THE PROSPECTUS.
Title of Series..................... Impac Secured Assets Corp., Mortgage
Pass-Through Certificates, Series 2002-1.
Cut-off Date........................ January 1, 2002.
Closing Date........................ January 31, 2002.
Company............................. Impac Secured Assets Corp., an affiliate
of Impac Funding Corporation.
Seller.............................. Impac Funding Corporation.
Master Servicer..................... Impac Funding Corporation.
Subservicer......................... GMAC Mortgage Corporation.
Trustee............................. Bankers Trust Company of California, N.A.
Distribution Date................... Distributions on the offered certificates
will be made on the 25th day of each
month or, if the 25th day is not a
business day, on the next business day,
beginning in February 2002.
Offered Certificates................ The classes of offered certificates and
their pass-through rates and certificate
principal balances or notional amounts
are set forth in the table below.
S-3
OFFERED CERTIFICATES
PASS-THROUGH INITIAL CERTIFICATE INITIAL RATING
CLASS RATE PRINCIPAL BALANCE (S&P/MOODY'S/FITCH)(1) DESIGNATION
- ----- ---- ----------------- ---------------------- -----------
CLASS A CERTIFICATES:
A-I-1 Adjustable Rate(2)(3) $ 30,800,000 AAA/Aaa/AAA Senior/Sequential/Adjustable Rate
A-I-2 4.59%(3) $ 17,900,000 AAA/Aaa/AAA Senior/Sequential/Fixed Rate
A-I-3 5.57%(3) $ 19,100,000 AAA/Aaa/AAA Senior/Sequential/Fixed Rate
A-I-4 6.29%(3)(4) $ 25,500,000 AAA/Aaa/AAA Senior/Fixed Rate
A-I-5 6.75%(3)(4) $ 10,000,000 AAA/Aaa/AAA Senior/Fixed Rate
A-I-6 7.03%(3)(4) $ 25,244,000 AAA/Aaa/AAA Senior/Fixed Rate
A-II 6.50%(3)(4) $ 57,956,000 AAA/Aaa/AAA Senior/Fixed Rate
Senior/Interest Only/
A-IO (5) N/A(6) AAA/Aaa/AAA Step-Down Rate
Total Class A Certificates: $ 186,500,000
MEZZANINE CERTIFICATES:
M-1 7.00%(4)(7) $ 6,000,000 AA/Aa2/AA Mezzanine/Fixed Rate
M-2 7.00%(4)(7) $ 4,000,000 A/A2/A Mezzanine/Fixed Rate
B 7.00%(4)(7) $ 3,500,000 BBB/Baa2/BBB Mezzanine/Fixed Rate
Total Mezzanine Certificates: $ 13,500,000
Total offered certificates: $ 200,000,000
(1) SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
(2) One-month LIBOR plus 0.23% per annum.
(3) Subject to a cap equal to (i) until the distribution date in July
2004, the weighted average of the net mortgage rates on the
mortgage loans adjusted for the interest payable on the Class A-IO
Certificates and (ii) thereafter, the weighted average of the net
mortgage rates on the mortgage loans in the related loan group.
(4) The initial pass-through rate is subject to an increase of 0.50%
per annum on the first distribution date after the first possible
optional termination date.
(5) Subject to a cap equal to the weighted average of the net mortgage
rates on the mortgage loans, the pass-through rate for the Class
A-IO Certificates will be 7.75% per annum for the February 2002
through January 2003 distribution dates, 7.00% for the February
2003 to July 2003 distribution dates, 5.00% per annum for the
August 2003 through January 2004 distribution dates, and 4.00% per
annum for the February 2004 through July 2004 distribution dates.
The Class A-IO Certificates will only be entitled to interest for
the first 30 distribution dates.
(6) The Class A-IO Certificates will not have a certificate principal
balance and will not be entitled to distributions of principal. The
Class A-IO Certificates will accrue interest on their notional
amount. The initial notional amount of the Class A-IO Certificates
will be $26,750,000. For the February 2002 distribution date
through the July 2002 distribution date, the notional amount of the
Class A-IO Certificates will be the lesser of $26,750,000 and the
sum of the aggregate principal balance of the mortgage loans and
the amount on deposit in the pre-funding account, for the August
2002 distribution date through the January 2003 distribution date,
the lesser of $25,000,000 and the aggregate principal balance of
the mortgage loans, and for the February 2003 distribution date
through the July 2004 distribution date, the lesser of $20,000,000
and the aggregate principal balance of the mortgage loans.
(7) Subject to a cap equal to (i) until the distribution date in July
2004, the weighted average of the net mortgage rates on the
mortgage loans adjusted for the interest payable on the Class A-IO
Certificates and (ii) thereafter, the lesser of (a) the weighted
average of the net mortgage rates on the mortgage loans in loan
group 1 and (b) the weighted average of the net mortgage rates on
the mortgage loans in loan group 2.
S-4
THE TRUST
The company will establish a trust with respect to the Series 2002-1
Certificates, pursuant to a pooling and servicing agreement dated as of January
1, 2002 among the company, the master servicer and the trustee. The trust will
consist of the mortgage loans and a reserve fund. There are fourteen classes of
certificates representing the trust, eleven of which are offered by this
prospectus supplement.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and/or principal on the offered
certificates will be made only from payments received from the trust as
described below.
The Class C Certificates, the Class P Certificates and the Class R Certificates
are the classes of certificates that are not offered by this prospectus
supplement.
SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
THE MORTGAGE LOANS
The trust will initially contain approximately 815 conventional, one- to
four-family, fixed-rate mortgage loans secured by first liens on residential
mortgage properties. The initial mortgage loans have an aggregate principal
balance of approximately $155,898,142 as of January 1, 2002.
The initial mortgage loans have original terms to maturity of not greater than
30 years and the following characteristics as of January 1, 2002:
Range of mortgage rates 5.875% to 11.990%
(approximate):
Weighted average mortgage rate 8.177%
(approximate):
Weighted average remaining 342 months
term to stated maturity
(approximate):
Range of principal balances $40,000 to $749,271
(approximate):
Average principal balance: $191,286
Range of loan-to-value ratios 18.34% to 100.00%
(approximate):
Weighted average loan-to-value 80.41% ratio (approximate):
The initial mortgage loans have been divided into two loan groups, loan group 1
and loan group 2. The initial mortgage loans in loan group 1 have the following
characteristics as of January 1, 2002:
Range of mortgage rates 5.875% to 11.700%
(approximate):
Weighted average mortgage rate 8.431%
(approximate):
Weighted average remaining 341 months
term to stated maturity
(approximate):
Range of principal balances $40,000 to $524,115
(approximate):
Average principal balance: $154,504
Range of loan-to-value ratios 19.20% to 100.00%
(approximate):
Weighted average loan-to-value 83.71%
ratio (approximate):
The initial mortgage loans in loan group 2 have the following characteristics as
of January 1, 2002:
S-5
Range of mortgage rates 6.125% to 11.990%
(approximate):
Weighted average mortgage rate 7.615%
(approximate):
Weighted average remaining 344 months
term to stated maturity
(approximate):
Range of principal balances $302,181 to $749,271
(approximate):
Average principal balance: $404,314
Range of loan-to-value ratios 18.34% to 95.00%
(approximate):
Weighted average loan-to-value 73.11%
ratio (approximate):
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
PRE-FUNDING ACCOUNT
On or before March 31, 2002, the Company may sell and the Trustee will be
obligated to purchase, on behalf of the trust, subsequent mortgage loans to be
included in the mortgage pool.
On the closing date, the Company will pay to the Trustee an amount equal to
$44,101,959, which will be held by the Trustee in the pre- funding account. The
amount on deposit in the pre-funding account will be reduced by the amount
thereof used to purchase subsequent mortgage loans during the period from the
closing date up to and including March 31, 2002. The Trustee will purchase
approximately $30,468,264 in conforming loans for loan group 1 and approximately
$13,633,695 in non- conforming loans for loan group 2 from the amount held in
the pre-funding account. Any amounts remaining in the pre-funding account after
March 31, 2002 will be distributed on the next distribution date to the holders
of the offered certificates.
INTEREST COVERAGE ACCOUNT
On the closing date, the Company will pay to the Trustee for deposit in an
interest coverage account, an amount which will be applied by the Trustee to
cover shortfalls in the amount of interest generated by the mortgage loans
attributable to the pre- funding feature.
FOR ADDITIONAL INFORMATION REGARDING THE INTEREST COVERAGE ACCOUNT, SEE
"DESCRIPTION OF THE CERTIFICATES--INTEREST COVERAGE ACCOUNT" IN THIS PROSPECTUS
SUPPLEMENT.
THE OFFERED CERTIFICATES
PRIORITY OF DISTRIBUTIONS. In general, on any distribution date, funds available
for distribution from payments and other amounts received on the mortgage loans
will be distributed in the following order:
INTEREST DISTRIBUTIONS
first, to pay current interest and any previously
unpaid interest on the Class A Certificates; and
second, to pay current interest and any previously unpaid interest on Class M-1
Certificates, the Class M-2 Certificates and the Class B Certificates, in that
order of priority.
PRINCIPAL DISTRIBUTIONS
to pay principal (including the payment of amounts to create and maintain
overcollateralization) on the Class A Certificates (other than the Class A-IO
Certificates) and the Mezzanine Certificates, but only in the order of priority
and in the amounts described herein.
The Class A-I-1, Class A-I-2, Class A-I-3, Class A- I-4, Class A-I-5 and Class
A-I-6 Certificates will primarily be entitled to distributions from loan group 1
and the Class A-II Certificates will primarily be entitled to distributions from
loan group 2. The remaining classes of certificates will be entitled to receive
distributions from both loan
S-6
groups. In some circumstances, however, the Class A-I-1, Class A-I-2, Class
A-I-3, Class A-I- 4, Class A-I-5 and Class A-I-6 Certificates, and the Class
A-II Certificates may receive distributions from the other loan group.
SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
The Class A-IO Certificates are interest-only certificates. The notional amount
of the Class A-IO Certificates for the February 2002 through July 2002
distribution dates is equal to the lesser of $26,750,000 and the sum of the
aggregate principal balance of the mortgage loans and the amount on deposit in
the pre- funding account, for the August 2002 distribution date through the
January 2003 distribution date is equal to the lesser of $25,000,000 and the
aggregate principal balance of the mortgage loans, and for the February 2003
distribution date through the July 2004 distribution date is equal to the lesser
of $20,000,000 and the aggregate principal balance of the mortgage loans.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the offered
certificates consists of excess spread, overcollateralization, and the
subordination provided to the more senior classes of certificates by the more
subordinate classes of certificates as described under "Description of the
Certificates--Allocation of Losses; Subordination" in this prospectus
supplement.
OPTIONAL TERMINATION
At its option, the holder of the Class C Certificates (or, if there is no single
holder, the majority holder of the Class C Certificates) may purchase all of the
mortgage loans, together with any properties in respect thereof 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, and
properties acquired in respect thereof, remaining in the trust has been reduced
to less than or equal to 10% of the sum of the aggregate principal balance of
the initial mortgage loans as of the cut-off date and the amount on deposit in
the pre-funding account on the closing date.
SEE "POOLING AND SERVICING AGREEMENT-- TERMINATION" IN THIS PROSPECTUS
SUPPLEMENT.
FEDERAL INCOME TAX CONSEQUENCES
Elections will be made to treat the trust (excluding the reserve fund) as
comprising multiple real estate mortgage investment conduits for federal income
tax purposes.
SEE "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT.
RATINGS
When issued, the offered certificates will receive the ratings set forth on page
S-4 of this prospectus supplement. The ratings on the offered certificates
address the likelihood that holders of the offered certificates will receive all
distributions on the underlying mortgage loans to which they are entitled.
However, the ratings do not address the possibility that certificateholders
might suffer a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold a security and is
subject to change or withdrawal at any time by the assigning rating agency. The
ratings also do not address the rate of principal prepayments on the mortgage
loans. In particular, the rate of prepayments, if different than originally
anticipated, could adversely affect the yield realized by holders of the offered
certificates.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
S-7
LEGAL INVESTMENT
The offered certificates, other than the Class M- 2 Certificates and the Class B
Certificates, will constitute "mortgage related securities" for purposes of
SMMEA. 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.
ERISA CONSIDERATIONS
The offered certificates may be purchased by persons investing assets of
employee benefit plans or individual retirement accounts, subject to important
considerations. Plans should consult with their legal advisors before investing
in the offered certificates.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
S-8
RISK FACTORS
You should carefully consider, among other things, the following
factors in connection with the purchase of the offered certificates:
THE OFFERED CERTIFICATES MAY HAVE LIMITED LIQUIDITY, SO YOU MAY BE UNABLE TO
SELL YOUR SECURITIES OR MAY BE FORCED TO SELL THEM AT A DISCOUNT FROM THEIR FAIR
MARKET VALUE
There can be no assurance that a secondary market for the offered
certificates will develop or, if one does develop, that it will provide holders
of the offered certificates with liquidity of investment or that it will
continue for the life of the offered certificates. As a result, any resale
prices that may be available for any offered certificate in any market that may
develop may be at a discount from the initial offering price or the fair market
value thereof. The offered certificates will not be listed on any securities
exchange.
THE CREDIT ENHANCEMENT IS LIMITED, AND THE POTENTIAL INADEQUACY OF THE CREDIT
ENHANCEMENT MAY CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE OFFERED
CERTIFICATES
The credit enhancement features described in the summary of this
prospectus supplement are intended to enhance the likelihood that holders of the
Class A Certificates, and to a limited extent, the holders of the Mezzanine
Certificates, will receive regular payments of interest and principal. However,
we cannot assure you that the applicable credit enhancement will adequately
cover any shortfalls in cash available to pay your certificates as a result of
delinquencies or defaults on the mortgage loans. The sum of the aggregate
principal balance of the mortgage loans as of the Cut-off Date and the amount on
deposit in the pre-funding account on the Closing Date will approximately equal
the aggregate certificate principal balance of the certificates on the Closing
Date, and therefore the initial amount of overcollateralization will be
considerably less than the initial overcollateralization target described
herein.
If delinquencies or defaults occur on the mortgage loans, neither the
master servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted mortgage loans if, in the good
faith judgment of the master servicer, these advances would not be ultimately
recovered from the proceeds of the mortgage loan.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses.
The ratings of the offered certificates by the rating agencies may be
lowered following the initial issuance thereof as a result of losses on the
mortgage loans in excess of the levels contemplated by the rating agencies at
the time of their initial rating analysis. None of the company, the master
servicer, the trustee or any of their respective affiliates will have any
obligation to replace or supplement any credit enhancement, or to take any other
action to maintain the ratings of the offered certificates. SEE "DESCRIPTION OF
CREDIT ENHANCEMENT" IN THE PROSPECTUS.
INTEREST GENERATED BY THE MORTGAGE LOANS AND AMOUNTS CONTRIBUTED FROM THE
INTEREST COVERAGE ACCOUNT MAY BE INSUFFICIENT TO CREATE OR MAINTAIN
OVERCOLLATERALIZATION
The amount of interest generated by the mortgage loans (net of fees and
expenses) and amounts contributed from the interest coverage account may be
higher than the amount of interest required to be paid to the offered
certificates. Any remaining interest will then be used first to absorb losses
that occur on the mortgage loans, and then to create and maintain
overcollateralization. We cannot assure you, however, that enough excess
interest will be available to cover losses or to create or maintain the required
level of overcollateralization. The factors described below will affect the
amount of excess interest that the mortgage loans will generate:
S-9
o Every time a mortgage loan is prepaid in full, excess interest may be
reduced because the mortgage loan will no longer be outstanding and generating
interest or, in the case of a partial prepayment, will be generating less
interest.
o Every time a mortgage loan is liquidated, excess interest may be
reduced because such mortgage loans will no longer be outstanding and generating
interest.
o If the rates of delinquencies, defaults or losses on the mortgage
loans turn out to be higher than expected, excess interest will be reduced by
the amount necessary to compensate for any shortfalls in cash available on such
date to make required distributions on the offered certificates.
o If prepayments, defaults and liquidations occur more rapidly on the
mortgage loans with relatively higher interest rates than on the mortgage loans
with relatively lower interest rates, the amount of excess interest generated by
the mortgage loans will be less than would otherwise be the case.
THE PASS-THROUGH RATES ON THE OFFERED CERTIFICATES ARE SUBJECT TO LIMITATION
The offered certificates, other than the Class A-I-1 Certificates and
Class A-IO Certificates, accrue interest at an annual rate equal to the lesser
of a fixed pass-through rate and the weighted average of the interest rates on
the mortgage loans, net of certain fees and expenses of the trust and net of the
amount of interest payable on the Class A-IO Certificates. The Class A-I-1
Certificates accrue interest at an annual rate equal to the lesser of an
adjustable pass-through rate based on one-month LIBOR and the weighted average
of the interest rates on the mortgage loans, net of certain fees and expenses of
the trust and net of the amount of interest payable on the Class A-IO
Certificates. The Class A-IO Certificates accrue interest at an annual rate
equal to the lesser of a fixed pass-through rate, which steps down over time,
and the weighted average of the interest rates on the mortgage loans, net of
certain fees and expenses of the trust.
A variety of factors could limit the pass-through rate on one or more
classes of the offered certificates and adversely affect the yield to maturity
on such class or classes of certificates:
o If prepayments, defaults and liquidations occur more rapidly on the
mortgage loans with relatively higher interest rates than on the mortgage loans
with relatively lower interest rates, the pass-through rates on the offered
certificates are more likely to be limited.
o The interest rates on the mortgage loans are fixed and will not
adjust. Consequently, if the pass- through rate on any class of the offered
certificates is limited, such pass-through rate may remain limited for an
indefinite period, reducing the amount of interest accruing on such class of
certificates for an indefinite period.
o The required payment by the trust of mortgage insurance premiums will
result in the limits on the pass-through rates on the offered certificates being
lower than would be the case if the trust did not have such obligations.
o The limit on the pass-through rates on the offered certificates
(other than the Class A-IO Certificates) will be affected by the amount of
interest payable on the Class A-IO Certificates. As the aggregate principal
balance of the mortgage loans is reduced by payments of principal (including
prepayments and the proceeds of liquidations of defaulted mortgage loans), the
portion of the total amount of interest generated by the mortgage pool that is
used to pay interest on the Class A-IO Certificates will increase. A rapid rate
of prepayments on the mortgage loans before the end of the first 30 distribution
dates would lower the pass-through rate ceiling applicable to the offered
certificates (other than the Class A-IO Certificates) increasing the likelihood
that such ceiling will limit the pass-
S-10
through rates on one or more of such classes of offered certificates. See the
definition of the pass-through rates of the offered certificates under
"Glossary" in this prospectus supplement.
The holders of the offered certificates WILL NOT be entitled to recover
interest in excess of any applicable limited rate on any distribution date from
excess cash flow or from any other source, except, solely with respect to the
first thirty distribution dates and with respect to the offered certificates
other than the Class A-IO Certificates and the Class A-I-1 Certificates, to the
extent of payments from the reserve fund, as described in this prospectus
supplement. See "Description of the Certificates--The Net WAC Shortfall Reserve
Fund" in this prospectus supplement. There can be no assurance that amounts on
deposit in the reserve fund will be sufficient to cover these shortfalls, and no
entity will have any obligation to deposit additional amounts into the reserve
fund after the closing date.
STATUTORY AND JUDICIAL LIMITATIONS ON FORECLOSURE PROCEDURES MAY DELAY RECOVERY
IN RESPECT OF THE MORTGAGED PROPERTIES AND, IN SOME INSTANCES, LIMIT THE AMOUNT
THAT MAY BE RECOVERED BY THE FORECLOSING LENDER, RESULTING IN LOSSES ON THE
MORTGAGE LOANS THAT MIGHT CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE
OFFERED CERTIFICATES
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage instrument are judicial foreclosure, involving court
proceedings, and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. A foreclosure action is subject to most of the delays
and expenses of other lawsuits if defenses are raised or counterclaims are
asserted. Delays may also result from difficulties in locating necessary
defendants. Non-judicial foreclosures may be subject to delays resulting from
state laws mandating the recording of notice of default and notice of sale and,
in some states, notice to any party having an interest of record in the real
property, including junior lienholders. Some states have adopted
"anti-deficiency" statutes that limit the ability of a lender to collect the
full amount owed on a loan if the property sells at foreclosure for less than
the full amount owed. In addition, United States courts have traditionally
imposed general equitable principles to limit the remedies available to lenders
in foreclosure actions that are perceived by the court as harsh or unfair. The
effect of these statutes and judicial principles may be to delay and/or reduce
distributions in respect of the offered certificates. SEE "LEGAL ASPECTS OF
MORTGAGE LOANS--FORECLOSURE ON MORTGAGES AND SOME CONTRACTS" IN THE PROSPECTUS.
THE VALUE OF THE MORTGAGE LOANS MAY BE AFFECTED BY, AMONG OTHER THINGS, A
DECLINE IN REAL ESTATE VALUES AND CHANGES IN THE BORROWERS' FINANCIAL CONDITION,
WHICH MAY CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE OFFERED CERTIFICATES
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels as of the dates of origination of the
related mortgage loans. If the residential real estate market should experience
an overall decline in property values so that the outstanding balances of the
mortgage loans, and any secondary financing on the mortgaged properties, become
equal to or greater than the value of the mortgaged properties, the actual rates
of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In particular, mortgage
loans with high loan-to-value ratios will be affected by any decline in real
estate values. Any decrease in the value of the mortgage loans may result in the
allocation of losses to the offered certificates to the extent not covered by
credit enhancement.
THE MORTGAGE LOANS WERE UNDERWRITTEN TO NON-CONFORMING UNDERWRITING STANDARDS,
WHICH MAY RESULT IN LOSSES OR SHORTFALLS TO BE INCURRED ON THE OFFERED
CERTIFICATES
The mortgage loans were underwritten generally in accordance with
underwriting standards which are primarily intended to provide for single family
"non-conforming" mortgage loans. A "non-conforming" mortgage loan means a
mortgage loan which is ineligible for purchase by Fannie Mae or Freddie Mac due
to either credit characteristics of the related mortgagor or documentation
standards in connection with the underwriting of the related
S-11
mortgage loan that do not meet the Fannie Mae or Freddie Mac underwriting
guidelines for "A" credit mortgagors. These credit characteristic include
mortgagors whose creditworthiness and repayment ability do not satisfy such
Fannie Mae or Freddie Mac underwriting guidelines and mortgagors who may have a
record of credit write-offs, outstanding judgments, prior bankruptcies and other
credit items that do not satisfy such Fannie Mae or Freddie Mac underwriting
guidelines. These documentation standards may include mortgagors who provide
limited or no documentation in connection with the underwriting of the related
mortgage loan. Accordingly, mortgage loans underwritten under the seller's
non-conforming credit underwriting standards are likely to experience rates of
delinquency, foreclosure and loss that are higher, and may be substantially
higher, than mortgage loans originated in accordance with the Fannie Mae or
Freddie Mac underwriting guidelines. Any resulting losses, to the extent not
covered by credit enhancement, may affect the yield to maturity of the offered
certificates.
THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF CALIFORNIA, WHICH MAY RESULT
IN LOSSES WITH RESPECT TO THESE MORTGAGE LOANS
Investors should note that some geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. For example, a
region's economic condition and housing market may be directly, or indirectly,
adversely affected by natural disasters or civil disturbances such as
earthquakes, hurricanes, floods, eruptions or riots, or by disruptions such as
ongoing power outages. The economic impact of any of these types of events may
also be felt in areas beyond the region immediately affected by the disaster or
disturbance. Approximately 47.19% of the initial mortgage loans in the
aggregate, 37.81% of the initial mortgage loans in loan group 1 and 67.94% of
the initial mortgage loans in loan group 2 (in each case by aggregate
outstanding principal balance as of the cut-off date) are in the state of
California. The concentration of the mortgage loans in the state of California
may present risk considerations in addition to those generally present for
similar mortgage-backed securities without this concentration. Any risks
associated with mortgage loan concentration may affect the yield to maturity of
the offered certificates to the extent losses caused by these risks which are
not covered by credit enhancement are allocated to the offered certificates.
SOME OF THE MORTGAGE LOANS PROVIDE FOR BALLOON PAYMENTS AT MATURITY, WHICH MAY
RESULT IN A GREATER RISK OF LOSS WITH RESPECT TO THESE MORTGAGE LOANS
Approximately 3.85% of the initial mortgage loans in the aggregate,
4.98% of the initial mortgage loans in loan group 1 and 1.34% of the initial
mortgage loans in loan group 2 (in each case by aggregate outstanding principal
balance as of the Cut-off Date) are balloon loans. These mortgage loans will
require a substantial payment of principal (that is, a balloon payment) at their
stated maturity in addition to their scheduled monthly payment. Mortgage loans
of this type involve a greater degree of risk than self-amortizing loans because
the ability of a mortgagor to make a balloon payment typically will depend upon
its ability either to fully refinance the loan or to sell the related mortgaged
property at a price sufficient to permit the mortgagor to make the balloon
payment. The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including the value of the related mortgaged
property, the level of available mortgage rates at the time of sale or
refinancing, the mortgagor's equity in the related mortgaged property,
prevailing general economic conditions, the availability of credit for loans
secured by comparable real properties. Any risks associated with the balloon
loans may affect the yield to maturity of the offered certificates to the extent
losses or delays in payment caused by these risks which are not covered by
credit enhancement are allocated to, or result in a slower rate of principal
payments on, the offered certificates.
THE RATE AND TIMING OF PREPAYMENTS WILL AFFECT YOUR YIELD
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a
S-12
prepayment on the certificates.
o If you purchase your certificates at a discount and principal is
repaid slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is
repaid faster than you anticipate, then your yield may be lower than you
anticipate.
o The yield to maturity of the Class A-IO Certificates will become
extremely sensitive to the rate of principal prepayment on the mortgage loans,
if prior to July 1, 2002, the sum of the aggregate principal balance of the
mortgage loans and the amount on deposit in the pre-funding account is reduced
to or below $26,750,000, if prior to January 1, 2003 the aggregate principal
balance of the mortgage loans is reduced to or below $25,000,000 or if prior to
July 1, 2004 the aggregate principal balance of the mortgage loans is reduced to
or below $20,000,000. Investors in the Class A-IO Certificates should fully
consider the risk that an extremely rapid rate of principal prepayment on the
mortgage loans could result in the failure of such investors to recover their
initial investments.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if interest rates decline, mortgage loan
prepayments may increase due to the availability of other mortgage loans at
lower interest rates. Conversely, if prevailing interest rates rise
significantly, the prepayments on mortgage loans may decrease.
o Approximately 72.35% of the initial mortgage loans in the aggregate,
73.58% of the initial mortgage loans in loan group 1 and 69.64% of the initial
mortgage loans in loan group 2 (in each case by aggregate principal balance as
of the Cut-off Date) require the mortgagor to pay a charge in certain instances
if the mortgagor prepays the mortgage loan during a stated period, which may be
from one year to five years after the mortgage loan was originated. A prepayment
charge may or may not discourage a mortgagor from prepaying the mortgage loan
during the applicable period.
o The seller may be required to purchase mortgage loans from the trust
in the event certain breaches of representations and warranties occur and have
not been cured. These purchases will have the same effect on the holders of the
offered certificates as a prepayment of the mortgage loans.
o The overcollateralization provisions, initially and whenever
overcollateralization is at a level below the required level, are intended to
result in an accelerated rate of principal distributions to holders of the
classes of offered certificates then entitled to distributions of principal. An
earlier return of principal to the holders of the offered certificates as a
result of the overcollateralization provisions will influence the yield on the
offered certificates in a manner similar to the manner in which principal
prepayments on the mortgage loans will influence the yield on the offered
certificates.
o Because principal distributions are paid to certain classes of
offered certificates before other such 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.
SEE "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING
OF PREPAYMENTS ON THE MORTGAGE LOANS AND THE WEIGHTED AVERAGE LIVES OF THE
OFFERED CERTIFICATES.
S-13
THE MORTGAGE LOANS MAY HAVE ENVIRONMENTAL RISKS, WHICH MAY RESULT IN INCREASED
LOSSES WITH RESPECT TO THESE MORTGAGE LOANS
To the extent the master servicer for a mortgage loan acquires title to
any related mortgaged property contaminated with or affected by hazardous wastes
or hazardous substances, these mortgage loans may incur losses. SEE "SERVICING
OF MORTGAGE LOANS--REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS" AND
"LEGAL ASPECTS OF MORTGAGE LOANS--ENVIRONMENTAL LEGISLATION" IN THE PROSPECTUS.
To the extent these environmental risks result in losses on the mortgage loans,
the yield to maturity of the offered certificates, to the extent not covered by
credit enhancement, may be affected.
SOME ADDITIONAL RISKS ARE ASSOCIATED WITH THE MEZZANINE 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 such certificates, the actual yield to maturity
of such certificates may be lower than the yield anticipated by such 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 overcollateralization following
distributions of principal on the related distribution date, will reduce the
certificate principal balance of the class of 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
otherwise 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 according
to 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 at least February 2005 or a later date as provided
in this prospectus supplement or during any period in which delinquencies and
losses on the mortgage loans exceed certain levels. As a result, the weighted
average lives of such certificates will be longer than would otherwise 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 such
certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. Further, because such certificates might not
receive any principal if certain delinquency levels occur, it is possible for
such certificates to receive no principal distributions even if no losses have
occurred on the mortgage pool.
In addition, the multiple class structure of the Class M-1
Certificates, the Class M-2 Certificates and the Class B 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 such losses are not covered by excess interest,
overcollateralization or a class of Mezzanine Certificates with a lower payment
priority. Furthermore, as described in this prospectus supplement, the timing of
receipt of principal and interest by the Mezzanine Certificates may be adversely
affected by losses even if such classes of certificates do not ultimately bear
such loss.
S-14
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS WILL AFFECT YOUR YIELD
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only up to the date of the principal 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 Relief Act to any mortgage loan will adversely affect, for an
indeterminate period of time, the ability of the Master Servicer to collect full
amounts of interest on the mortgage loan. This may result in a shortfall in
interest collections available for distribution to certificateholders on the
next distribution date. The Master Servicer is required to cover a portion of
the shortfall in interest collections that are attributable to prepayments, but
only up to the amount of the Master Servicer's aggregate servicing fee for the
related calendar month. In addition, certain shortfalls in interest collections
arising from the application of the Relief Act will not be covered by the Master
Servicer.
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 Master Servicer will be allocated,
first, in reduction of amounts otherwise distributable to the holders of the
Class C Certificates, and thereafter, to the Monthly Interest Distributable
Amounts with respect to the offered certificates on a pro rata basis based on
the respective amounts of interest accrued on such Certificates for such
Distribution Date. The holders of the offered certificates will not be entitled
to reimbursement for any such interest shortfalls. If these shortfalls are
allocated to the offered certificates the amount of interest paid to those
certificates will be reduced, adversely affecting the yield on your investment.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and other
charges, require specific disclosure, and require licensing of the seller. 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 initial mortgage loans also are, and the subsequent mortgage loans
also will be, subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require specific 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 trust to damages and administrative enforcement.
With respect to the initial mortgage loans and the subsequent mortgage
loans, the seller will represent that as of the closing date and the subsequent
transfer date, respectively, to the best of seller's knowledge, each such
mortgage loan at the time it was made complied in all material respects with
applicable state and federal laws,
S-15
including, without limitation, usury, equal credit opportunity, truth-in-lending
and disclosure laws; and each such mortgage loan is being serviced in all
material respects in accordance with applicable state and federal laws,
including, without limitation, usury, equal credit opportunity and disclosure
laws. In the event of a breach of this representation, it will be obligated to
cure the breach or repurchase or replace the affected mortgage loan in the
manner described in the prospectus.
THERE MAY BE VARIATIONS IN SUBSEQUENT MORTGAGE LOANS FROM THE INITIAL MORTGAGE
LOANS
Each subsequent mortgage loan generally will satisfy the eligibility
criteria described in this prospectus supplement at the time of its sale to the
trust. The characteristics of the subsequent mortgage loans, however, may vary
from the specific characteristics reflected in the statistical information
relating to the initial mortgage loans presented in this prospectus supplement,
although the extent of such variance is not expected to be material.
MANDATORY PREPAYMENT
To the extent that the amount on deposit in the pre-funding account has
not been fully applied to the purchase of subsequent mortgage loans on or before
March 31, 2002, the holders of the offered certificates then entitled to
principal distributions will receive on the distribution date immediately
following March 31, 2002 the amounts in the pre-funding account after giving
effect to any purchase of subsequent mortgage loans. Although no assurance can
be given, the company intends that the principal amount of subsequent mortgage
loans sold to the trustee will require the application of substantially all
amounts on deposit in the pre-funding account and that there will be no material
principal payment to the holders of the offered certificates on such
distribution date.
THE RATINGS ON THE OFFERED CERTIFICATES ARE NOT A RECOMMENDATION TO BUY, SELL OR
HOLD THE OFFERED CERTIFICATES AND ARE SUBJECT TO WITHDRAWAL AT ANY TIME, WHICH
MAY RESULT IN LOSSES ON THE OFFERED CERTIFICATES
It is a condition to the issuance of the offered certificates that each
class of offered certificates be rated no lower than the ratings described on
page S-4 of this prospectus supplement. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to maintain the rating on any
offered certificate, and, accordingly, there can be no assurance that the
ratings assigned to any offered certificate on the date on which the offered
certificates are initially issued will not be lowered or withdrawn by a rating
agency at any time thereafter. In the event any rating is revised or withdrawn,
the liquidity or the market value of the related offered certificates may be
adversely affected. SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS.
A TRANSFER OF SUBSERVICING MAY RESULT IN INCREASED LOSSES AND DELINQUENCIES ON
THE MORTGAGE LOANS
The mortgage loans will initially be subserviced by Wendover Funding,
Inc. as described herein under "Pooling and Servicing Agreement--The
Subservicers." However, the master servicer has entered into a contract to
transfer the subservicing with respect to the initial mortgage loans to GMAC
Mortgage Corporation on or about April 1, 2002, and with respect to the
subsequent mortgage loans, no later than three months after they are transferred
to the trust. Investors should note, however, that when the servicing of
mortgage loans is transferred, there is generally a rise in delinquencies
associated with such transfer. Such increase in delinquencies may result in
losses, which, to the extent they are not absorbed by credit enhancement, will
cause losses or shortfalls to be incurred by the holders of the offered
certificates. In addition, any higher default rate resulting from such transfer
may result in an acceleration of prepayments on the mortgage loans.
S-16
THE RECORDING OF MORTGAGES IN THE NAME OF MERS MAY AFFECT THE YIELD ON THE
CERTIFICATES.
The mortgages or assignments of mortgage for some of the mortgage loans
have been or may be recorded in the name of Mortgage Electronic Registration
Systems, Inc., or MERS, solely as nominee for the seller and its successors and
assigns. Subsequent assignments of those mortgages are registered electronically
through the MERS(R) System. However, if MERS discontinues the MERS(R) System and
it becomes necessary to record an assignment of the mortgage to the trustee,
then any related expenses shall be paid by the trust and will reduce the amount
available to pay principal of and interest on the mezzanine certificates.
The recording of mortgages in the name of MERS is a new practice in the
mortgage lending industry. Public recording officers and others may have
limited, if any, experience with lenders seeking to foreclose mortgages,
assignments of which are registered with MERS. Accordingly, delays and
additional costs in commencing, prosecuting and completing foreclosure
proceedings and conducting foreclosure sales of the mortgaged properties could
result. Those delays and additional costs could in turn delay the distribution
of liquidation proceeds to certificateholders and increase the amount of losses
on the mortgage loans.
FOR ADDITIONAL INFORMATION REGARDING MERS AND THE MERS(R) SYSTEM, SEE
"DESCRIPTION OF THE MORTGAGE POOL--MORTGAGE POOL CHARACTERISTICS" AND "YIELD ON
THE CERTIFICATES--YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES" IN THIS
PROSPECTUS SUPPLEMENT.
S-17
THE MORTGAGE POOL
GENERAL
References to percentages of the mortgage loans unless otherwise noted
are calculated based on the aggregate principal balance of the initial mortgage
loans as of the Cut-off Date.
The mortgage pool will consist of conventional, one- to four-family,
fixed-rate, fully-amortizing and balloon payment mortgage loans secured by first
liens on mortgaged properties. The mortgage pool will include the initial
mortgage loans, which will be conveyed to the trust on the Closing Date, and the
subsequent mortgage loans, which will be acquired by the trust during the
Funding Period with amounts on deposit in the Pre-Funding Account. The initial
mortgage loans consist of 815 mortgage loans with an aggregate principal balance
as of the Cut-off Date of approximately $155,898,142, after application of
scheduled payments due on or before the Cut-off Date whether or not received.
The initial mortgage loans have, and the subsequent mortgage loans will have,
original terms to maturity of not greater than 30 years.
The mortgage pool will consist of two groups of mortgage loans, Loan
Group 1 and Loan Group 2. The mortgage loans in the two groups are referred to
as the Group 1 Loans and the Group 2 Loans, and the initial mortgage loans in
the two groups are referred to as the initial Group 1 Loans and the initial
Group 2 Loans. The Group 1 Loans will consist of mortgage loans which had
principal balances at origination which are less than or equal to the conforming
balance. The conforming balance for mortgage loans secured by a single family
property is $300,700 for all mortgage loans other than those originated in
Alaska, Hawaii and the U.S. Virgin Islands, for which it is $451,050. The
conforming balance is higher for mortgage loans secured by two- to four-family
properties.
The Seller will convey the initial mortgage loans to the company on the
Closing Date pursuant to the Mortgage Loan Purchase Agreement. The company will
convey the initial mortgage loans to the trust on the Closing Date pursuant to
the Agreement. The Seller will make certain representations and warranties with
respect to the initial mortgage loans in the Mortgage Loan Purchase Agreement.
These representations and warranties will be assigned by the company to the
Trustee for the benefit of the Certificateholders. As more particularly
described in the prospectus, the Seller will have certain repurchase or
substitution obligations in connection with a breach of any such representation
or warranty, as well as in connection with an omission or defect in respect of
certain constituent documents required to be delivered with respect to the
mortgage loans, if such breach, omission or defect cannot be cured and it
materially and adversely affects the interests of the Certificateholders. In the
event the Seller fails to repurchase an initial mortgage loan, Impac Holdings
will be required to do so. SEE "THE MORTGAGE POOLS--REPRESENTATIONS BY SELLERS"
IN THE PROSPECTUS.
The mortgage loans will have been originated or acquired by the Seller
in accordance with the underwriting criteria described herein. SEE
"--UNDERWRITING" BELOW.
All of the mortgage loans will initially be subserviced by Wendover
Funding, Inc. The subservicing with respect to the mortgage loans will be
transferred to GMAC Mortgage Corporation on or about April 1, 2002, as described
herein under "Pooling and Servicing Agreement--The Subservicers."
All of the mortgage loans have scheduled monthly payments due on the
Due Date. Each mortgage loan will contain a customary "due-on-sale" clause.
Certain of the initial mortgage loans will have their first scheduled
monthly payments due on March 1, 2002. As to those initial mortgage loans, no
principal amortization payments will be distributed (unless prepayments are
received thereon) until the distribution date occurring in March 2002, the month
in which the first scheduled monthly payment is due. However, on the Closing
Date, cash will be deposited in the Certificate Account in an amount equal
S-18
to one month's interest accrued from January 1, 2002 (at the related mortgage
rates) on such mortgage loans, to be remitted to the Trustee for distribution on
the distribution date occurring in February 2002, the month prior to the month
in which the first scheduled monthly payment is due on such initial mortgage
loans.
PREPAYMENT CHARGES
Approximately 72.35% of the initial mortgage loans in the aggregate,
73.58% of the initial Group 1 Loans and 69.64% of the initial Group 2 Loans,
provide for payment by the mortgagor of a prepayment charge in limited
circumstances on prepayments. Generally, these initial mortgage loans provide
for payment of a prepayment charge on partial or full prepayments made within
one year, five years or other period as provided in the related mortgage note
from the date of origination of the initial mortgage loan. The amount of the
prepayment charge is as provided in the related mortgage note, and the
prepayment charge will generally apply if, in any twelve-month period during the
first year, five years or other period as provided in the related mortgage note
from the date of origination of the initial mortgage loan, the mortgagor prepays
an aggregate amount exceeding 20% of the original principal balance of the
initial mortgage loan. The amount of the prepayment charge will generally be
equal to 6 months' advance interest calculated on the basis of the mortgage rate
in effect at the time of the prepayment on the amount prepaid in excess of 20%
of the original principal balance of the initial mortgage loan. The holders of
the Class P 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. The Master Servicer may waive the collection
of any otherwise applicable prepayment charge or reduce the amount thereof
actually collected, but only if the Master Servicer does so in compliance with
the prepayment charge waiver standards set forth in the Agreement. If the Master
Servicer waives any prepayment charge other than in accordance with the
standards set forth in the Agreement, the Master Servicer will be required to
pay the amount of the waived prepayment charge. There can be no assurance that
the prepayment charges will have any effect on the prepayment performance of the
initial mortgage loans.
PRIMARY MORTGAGE INSURANCE AND THE RADIAN LENDER-PAID PMI POLICY
Except with respect to approximately 0.11% of the Group 1 Loans (by
aggregate outstanding principal balance as of the Cut-off Date), each mortgage
loan with a loan-to-value ratio at origination in excess of 80.00% will be
insured by one of the following: (1) a Primary Insurance Policy issued by a
private mortgage insurer (other than a Radian Lender-Paid PMI Policy) or (2) a
Radian Lender-Paid PMI Policy.
Each Primary Insurance Policy will insure against default under each
insured mortgage note as follows: (A) for which the outstanding principal
balance at origination of such mortgage loan is greater than or equal to 80.01%
and up to and including 90.00% of the lesser of the Appraised Value and the
sales price, such mortgage loan is covered by a Primary Insurance Policy in an
amount equal to at least 12.00% of the Allowable Claim and (B) for which the
outstanding principal balance at origination of such mortgage loan exceeded
90.00% of the lesser of the Appraised Value and the sales price, such mortgage
loan is covered by a Primary Insurance Policy in an amount equal to at least
30.00% of the Allowable Claim.
Each Radian Lender-Paid PMI Policy will insure against default under
each insured mortgage note as follows: (A) for which the outstanding principal
balance at origination of such mortgage loan is greater than or equal to 80.01%
and up to and including 89.99% of the lesser of the Appraised Value and the
sales price, such mortgage loan is covered by a Primary Insurance Policy in an
amount equal to at least 22.00% of the Allowable Claim, (B) for which the
outstanding principal balance at origination of such mortgage loan is at least
90.00% and up to and including 95.00% of the lesser of the Appraised Value and
the sales price, such mortgage loan is covered by a Primary Insurance Policy in
an amount equal to at least 25.00% of the Allowable Claim and (C) for which the
outstanding principal balance at origination of such mortgage loan is at least
95.01% and up to and including 97.00% of the lesser of the Appraised Value and
the sales price, such mortgage loan is covered by such Primary Insurance Policy
in an amount equal to at least 35.00% of the Allowable Claim.
S-19
With respect to the Radian Lender-Paid PMI Policies, the premium will
be payable by the Master Servicer out of interest collections on the mortgage
loans at a rate equal to the related Radian PMI Rate. The Radian PMI Rates range
from 0.55% to 1.26% of the Stated Principal Balance of the related Radian PMI
Insured Loan and the Radian PMI Rates have a weighted average of approximately
0.72%.
Each mortgage loan is required to be covered by a standard hazard
insurance policy.
SEE "PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS
THEREUNDER--HAZARD INSURANCE POLICIES" IN THE PROSPECTUS.
MORTGAGE LOAN CHARACTERISTICS
The average principal balance of the initial mortgage loans at
origination was approximately $191,435. No initial mortgage loan had a principal
balance at origination of greater than approximately $750,000 or less than
approximately $40,000. The average principal balance of the initial mortgage
loans as of the Cut-off Date was approximately $191,286. No initial mortgage
loan had a principal balance as of the Cut-off Date of greater than
approximately $749,271 or less than approximately $40,000.
As of the Cut-off Date, the initial mortgage loans had mortgage rates
ranging from approximately 5.875% per annum to approximately 11.990% per annum
and the weighted average mortgage rate was approximately 8.177% per annum. The
weighted average remaining term to stated maturity of the initial mortgage loans
will be approximately 342 months as of the Cut-off Date. None of the initial
mortgage loans will have a first Due Date prior to January 1, 2001 or after
March 1, 2002, or will have a remaining term to maturity of less than 167 months
or greater than 360 months as of the Cut-off Date. The latest maturity date of
any initial mortgage loan is February 1, 2032.
The weighted average loan-to-value ratio at origination of the initial
mortgage loans was approximately 80.41%. No loan-to-value ratio at origination
was greater than approximately 100.00% or less than approximately 18.34%.
The original mortgages for some of the mortgage loans have been, or in
the future may be, at the sole discretion of the master servicer, recorded in
the name of Mortgage Electronic Registration Systems, Inc., or MERS, solely as
nominee for the seller and its successors and assigns, and subsequent
assignments of those mortgages have been, or in the future may be, at the sole
discretion of the master servicer, registered electronically through the MERS(R)
System. In some other cases, the original mortgage was recorded in the name of
the originator of the mortgage loan, record ownership was later assigned to
MERS, solely as nominee for the owner of the mortgage loan, and subsequent
assignments of the mortgage were, or in the future may be, at the sole
discretion of the master servicer, registered electronically through the MERS(R)
System. For each of these mortgage loans, MERS serves as mortgagee of record on
the mortgage solely as a nominee in an administrative capacity on behalf of the
trustee, and does not have any interest in the mortgage loan. As of the cut-off
date, approximately 18.19% of the aggregate principal balance of the mortgage
loans were recorded in the name of MERS. For additional information regarding
the recording of mortgages in the name of MERS see "Yield on the
Certificates--Yield Sensitivity of the Mezzanine Certificates" in this
prospectus supplement.
Approximately 41 initial mortgage loans, representing approximately
3.85% of the mortgage pool (by aggregate outstanding principal balance as of the
Cut-off Date), are balloon loans. The amount of the balloon payment on each of
these initial mortgage loans is substantially in excess of the amount of the
scheduled monthly payment on such initial mortgage loan for the period prior to
the Due Date of the balloon payment. These initial mortgage loans have a
weighted average remaining term to maturity of approximately 178 months.
S-20
None of the initial mortgage loans are buydown mortgage loans.
None of the initial mortgage loans were 30 days or more delinquent as
of the Cut-off Date.
Set forth below is a description of certain additional characteristics
of the initial mortgage loans as of the Cut-off Date, except as otherwise
indicated. All percentages of the initial mortgage loans are approximate
percentages by aggregate principal balance as of the Cut-off Date, except as
otherwise indicated. Dollar amounts and percentages may not add up to totals due
to rounding.
S-21
PRINCIPAL BALANCES AT ORIGINATION
PERCENTAGE OF
ORIGINAL NUMBER OF CUT-OFF DATE
INITIAL MORTGAGE LOAN INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- -----------------
0.01 - 50,000.00...................... 5 $ 218,164 0.14%
50,000.01 - 100,000.00...................... 137 11,222,847 7.20
100,000.01 - 150,000.00...................... 232 28,943,036 18.57
150,000.01 - 200,000.00...................... 159 27,001,616 17.32
200,000.01 - 250,000.00...................... 93 20,564,789 13.19
250,000.01 - 300,000.00...................... 64 17,454,277 11.20
300,000.01 - 350,000.00...................... 48 15,580,315 9.99
350,000.01 - 400,000.00...................... 22 8,269,968 5.30
400,000.01 - 450,000.00...................... 22 9,397,441 6.03
450,000.01 - 500,000.00...................... 18 8,589,181 5.51
500,000.01 - 550,000.00...................... 7 3,653,403 2.34
550,000.01 - 600,000.00...................... 4 2,264,862 1.45
600,000.01 - 650,000.00...................... 1 642,000 0.41
650,000.01 - 700,000.00...................... 2 1,346,973 0.86
700,000.01 - 750,000.00...................... 1 749,271 0.48
--- ------------ ------
Total................................... 815 $155,898,142 100.00%
=== ============ ======
The average principal balance of the initial mortgage loans at
origination was approximately $191,435.
S-22
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
CURRENT INITIAL MORTGAGE LOAN INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- -----------------
0.01 - 50,000.00...................... 6 $ 267,415 0.17%
50,000.01 - 100,000.00...................... 136 11,173,596 7.17
100,000.01 - 150,000.00...................... 232 28,943,036 18.57
150,000.01 - 200,000.00...................... 159 27,001,616 17.32
200,000.01 - 250,000.00...................... 93 20,564,789 13.19
250,000.01 - 300,000.00...................... 64 17,454,277 11.20
300,000.01 - 350,000.00...................... 48 15,580,315 9.99
350,000.01 - 400,000.00...................... 22 8,269,968 5.30
400,000.01 - 450,000.00...................... 22 9,397,441 6.03
450,000.01 - 500,000.00...................... 18 8,589,181 5.51
500,000.01 - 550,000.00...................... 7 3,653,403 2.34
550,000.01 - 600,000.00...................... 4 2,264,862 1.45
600,000.01 - 650,000.00...................... 1 642,000 0.41
650,000.01 - 700,000.00...................... 2 1,346,973 0.86
700,000.01 - 750,000.00...................... 1 749,271 0.48
--- ------------ -------
Total................................... 815 $155,898,142 100.00%
=== ============ ======
As of the Cut-off Date, the average current principal balance of
the initial mortgage loans will be approximately $191,286.
S-23
MORTGAGE RATES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
5.500 - 5.999...................... 1 $ 95,403 0.06%
6.000 - 6.499...................... 14 5,260,365 3.37
6.500 - 6.999...................... 78 21,723,199 13.93
7.000 - 7.499...................... 73 16,983,000 10.89
7.500 - 7.999...................... 108 21,593,808 13.85
8.000 - 8.499...................... 126 24,173,868 15.51
8.500 - 8.999...................... 180 29,725,260 19.07
9.000 - 9.499...................... 104 16,812,638 10.78
9.500 - 9.999...................... 87 12,993,676 8.33
10.000 - 10.499...................... 21 3,148,182 2.02
10.500 - 10.999...................... 12 1,460,565 0.94
11.000 - 11.499...................... 8 1,331,726 0.85
11.500 - 11.999...................... 3 596,452 0.38
--- ------------ ------
Total............................ 815 $155,898,142 100.00%
=== ============ ======
The weighted average mortgage rate of the initial mortgage loans was
approximately 8.177% per annum.
S-24
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
CURRENT INITIAL MORTGAGE LOAN INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- -----------------
15.01 - 20.00.............................. 2 $ 669,382 0.43%
20.01 - 25.00.............................. 3 990,473 0.64
25.01 - 30.00.............................. 1 149,871 0.10
30.01 - 35.00.............................. 2 638,630 0.41
35.01 - 40.00.............................. 1 157,500 0.10
40.01 - 45.00.............................. 3 761,958 0.49
45.01 - 50.00.............................. 6 1,466,245 0.94
50.01 - 55.00.............................. 7 2,105,941 1.35
55.01 - 60.00.............................. 30 5,985,652 3.84
60.01 - 65.00.............................. 29 6,071,463 3.89
65.01 - 70.00.............................. 83 21,977,453 14.10
70.01 - 75.00.............................. 33 6,989,132 4.48
75.01 - 80.00.............................. 184 35,126,453 22.53
80.01 - 85.00.............................. 20 4,018,697 2.58
85.01 - 90.00.............................. 197 33,908,718 21.75
90.01 - 95.00.............................. 199 32,533,000 20.87
95.01 -100.00.............................. 15 2,347,575 1.51
--- ------------ ------
Total.................................. 815 $155,898,142 100.00%
=== ============ ======
The minimum and maximum loan-to-value ratios of the initial mortgage
loans at origination were approximately 18.34% and 100.00%, respectively, and
the weighted average of the loan-to-value ratios of the initial mortgage loans
at origination was approximately 80.41%.
OCCUPANCY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
OCCUPANCY (AS INDICATED BY BORROWER) INITIAL MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ ---------------------- ----------------- -----------------
Second Home........................... 21 $ 3,118,105 2.00%
Non-Owner Occupied.................... 84 13,428,983 8.61
Primary Residence..................... 710 139,351,055 89.39
--- ------------ ------
Total................................ 815 $155,898,142 100.00%
=== ============ ======
S-25
MORTGAGE LOAN PROGRAM AND DOCUMENTATION TYPE
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM AND DOCUMENTATION TYPE INITIAL MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ---------------------- ----------------- -----------------
Progressive Series Program (Full
Documentation)........................ 83 $ 20,460,055 13.12%
Progressive Series Program (Limited
(Stated) Documentation)............... 143 35,744,557 22.93
Progressive Series Program
(Alternative Documentation)........... 1 139,882 0.09
Progressive Express(TM)Program (Non
Verified Assets)...................... 343 55,822,795 35.81
Progressive Express(TM)Program
(Verified Assets)..................... 155 29,211,469 18.74
Progressive Express(TM)No Doc
Program (No Documentation)............ 87 14,243,284 9.14
Progressive Series Program (Lite
Income/Stated Asset Documentation).... 3 276,100 0.18
--- ------------ ------
Total................................ 815 $155,898,142 100.00%
=== ============ ======
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DETAILED DESCRIPTION OF THE
SELLER'S LOAN PROGRAMS AND DOCUMENTATION REQUIREMENTS.
S-26
RISK CATEGORIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
CREDIT GRADE INITIAL MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ---------------------- ----------------- -----------------
A+(1)...................................... 148 $ 40,019,035 25.67%
A(1)....................................... 77 16,145,389 10.36
A-(1)...................................... 5 456,171 0.29
Progressive Express(TM)I(2)................ 238 40,934,092 26.26
Progressive Express(TM)II(2)............... 285 47,994,541 30.79
Progressive Express(TM)III(2).............. 30 5,572,350 3.57
Progressive Express(TM)IV(2)............... 23 3,645,733 2.34
Progressive Express(TM)V(2)................ 5 480,453 0.31
Progressive Express(TM)VI(2)............... 4 650,378 0.42
--- ------------ ------
Total................................ 815 $155,898,142 100.00%
=== ============ ======
- -----------------
(1) All of these initial mortgage loans were reviewed and placed into risk
categories based on the credit standards of the Progressive Series Program.
Credit grades of A+, A and A- correspond to Progressive Series I+, I and II, and
III and III+, respectively. All of the mortgage loans originated pursuant to the
Express Priority Refi(TM) Program have been placed in Progressive Express(TM)
Programs II and III. SEE "-UNDERWRITING STANDARDS."
(2) These initial mortgage loans were originated under the Seller's Progressive
Express(TM) Program. The underwriting for these initial mortgage loans is
generally based on the borrower's "FICO" score and therefore these initial
mortgage loans do not correspond to the alphabetical risk categories liste0d
above.
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DESCRIPTION OF THE SELLER'S
RISK CATEGORIES.
S-27
PROPERTY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE INITIAL MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ---------------------- ----------------- -----------------
Single-Family............................... 594 $114,602,492 73.51%
De Minimis PUD.............................. 92 19,463,221 12.48
Condominium................................. 57 8,632,391 5.54
Two- to Four-Family......................... 37 8,126,925 5.21
Planned Unit Development.................... 27 3,927,723 2.52
Hi-Rise..................................... 8 1,145,390 0.73
--- ------------ ------
Total.................................... 815 $155,898,142 100.00%
=== ============ ======
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
STATE INITIAL MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- ---------------------- ----------------- -----------------
California................................. 306 $ 73,563,341 47.19%
Florida.................................... 157 23,577,882 15.12
Georgia ................................... 36 5,581,856 3.58
New York................................... 37 9,049,239 5.80
Texas...................................... 50 7,113,221 4.56
Other (less than 3% in any one state)...... 229 37,012,604 23.74
--- ------------ ------
Total................................... 815 $155,898,142 100.00%
=== ============ ======
No more than approximately 1.05% of the initial mortgage loans (by
aggregate outstanding principal balance as of the Cut-off Date) will be secured
by mortgaged properties located in any one zip code.
S-28
LOAN PURPOSES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE INITIAL MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ---------------------- ----------------- -----------------
Purchase................................... 452 $ 78,996,558 50.67%
Cash-Out Refinance......................... 256 52,387,774 33.60
Rate and Term Refinance.................... 106 24,389,650 15.64
Construction............................... 1 124,160 0.08
--- ------------ ------
Total................................... 815 $155,898,142 100.00%
=== ============ ======
In general, in the case of an initial mortgage loan made for "rate and
term" refinance purposes, substantially all of the proceeds are used to pay in
full the principal balance of a previous mortgage loan of the mortgagor with
respect to a mortgaged property and to pay origination and closing costs
associated with such refinancing. Initial mortgage loans made for "cash-out"
refinance purposes may involve the use of the proceeds to pay in full the
principal balance of a previous mortgage loan and related costs except that a
portion of the proceeds are generally retained by the mortgagor for uses
unrelated to the mortgaged property. The amount of these proceeds retained by
the mortgagor may be substantial.
INITIAL GROUP 1 LOAN CHARACTERISTICS
The initial Group 1 Loans will consist of 695 conventional, one- to
four-family, fixed-rate, fully- amortizing and balloon payment mortgage loans
secured by first liens on mortgaged properties and having an aggregate principal
balance as of the Cut-off Date of approximately $107,380,484 after application
of scheduled payments due on or before the Cut-off Date whether or not received.
The average principal balance of the initial Group 1 Loans at
origination was approximately $154,621. No Initial Group 1 Loan had a principal
balance at origination of greater than approximately $525,000 or less than
approximately $40,000. The average principal balance of the initial Group 1
Loans as of the Cut-off Date was approximately $154,504. No initial Group 1 Loan
had a principal balance as of the Cut-off Date of greater than approximately
$524,115 or less than approximately $40,000.
As of the Cut-off Date, the initial Group 1 Loans had mortgage rates
ranging from approximately 5.875% per annum to approximately 11.700% per annum
and the weighted average mortgage rate was approximately 8.431% per annum. The
weighted average remaining term to stated maturity of the initial Group 1 Loans
will be approximately 341 months as of the Cut-off Date. None of the initial
Group 1 Loans will have a first Due Date prior to January 1, 2001 or after March
1, 2002, or will have a remaining term to maturity of less than 167 months or
greater than 360 months as of the Cut-off Date. The latest maturity date of any
initial Group 1 Loan is February 1, 2032.
The weighted average loan-to-value ratio at origination of the initial
Group 1 Loans was approximately 83.71%. No loan-to-value ratio at origination
was greater than approximately 100.00% or less than approximately 19.20%.
Approximately 39 initial Group 1 Loans, representing approximately
4.98% of the initial Group 1 Loans (by aggregate outstanding principal balance
as of the Cut-off Date), are balloon loans. The amount of the balloon payment on
each of these initial Group 1 Loans is substantially in excess of the amount of
the scheduled monthly
S-29
payment on such initial Group 1 Loan for the period prior to the Due Date of the
balloon payment. These initial Group 1 Loans have a weighted average remaining
term to maturity of approximately 178 months.
None of the initial Group 1 Loans are buydown mortgage loans.
None of the initial Group 1 Loans were 30 days or more delinquent as of
the Cut-off Date.
Set forth below is a description of certain additional characteristics
of the initial Group 1 Loans as of the Cut-off Date, except as otherwise
indicated. All percentages of the initial Group 1 Loans are approximate
percentages by aggregate principal balance of the initial Group 1 Loans as of
the Cut-off Date, except as otherwise indicated. Dollar amounts and percentages
may not add up to totals due to rounding.
PRINCIPAL BALANCES AT ORIGINATION
PERCENTAGE OF
ORIGINAL CUT-OFF DATE
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES($) INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- --------------------- ----------------- -----------------
0.01 - 50,000.00...................... 5 $ 218,164 0.20%
50,000.01 - 100,000.00...................... 137 11,222,847 10.45
100,000.01 - 150,000.00...................... 232 28,943,036 26.95
150,000.01 - 200,000.00...................... 159 27,001,616 25.15
200,000.01 - 250,000.00...................... 93 20,564,789 19.15
250,000.01 - 300,000.00...................... 64 17,454,277 16.25
300,000.01 - 350,000.00...................... 3 1,031,929 0.96
400,000.01 - 450,000.00...................... 1 419,711 0.39
500,000.01 - 550,000.00...................... 1 524,115 0.49
--- ------------ ------
Total................................... 695 $107,380,484 100.00%
=== ============ ======
The average principal balance of the initial Group 1 Loans at
origination was approximately $154,621.
S-30
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
PERCENTAGE OF
CUT-OFF DATE
CURRENT MORTTGAGE LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES($) INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- --------------------- ----------------- -----------------
0.01 - 50,000.00...................... 6 $ 267,415 0.25%
50,000.01 - 100,000.00...................... 136 11,173,596 10.41
100,000.01 - 150,000.00...................... 232 28,943,036 26.95
150,000.01 - 200,000.00...................... 159 27,001,616 25.15
200,000.01 - 250,000.00...................... 93 20,564,789 19.15
250,000.01 - 300,000.00...................... 64 17,454,277 16.25
300,000.01 - 350,000.00...................... 3 1,031,929 0.96
400,000.01 - 450,000.00...................... 1 419,711 0.39
500,000.01 - 550,000.00...................... 1 524,115 0.49
--- ------------ ------
Total................................... 695 $107,380,484 100.00%
=== ============ ======
As of the Cut-off Date, the average current principal balance of
the initial Group 1 Loans will be approximately $154,504.
S-31
MORTGAGE RATES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES(%) INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- --------------------- ----------------- -----------------
5.500 - 5.999...................... 1 $ 95,403 0.09%
6.000 - 6.499...................... 5 971,466 0.90
6.500 - 6.999...................... 47 8,667,954 8.07
7.000 - 7.499...................... 56 9,709,072 9.04
7.500 - 7.999...................... 91 14,901,036 13.88
8.000 - 8.499...................... 109 17,180,745 16.00
8.500 - 8.999...................... 167 25,017,396 23.30
9.000 - 9.499...................... 96 13,987,789 13.03
9.500 - 9.999...................... 82 11,247,917 10.47
10.000 - 10.499...................... 20 2,842,313 2.65
10.500 - 10.999...................... 12 1,460,565 1.36
11.000 - 11.499...................... 7 1,025,376 0.95
11.500 - 11.999...................... 2 273,452 0.25
--- ------------ -------
Total............................ 695 $107,380,484 100.00%
=== ============ ======
The weighted average mortgage rate of the initial Group 1 Loans was
approximately 8.431% per annum.
S-32
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS(%) INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------------------- --------------------- ----------------- -----------------
15.01 - 20.00.............................. 1 $ 119,892 0.11%
20.01 - 25.00.............................. 1 110,000 0.10
25.01 - 30.00.............................. 1 149,871 0.14
30.01 - 35.00.............................. 1 140,000 0.13
35.01 - 40.00.............................. 1 157,500 0.15
40.01 - 45.00.............................. 2 262,339 0.24
45.01 - 50.00.............................. 4 515,245 0.48
50.01 - 55.00.............................. 4 609,667 0.57
55.01 - 60.00.............................. 25 4,016,088 3.74
60.01 - 65.00.............................. 21 3,141,940 2.93
65.01 - 70.00.............................. 54 9,374,684 8.73
70.01 - 75.00.............................. 25 3,744,404 3.49
75.01 - 80.00.............................. 157 23,985,847 22.34
80.01 - 85.00.............................. 16 2,629,198 2.45
85.01 - 90.00.............................. 176 26,176,895 24.38
90.01 - 95.00.............................. 191 29,899,339 27.84
95.01 -100.00.............................. 15 2,347,575 2.19
--- ------------ ------
Total.................................. 695 $107,380,484 100.00%
=== ============ ======
The minimum and maximum loan-to-value ratios of the initial Group 1
Loans at origination were approximately 19.20% and 100.00%, respectively, and
the weighted average of the loan-to-value ratios of the initial Group 1 Loans at
origination was approximately 83.71%.
OCCUPANCY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
OCCUPANCY (AS INDICATED BY BORROWER) INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ --------------------- ----------------- -----------------
Second Home........................... 19 $ 2,379,688 2.22%
Non-Owner Occupied.................... 82 12,764,248 11.89
Primary Residence..................... 594 92,236,549 85.90
--- ------------ ------
Total................................ 695 $107,380,484 100.00%
=== ============ ======
S-33
MORTGAGE LOAN PROGRAM AND DOCUMENTATION TYPE
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM AND DOCUMENTATION TYPE INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- --------------------- ----------------- -----------------
Progressive Series Program (Full
Documentation)............................... 63 $ 11,126,034 10.36%
Progressive Series Program (Limited
(Stated) Documentation)...................... 96 16,237,624 15.12
Progressive Series Program (Alternative
Documentation)............................... 1 139,882 0.13
Progressive Express(TM)Program (Non
Verified Assets)............................. 319 46,781,981 43.57
Progressive Express(TM)Program (Verified
Assets)...................................... 135 21,665,917 20.18
Progressive Express(TM)No Doc Program
(No Documentation)........................... 78 11,152,946 10.39
Progressive Series Program (Lite
Income/Stated Asset Documentation)........... 3 276,100 0.26
--- ------------ -------
Total................................ 695 $107,380,484 100.00%
=== ============ ======
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DETAILED DESCRIPTION OF THE
SELLER'S LOAN PROGRAMS AND DOCUMENTATION REQUIREMENTS.
S-34
RISK CATEGORIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
CREDIT GRADE INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ --------------------- ----------------- -----------------
A+(1)...................................... 95 $ 17,319,109 16.13%
A(1)....................................... 63 10,004,360 9.32
A-(1)...................................... 5 456,171 0.42
Progressive Express(TM)I(2)................ 215 32,252,455 30.04
Progressive Express(TM)II(2)............... 261 39,397,365 36.69
Progressive Express(TM)III(2).............. 25 3,666,459 3.41
Progressive Express(TM)IV(2)............... 22 3,153,733 2.94
Progressive Express(TM)V(2)................ 5 480,453 0.45
Progressive Express(TM)VI(2)............... 4 650,378 0.61
--- ------------ -------
Total................................ 695 $107,380,484 100.00%
=== ============ ======
- -----------------
(1) All of these mortgage loans were reviewed and placed into risk categories
based on the credit standards of the Progressive Series Program. Credit grades
of A+, A and A- correspond to Progressive Series I+, I and II, and III and III+,
respectively. All of the mortgage loans originated pursuant to the Express
Priority Refi(TM) Program have been placed in Progressive Express(TM) Programs
II and III. SEE "--UNDERWRITING STANDARDS."
(2) These mortgage loans were originated under the Seller's Progressive
Express(TM) Program. The underwriting for these mortgage loans is generally
based on the borrower's "FICO" score and therefore these mortgage loans do not
correspond to the alphabetical risk categories listed above.
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DESCRIPTION OF THE SELLER'S
RISK CATEGORIES.
S-35
PROPERTY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- --------------------- ----------------- -----------------
Single-Family............................... 497 $ 76,021,521 70.80%
De Minimis PUD.............................. 77 12,903,604 12.02
Condominium................................. 53 6,969,642 6.49
Two- to Four-Family......................... 34 6,766,104 6.30
Planned Unit Development.................... 26 3,574,223 3.33
Hi-Rise..................................... 8 1,145,390 1.07
--- ------------ ------
Total.................................... 695 $107,380,484 100.00%
=== ============ ======
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
STATE INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- --------------------- ----------------- -----------------
California................................. 227 $ 40,602,456 37.81%
Florida.................................... 149 20,546,300 19.13
Georgia.................................... 33 4,429,456 4.13
New York................................... 27 5,094,570 4.74
Texas...................................... 48 6,245,659 5.82
Other (less than 3% in any one state)...... 211 30,462,043 28.37
--- ------------ -------
Total................................... 695 $107,380,484 100.00%
=== ============ ======
No more than approximately 0.85% of the initial Group 1 Loans (by
aggregate outstanding principal balance as of the Cut-off Date) will be secured
by mortgaged properties located in any one zip code.
S-36
LOAN PURPOSES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE INITIAL GROUP 1 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ --------------------- ----------------- -----------------
Purchase................................... 413 $ 63,845,597 59.46%
Cash-Out Refinance......................... 208 32,878,832 30.62
Rate and Term Refinance.................... 73 10,531,895 9.81
Construction............................... 1 124,160 0.12
--- ------------ ------
Total................................... 695 $107,380,484 100.00%
=== ============ ======
In general, in the case of a mortgage loan made for "rate and term"
refinance purposes, substantially all of the proceeds are used to pay in full
the principal balance of a previous mortgage loan of the mortgagor with respect
to a mortgaged property and to pay origination and closing costs associated with
such refinancing. Mortgage loans made for "cash-out" refinance purposes may
involve the use of the proceeds to pay in full the principal balance of a
previous mortgage loan and related costs except that a portion of the proceeds
are generally retained by the mortgagor for uses unrelated to the mortgaged
property. The amount of these proceeds retained by the mortgagor may be
substantial.
INITIAL GROUP 2 LOAN CHARACTERISTICS
The initial Group 2 Loans will consist of 120 conventional, one- to
four-family, fixed-rate, fully- amortizing and balloon payment mortgage loans
secured by first liens on mortgaged properties and having an aggregate principal
balance as of the Cut-off Date of approximately $48,517,658 after application of
scheduled payments due on or before the Cut-off Date whether or not received.
The average principal balance of the initial Group 2 Loans at
origination was approximately $404,645. No initial Group 2 Loan had a principal
balance at origination of greater than approximately $750,000 or less than
approximately $302,400. The average principal balance of the initial Group 2
Loans as of the Cut-off Date was approximately $404,314. No initial Group 2 Loan
had a principal balance as of the Cut-off Date of greater than approximately
$749,271 or less than approximately $302,181.
As of the Cut-off Date, the initial Group 2 Loans had mortgage rates
ranging from approximately 6.125% per annum to approximately 11.990% per annum
and the weighted average mortgage rate was approximately 7.615% per annum. The
weighted average remaining term to stated maturity of the initial Group 2 Loans
will be approximately 344 months as of the Cut-off Date. None of the initial
Group 2 Loans will have a first Due Date prior to June 1, 2001 or after March 1,
2002, or will have a remaining term to maturity of less than 175 months or
greater than 360 months as of the Cut-off Date. The latest maturity date of any
initial Group 2 Loan is February 1, 2032.
The weighted average loan-to-value ratio at origination of the initial
Group 2 Loans was approximately 73.11%. No loan-to-value ratio at origination
was greater than approximately 95.00% or less than approximately 18.34%.
Two initial Group 2 Loans representing approximately 1.34% of the
initial Group 2 Loans (by aggregate outstanding principal balance as of the
Cut-off Date), are balloon loans. The amount of the balloon payment on each of
these initial Group 2 Loans is substantially in excess of the amount of the
scheduled monthly payment on
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such initial Group 2 Loan for the period prior to the Due Date of the balloon
payment. Each of these initial Group 2 Loans has a remaining term to maturity of
178 months.
None of the initial Group 2 Loans are buydown mortgage loans.
None of the initial Group 2 Loans were 30 days or more delinquent as of
the Cut-off Date.
Set forth below is a description of certain additional characteristics
of the initial Group 2 Loans as of the Cut-off Date, except as otherwise
indicated. All percentages of the initial Group 2 Loans are approximate
percentages by aggregate principal balance of the initial Group 2 Loans as of
the Cut-off Date, except as otherwise indicated. Dollar amounts and percentages
may not add up to totals due to rounding.
PRINCIPAL BALANCES AT ORIGINATION
PERCENTAGE OF
ORIGINAL CUT-OFF DATE
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES($) INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ --------------------- ----------------- ------------------
300,000.01 - 350,000.00...................... 45 $14,548,386 29.99%
350,000.01 - 400,000.00...................... 22 8,269,968 17.05
400,000.01 - 450,000.00...................... 21 8,977,730 18.50
450,000.01 - 500,000.00...................... 18 8,589,181 17.70
500,000.01 - 550,000.00...................... 6 3,129,288 6.45
550,000.01 - 600,000.00...................... 4 2,264,862 4.67
600,000.01 - 650,000.00...................... 1 642,000 1.32
650,000.01 - 700,000.00...................... 2 1,346,973 2.78
700,000.01 - 750,000.00...................... 1 749,271 1.54
--- ----------- -------
Total................................... 120 $48,517,658 100.00%
=== =========== ======
The average principal balance of the initial Group 2 Loans at
origination was approximately $404,645.
S-38
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
PERCENTAGE OF
CUT-OFF DATE
CURRENT MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCES($) INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ --------------------- ----------------- ------------------
300,000.01 - 350,000.00...................... 45 $14,548,386 29.99%
350,000.01 - 400,000.00...................... 22 8,269,968 17.05
400,000.01 - 450,000.00...................... 21 8,977,730 18.50
450,000.01 - 500,000.00...................... 18 8,589,181 17.70
500,000.01 - 550,000.00...................... 6 3,129,288 6.45
550,000.01 - 600,000.00...................... 4 2,264,862 4.67
600,000.01 - 650,000.00...................... 1 642,000 1.32
650,000.01 - 700,000.00...................... 2 1,346,973 2.78
700,000.01 - 750,000.00...................... 1 749,271 1.54
--- ----------- ------
Total................................... 120 $48,517,658 100.00%
=== =========== ======
As of the Cut-off Date, the average current principal balance of
the initial Group 2 Loans will be approximately $404,314.
MORTGAGE RATES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES(%) INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- --------------------- ----------------- -----------------
6.000 - 6.499...................... 9 $ 4,288,899 8.84%
6.500 - 6.999...................... 31 13,055,246 26.91
7.000 - 7.179...................... 17 7,273,928 14.99
7.500 - 7.999...................... 17 6,692,772 13.79
8.000 - 8.179...................... 17 6,993,123 14.41
8.500 - 8.139...................... 13 4,707,864 9.70
9.000 - 9.489...................... 8 2,824,849 5.82
9.500 - 9.959...................... 5 1,745,759 3.60
10.000 - 10.499...................... 1 305,868 0.63
11.000 - 11.499...................... 1 306,350 0.63
11.500 - 11.999...................... 1 323,000 0.67
--- ----------- -------
Total............................ 120 $48,517,658 100.00%
=== =========== ======
The weighted average mortgage rate of the initial Group 2 Loans was
approximately 7.615% per annum.
S-39
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS(%) INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------------------- --------------------- ----------------- -----------------
15.01 - 20.00.............................. 1 $ 549,491 1.13%
20.01 - 25.00.............................. 2 880,473 1.81
30.01 - 35.00.............................. 1 498,630 1.03
40.01 - 45.00.............................. 1 499,620 1.03
45.01 - 50.00.............................. 2 951,000 1.96
50.01 - 55.00.............................. 3 1,496,273 3.08
55.01 - 60.00.............................. 5 1,969,564 4.06
60.01 - 65.00.............................. 8 2,929,523 6.04
65.01 - 70.00.............................. 29 12,602,769 25.98
70.01 - 75.00.............................. 8 3,244,728 6.69
75.01 - 80.00.............................. 27 11,140,606 22.96
80.01 - 85.00.............................. 4 1,389,499 2.86
85.01 - 90.00.............................. 21 7,731,823 15.94
90.01 - 95.00.............................. 8 2,633,661 5.43
--- ----------- --------
Total.................................. 120 $48,517,658 100.00%
=== =========== ------
The minimum and maximum loan-to-value ratios of the initial Group 2
Loans at origination were approximately 18.34% and 95.00%, respectively, and the
weighted average of the loan-to-value ratios of the initial Group 2 Loans at
origination was approximately 73.11%.
OCCUPANCY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
OCCUPANCY (AS INDICATED BY BORROWER) INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ --------------------- ----------------- -----------------
Second Home........................... 2 $ 738,417 1.52%
Non-Owner Occupied.................... 2 664,735 1.37
Primary Residence..................... 116 47,114,506 97.11
--- ------------ -------
Total................................ 120 $48,517,658 100.00%
=== =========== ======
S-40
MORTGAGE LOAN PROGRAM AND DOCUMENTATION TYPE
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM AND DOCUMENTATION TYPE INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- --------------------- ----------------- -----------------
Progressive Series Program (Full
Documentation)........................ 20 $ 9,334,022 19.24%
Progressive Series Program (Limited
(Stated) Documentation)............... 47 19,506,933 40.21
Progressive Express(TM)Program (Non
Verified Assets)...................... 24 9,040,813 18.63
Progressive Express(TM)Program
(Verified Assets)..................... 20 7,545,553 15.55
Progressive Express(TM)No Doc
Program (No Documentation)............ 9 3,090,338 6.37
--- ----------- -------
Total................................ 120 $48,517,658 100.00%
=== =========== ======
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DETAILED DESCRIPTION OF THE
SELLER'S LOAN PROGRAMS AND DOCUMENTATION REQUIREMENTS.
S-41
RISK CATEGORIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
CREDIT GRADE INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ --------------------- ----------------- -----------------
A+(1)...................................... 53 $22,699,926 46.79%
A(1)....................................... 14 6,141,028 12.66
Progressive Express(TM)I(2)................ 23 8,681,637 17.89
Progressive Express(TM)II(2)............... 24 8,597,177 17.72
Progressive Express(TM)III(2).............. 5 1,905,891 3.93
Progressive Express(TM)IV(2)............... 1 492,000 1.01
--- ----------- ------
Total................................ 120 $48,517,658 100.00%
=== =========== ======
- -----------------
(1) All of these mortgage loans were reviewed and placed into risk categories
based on the credit standards of the Progressive Series Program. Credit grades
of A+ and A correspond to Progressive Series I+, and I and II respectively. All
of the mortgage loans originated pursuant to the Express Priority Refi(TM)
Program have been placed in Progressive Express(TM) Programs II and III. SEE
"-UNDERWRITING STANDARDS."
(2) These mortgage loans were originated under the Seller's Progressive
Express(TM) Program. The underwriting for these mortgage loans is generally
based on the borrower's "FICO" score and therefore these mortgage loans do not
correspond to the alphabetical risk categories listed above.
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DESCRIPTION OF THE SELLER'S
RISK CATEGORIES.
S-42
PROPERTY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- --------------------- ----------------- -----------------
Single-Family............................... 97 $38,580,970 79.52%
De Minimis PUD.............................. 15 6,559,617 13.52
Condominium................................. 4 1,662,750 3.43
Two- to Four-Family......................... 3 1,360,821 2.80
Planned Unit Development.................... 1 353,500 0.73
--- ----------- ------
Total.................................... 120 $48,517,658 100.00%
=== =========== ======
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
STATE INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- --------------------- ----------------- -----------------
California................................. 79 $32,960,885 67.94%
Connecticut................................ 3 1,498,418 3.09
Florida.................................... 8 3,031,582 6.25
New Jersey................................. 4 1,457,814 3.00
New York................................... 10 3,954,669 8.15
Other (less than 3% in any one state)...... 16 5,614,290 11.57
--- ----------- ------
Total................................... 120 $48,517,658 100.00%
=== =========== ======
No more than approximately 3.38% of the initial Group 2 Loans (by
aggregate outstanding principal balance as of the Cut-off Date) will be secured
by mortgaged properties located in any one zip code.
S-43
LOAN PURPOSES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE INITIAL GROUP 2 LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ --------------------- ----------------- -----------------
Purchase................................... 39 $15,150,961 31.23%
Cash-Out Refinance......................... 48 19,508,942 40.21
Rate and Term Refinance.................... 33 13,857,755 28.56
--- ----------- ------
Total................................... 120 $48,517,658 100.00%
=== =========== ======
In general, in the case of a mortgage loan made for "rate and term"
refinance purposes, substantially all of the proceeds are used to pay in full
the principal balance of a previous mortgage loan of the mortgagor with respect
to a mortgaged property and to pay origination and closing costs associated with
such refinancing. Mortgage loans made for "cash-out" refinance purposes may
involve the use of the proceeds to pay in full the principal balance of a
previous mortgage loan and related costs except that a portion of the proceeds
are generally retained by the mortgagor for uses unrelated to the mortgaged
property. The amount of these proceeds retained by the mortgagor may be
substantial.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
Under and to the extent provided in the Agreement, the Trustee, on
behalf of the Trust, will be obligated to purchase from the Company during the
Funding Period, subject to the availability thereof, subsequent mortgage loans
secured by conventional, one- to four-family, fixed-rate mortgage loans secured
by first liens on residential mortgage properties. Each subsequent mortgage loan
shall have been underwritten in accordance with the criteria set forth under
"--Underwriting Standards" herein. The subsequent mortgage loans will be
transferred to the Trustee, on behalf of the Trust, pursuant to subsequent
transfer instruments between the Company and the Trustee. In connection with the
purchase of subsequent mortgage loans on such Subsequent Transfer Dates, the
Trustee, on behalf of the Trust, will be required to pay to the Company from
amounts on deposit in the Pre-Funding Account, a cash purchase price of 100% of
the principal balance thereof. The amount paid from the Pre-Funding Account on
each Subsequent Transfer Date will not include accrued interest on the related
subsequent mortgage loans. Following each Subsequent Transfer Date, the
aggregate principal balance of the mortgage loans will increase by an amount
equal to the aggregate principal balance of the related subsequent mortgage
loans so purchased and the amount in the Pre-Funding Account will decrease
accordingly.
The Pre-Funding Account will be established to provide the Trustee, on
behalf of the Trust, with sufficient funds to purchase subsequent mortgage
loans. During the Funding Period, the Original Pre-Funded Amount will be reduced
by the amount used to purchase subsequent mortgage loans for the mortgage pool
in accordance with the Agreement. Any investment income on funds in the
Pre-Funding Account will either be transferred to the Interest Coverage Account
or paid to the Company or its designee as provided in the Agreement.
Any conveyance of subsequent mortgage loans on a Subsequent Transfer
Date is subject to certain conditions including, but not limited to the
following: (a) each such mortgage loan must satisfy the representations and
warranties specified in the related Subsequent Transfer Instrument and the
Agreement; (b) the Company will not select such mortgage loans in a manner that
it believes to be adverse to the interests of the Certificateholders; (c) the
Company will deliver certain opinions of counsel with respect to the validity of
the conveyance of such mortgage loans; (d) as of the related Subsequent Cut-off
Date, each
S-44
such mortgage loan will satisfy the following criteria, among other things: (i)
the mortgage loan may not be 30 or more days delinquent as of the last day of
the calendar month preceding the related Subsequent Cut-off Date; (ii) no
mortgage loan will have a remaining term to maturity of less than 167 months or
greater than 360 months; (iii) if the mortgage loan has a loan-to-value ratio
greater than 80.00%, it is covered by a Primary Insurance Policy or the Radian
Lender-Paid PMI Policy; (iv) no mortgage loan will be a buydown mortgage loan;
(v) no mortgage loan will have a first Due Date prior to October 1, 2001 or
after May 1, 2002; (vi) no mortgage loan will have a maturity date later than
April 2032; (vii) no mortgage loan will have a credit score less than 600;
(viii) the mortgage loans shall have been underwritten in accordance with the
criteria set forth under "--Underwriting Standards" herein; and (ix) the
transfer of such mortgage loans into the mortgage pool during the Funding Period
will not result in the certificates receiving lower credit ratings from the
Ratings Agencies upon termination of the Funding Period than the ratings that
were obtained at the time of the initial offering of the certificates; and (e)
as of the related Subsequent Cut-off Date, each group of such mortgage loans
will satisfy the following criteria, among other things: (i) the weighted
average mortgage rate of such mortgage loans will be approximately 8.5%; (ii)
the weighted average credit score of such mortgage loans will be approximately
685; and (iii) no more than 46% and 16% of such mortgage loans will be
concentrated in the states of California and Florida, respectively.
UNDERWRITING STANDARDS
GENERAL
All of the initial mortgage loans were, and all of the subsequent
mortgage loans will be, originated by the Seller, generally in accordance with
the underwriting criteria specified in the prospectus, except as described in
this prospectus supplement.
Approximately 36.32% of the initial mortgage loans in the aggregate,
25.87% of the initial Group 1 Loans and 59.44% of the Initial Group 2 Loans were
underwritten pursuant to, or in accordance with, the standards of the Seller's
Progressive Series Program which is described below. Approximately 63.68% of the
initial mortgage loans in the aggregate, 74.13% of the initial Group 1 Loans and
40.56% of the initial Group 2 Loans were underwritten pursuant to, or in
accordance with, the standards of the Progressive Express(TM) Program,
respectively, each of which is described below.
DETAILS OF SPECIFIC PROGRAMS
The following provisions apply to all of the mortgage loans originated
under the Seller's Progressive Series Program and Progressive Express(TM)
Program.
ELIGIBILITY. The Seller generally performs a pre-funding audit on each
mortgage loan. This audit includes a review for compliance with the related
program parameters and accuracy of the legal documents.
QUALITY CONTROL. The Seller performs a post-closing quality control
review on a minimum of 25% of the mortgage loans originated or acquired under
the programs described below for complete re-verification of employment, income
and liquid assets used to qualify for such mortgage loan. Such review also
includes procedures intended to detect evidence of fraudulent documentation
and/or imprudent activity during the processing, funding, servicing or selling
of the mortgage loan. Verification of occupancy and applicable information is
made by regular mail.
VARIATIONS. The Seller uses the following parameters as guidelines
only. On a case-by-case basis, the Seller may determine that the prospective
mortgagor warrants an exception outside the standard program guidelines. An
exception may be allowed if the loan application reflects certain compensating
factors,
S-45
including instances where the prospective mortgagor:
o has demonstrated an ability to save and devote a greater
portion of income to basic housing needs;
o may have a potential for increased earnings and advancement
because of education or special job training, even if the
prospective mortgagor has just entered the job market;
o has demonstrated an ability to maintain a debt free position;
o may have short term income that is verifiable but could not be
counted as stable income because it does not meet the
remaining term requirements; and
o has net worth substantial enough to suggest that repayment of
the loan is within the prospective mortgagor's ability.
APPRAISALS. The Seller does not publish an approved appraiser list for
the conduit seller. Each conduit seller maintains its own list of appraisers,
provided that each appraiser must:
o be a state licensed or certified appraiser;
o meet the independent appraiser requirements for staff
appraisers, or, if appropriate, be on appraisers specified by
the Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the FDIC and the
Office of Thrift Supervision under their respective real
estate appraisal regulations adopted in accordance with Title
XI of the Financial Institutions Reform Recovery and
Enforcement Act of 1989, regardless of whether the seller is
subject to those regulations;
o be experienced in the appraisal of properties similar to the
type being appraised;
o be actively engaged in appraisal work; and
o subscribe to a code of ethics that is at least as strict as
the code of the American Institute of Real Estate Appraisers
or the Society of Real Estate Appraisers.
With respect to the Seller's Progressive Series Program or Progressive
Express(TM) Program one full appraisal is required on each loan. In addition, an
automated valuation model, or AVM, is obtained either (a) when the loan amount
is between $350,000 and $500,000 or (b) when the property has multiple units and
the loan-to-value ratio is equal to or less than 80%. An enhanced desk review is
required either (a) when the loan-to-value ratio is 90.01% to 95% or (b) when
the property has multiple units and the loan-to-value ratio is greater than 80%.
An enhanced field review is also required when the LTV ratio is over 95% or when
the loan amount is above $500,000, the property is unique, or the property
exceeds 10 acres. With respect to the Seller's Progressive Express(TM) No Doc
Program, one full appraisal is required on each loan. In addition, an enhanced
desk review is required. An enhanced field review is also required when the loan
amount is above $500,000, the property is unique or the property exceeds 10
acres. At the underwriter's discretion, any one of the above appraisal reviews
may be required when program parameters do not require an appraisal review.
S-46
THE PROGRESSIVE SERIES PROGRAM
GENERAL. The underwriting guidelines utilized in the Progressive Series
Program, as developed by the Seller, are intended to assess the borrower's
ability and willingness to repay the mortgage loan obligation and to assess the
adequacy of the mortgaged property as collateral for the mortgage loan. The
Progressive Series Program is designed to meet the needs of borrowers with
excellent credit, as well as those whose credit has been adversely affected. The
Progressive Series Program consists of seven mortgage loan programs. Each
program has different credit criteria, reserve requirements, qualifying ratios
and loan- to-value ratio restrictions. Series I is designed for credit history
and income requirements typical of "A" credit borrowers. In the event a borrower
does not fit the Series I criteria, the borrower's mortgage loan is placed into
either Series II, III, III+, IV, V or VI, depending on which series' mortgage
loan parameters meets the borrower's unique credit profile. Series II, III,
III+, IV, V or VI allow for less restrictive standards because of certain
compensating or offsetting factors such as a lower loan-to-value ratio, verified
liquid assets, job stability, pride of ownership and, in the case of refinance
mortgage loans, length of time owning the mortgaged property. The philosophy of
the Progressive Series Program is that no single borrower characteristic should
automatically determine whether an application for a mortgage loan should be
approved or disapproved. Lending decisions are based on a risk analysis
assessment after the review of the entire mortgage loan file. Each mortgage loan
is individually underwritten with emphasis placed on the overall quality of the
mortgage loan. The Progressive Series I, II, III, III+, IV, V and VI Program
borrowers are required to have debt service-to-income ratios within the range of
45% to 60% calculated on the basis of monthly income and depending on the
loan-to-value ratio of the mortgage loan.
Under the Progressive Series Program, the Seller underwrites one- to
four-family mortgage loans with loan-to-value ratios at origination of up to
97%, depending on, among other things, a borrower's credit history, repayment
ability and debt service-to-income ratio, as well as the type and use of the
mortgaged property. Second lien financing of the mortgaged properties may be
provided by lenders other than the Seller at origination; however, the combined
loan-to-value ratio ("CLTV") generally may not exceed 90% for mortgage loan
amounts up to $400,000 and 100% for mortgage loan amounts above $400,000. Under
the Seller's 80/20 program, which is available to Progressive Series I and II
borrowers only, the Seller may allow second lien financing at the same time as
the origination of the first lien with CLTVs of up to 100%. The Seller's 80/20
program requires one full appraisal and an AVM.
The mortgage loans in the Progressive Series Program generally bear
rates of interest that are greater than those which are originated in accordance
with Freddie Mac and Fannie Mae standards. In general, the maximum amount for
mortgage loans originated under the Progressive Series Program is $750,000;
however, the Seller may approve mortgage loans in excess of such amount on a
case-by-case basis.
All of the mortgage loans originated under the Progressive Series I, II
and III Programs are underwritten either by employees of the Seller or by
contracted mortgage insurance companies or delegated conduit sellers. Generally
all of the mortgage loans originated under the Series III+, IV, V and VI
Programs are underwritten by employees of the Seller and designated conduit
sellers. All of the Series I Program mortgage loans and all of the Series II and
III Program mortgage loans with loan-to-value ratios at origination in excess of
80% are insured by a Radian, Republic Mortgage Insurance Corporation, General
Electric Mortgage Insurance, PMI or United Guaranty Insurance. The borrower can
elect to have primary mortgage insurance covered by their loan payment. If the
borrower makes such election, a loan-to-value ratio between 80.01% and 90.00%
requires 22% coverage, a loan-to-value ratio between 90.01% and 95.00% requires
30% coverage and a loan-to-value ratio between 95.01% and 97.00% requires 35%
coverage. If the borrower does not make such election, the related mortgage loan
will be covered by a modified primary mortgage insurance policy issued by Radian
to the Seller providing coverage in the
S-47
amount of (i) 22% coverage for a mortgage loan with a loan-to-value ratio
between 80.01% and 90.00%, (ii) 30% coverage for a mortgage loan with a
loan-to-value ratio between 90.01% and 95.00% and (iii) 35% coverage for a
mortgage loan with a loan-to-value ratio between 95.01% and 97.00%. None of the
Series III+ Program mortgage loans with loan-to-value ratios at origination in
excess of 80% will be insured by a Primary Insurance Policy. All Series IV, V
and VI Program mortgage loans have loan-to-value ratios at origination which are
less than or equal to 85% and do not require a Primary Insurance Policy. The
Seller receives verbal verification from the conduit seller of employment prior
to funding or acquiring each Progressive Series Program mortgage loan.
FULL/ALTERNATIVE DOCUMENTATION AND REDUCED DOCUMENTATION PROGRESSIVE
SERIES PROGRAMS. Each prospective borrower completes a mortgage loan application
which includes information with respect to the applicant's liabilities, income,
credit history, employment history and personal information. The Seller requires
a credit report on each applicant from a credit reporting company. The report
typically contains information relating to credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments.
The Progressive Series Program allows for approval of an application
pursuant to the (a) Full/Alternative Documentation Program, or (b) the Limited
(Stated) Documentation Program (the foregoing, a "Reduced Documentation
Program"). The Full/Alternative Documentation Program requires the following
documents: (i) Uniform Residential Loan Application (Fannie Mae Form 1003 or
Freddie Mac Form 65), (ii) Statement of Assets and Liabilities (Fannie Mae Form
1003A or Freddie Mac Form 65A), (iii) Residential Mortgage Credit Report with
records obtained from at least two separate repositories, (iv) Verification of
Employment Form providing a complete two year employment history, (v)
Verification of Deposit Form for all liquid assets, verifying minimum cash
reserves based upon the loan-to-value ratio and borrower's income, and (vi) a
Uniform Residential Appraisal Report (Fannie Mae Form 1004 or Freddie Mac Form
70). The Full/Alternative Documentation Program allows for the use of certain
alternative documents in lieu of the Verification of Deposit Form and
Verification of Employment Form. These include W-2 Statements, tax returns and
one pay check from the most recent full month for verification of income and the
most recent one month personal bank statement for verification of liquid assets.
In addition, self- employed borrowers must provide federal tax returns for the
previous two years, including K-1's, federal business tax returns for two years,
year-to-date financial statements and a signed IRS Form 4506 (Request for Copy
of Tax Returns).
Under each Reduced Documentation Program (other than the Lite
Income/Stated Assets Program), which is available to borrowers in every
Progressive Series Program, the Seller obtains from prospective borrowers either
a verification of deposits or bank statements for the most recent one-month
period preceding the mortgage loan application. Under this program the borrower
provides income information on the mortgage loan application, and the debt
service-to-income ratio is calculated. However, income is not verified.
Permitted maximum loan-to-value ratios (including secondary financing) under the
Reduced Documentation Program generally are limited.
Under the Lite Income/Stated Assets Program (LISA), which is available
to borrowers for the Series I, II and III programs, the Seller obtains a 30-day
pay stub from prospective salaried borrowers and from prospective self-employed
borrowers, bank statements for the most recent 12-month period preceding the
mortgage loan application and a year-to-date profit and loss statement. Under
this program, the borrower provides income information on the mortgage loan
application, and the debt service-to-income ratio is calculated. The maximum
loan-to-value ratio under this program is 97%.
Under all Progressive Series Programs, the Seller or the conduit seller
verbally verifies the borrower's employment prior to closing. Credit history,
collateral quality and the amount of the down
S-48
payment are important factors in evaluating a mortgage loan submitted under one
of the Reduced Documentation Programs. In addition, in order to qualify for a
Reduced Documentation Program, a mortgage loan must conform to certain criteria
regarding maximum loan amount, property type and occupancy status. Mortgage
loans having a loan-to-value ratio at origination in excess of 80% for Series I,
II and III and mortgage loans on mortgaged property used as a second or vacation
home by the prospective borrowers are not eligible for a Reduced Documentation
Program. In general, the maximum loan amount for mortgage loans underwritten in
accordance with Series I, II and III Reduced Documentation Program is $650,000
for purchase transactions and rate-term transactions and a maximum loan amount
of $650,000 for cash out refinance transactions. The maximum loan amount for
mortgage loans underwritten in accordance with Series III+, IV, V and VI Reduced
Documentation Program is $400,000, however, exceptions are granted on a
case-by-case basis. Secondary financing is allowed in the origination of the
Reduced Documentation Program but must meet the CLTV requirements described
above and certain other requirements for subordinate financing. In all cases,
liquid assets must support the level of income of the borrower as stated in
proportion to the type of employment of the borrower. Full Documentation is
requested by the underwriter if it is the judgment of the underwriter that the
compensating factors are insufficient for loan approval.
CREDIT HISTORY. The Progressive Series Program defines an acceptable
credit history in each of the Series I, II and III Programs. The Series I
Program defines an acceptable credit history as a borrower who has "A" credit,
meaning a minimum of four trade accounts, including a mortgage and/or rental
history, along with one non-traditional trade account to satisfy five trades,
with 24 months credit history, no 30-day delinquent mortgage payments in the
last 12 months, and a maximum of one 30-day delinquent payments on any revolving
credit account within the past 12 months and a maximum of one 30-day delinquent
payment on installment credit account within the past 12 months. However, if the
Loan-to-Value Ratio of the loan is 90% or less, consumer credit is disregarded.
Bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established or re-affirmed satisfactory credit history.
Foreclosures are not allowed in the past 3 years. No judgments, suits liens,
collections or charge-offs in the past 24 months, generally older items must be
paid prior to or at closing. Tax liens are not allowed within the last 24
months.
With respect to the Series II Program, a borrower must have a minimum
of four trade accounts including a mortgage and/or rental history, along with
one non-traditional trade account to satisfy five trades, with no late mortgage
payments for the past 12 months and may have one 30-day delinquent mortgage
payment within the past 13th through 24th months. A borrower may not have more
than three 30- day delinquent payments on any revolving credit account and a
maximum of three 30-day delinquent payments within the past 12 months on any
installment credit account. However, if the Loan-to-Value Ratio of the loan is
90% or less, consumer credit is disregarded. All bankruptcies must be at least
24 months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed in the
past 3 years. No judgments, suits liens, collections or charge-offs in the past
24 months, generally older items must be paid prior to or at closing. Tax liens
are not allowed within the last 24 months.
With respect to the Series III Program, a borrower must have a minimum
of four trade accounts including a mortgage and/or rental history, along with
one non-traditional trade account to satisfy five trades, with 24-months credit
history, a borrower may not have more than two 30-day delinquent mortgage
payments within the past 12 months and may have no more than three 30-day
delinquent mortgage payments within the past 13th through 24th months.
Bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established or re-affirmed satisfactory credit history.
Foreclosures are not allowed in the past 3 years. No judgments, suits liens,
collections or charge-offs in the past 24 months, generally older items must be
paid prior to or at closing. Tax liens are not allowed within the last 24
S-49
months.
With respect to the Series III+ Program, a borrower must have a minimum
of two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than two 30-day delinquent mortgage
payments within the past 12 months. Any open judgments, suits, liens,
collections and charge-offs not to exceed $500 per incident generally are paid
prior to or at closing. Bankruptcies must be at least 24 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed during the past 24 months. Tax
liens are not allowed within the last 12 months.
With respect to the Series IV Program, a borrower must have a minimum
of two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than four 30-day delinquent mortgage
payments or three 30-day delinquent mortgage payments and one 60-day delinquent
mortgage payment within the past 12 months. Any open judgments, suits, liens,
collections and charge-offs not to exceed $1,000 per incident generally are paid
prior to or at closing. Bankruptcies must be at least 18 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed in the past 18 months. Tax liens
are not allowed within the last 12 months.
With respect to the Series V Program, a borrower must have a minimum of
two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than five 30-day delinquent mortgage
payments or two 60-day delinquent mortgage payments and one 90-day delinquent
mortgage payment within the past 12 months. Any open judgments, suits, liens,
collections and charge-offs not to exceed $4,000 per incident generally are paid
prior to or at closing. Bankruptcies must be at least 12 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed in the past 12 months. Tax liens
are not allowed within the last 12 months.
With respect to the Series VI program, a borrower must have a minimum
of two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than one 90-day delinquent mortgage
payment within the past 12 months. Any open judgements, suits, liens,
collections and charge-offs generally are paid prior to or at closing.
Bankruptcies must be at least 6 months old. Foreclosures are not allowed in the
past 6 months. Tax liens are not allowed within the last 6 months.
THE PROGRESSIVE EXPRESSTM PROGRAMS
PROGRESSIVE EXPRESSTM PROGRAMS WITH DOCUMENTATION
GENERAL. In July 1996, the Seller developed an additional series to the
Progressive Program, the "Progressive Express(TM) Program." The concept of the
Progressive Express(TM) Program is to underwrite the loan focusing on the
borrower's Credit Score, ability and willingness to repay the mortgage loan
obligation, and assess the adequacy of the mortgaged property as collateral for
the loan. The Credit Score is an electronic evaluation of past and present
credit accounts on the borrower's credit bureau report. This includes all
reported accounts as well as public records and inquiries. The Progressive
Express(TM) Program offers six levels of mortgage loan programs. The Progressive
Express(TM) Program has a minimum Credit Score that must be met by the
borrower's primary wage earner and does not allow for exceptions to the Credit
Score requirement. The Credit Score requirement is as follows: Progressive
Express(TM) I above 680, Progressive Express(TM) II 680-620, Progressive
Express(TM) III 619-601, Progressive Express(TM) IV 600-581, Progressive
Express(TM) V 580-551, and Progressive Express(TM) VI 550-500. Each Progressive
Express(TM) program has different Credit Score requirements, credit criteria,
reserve requirements, and loan-to-value
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ratio restrictions. Progressive Express(TM) I is designed for credit history and
income requirements typical of "A+" credit borrowers. In the event a borrower
does not fit the Progressive Express(TM) I criteria, the borrower's mortgage
loan is placed into either Progressive Express(TM) II, III, IV, V, or VI,
depending on which series' mortgage loan parameters meets the borrowers unique
credit profile.
All of the mortgage loans originated under the Progressive Express(TM)
program are underwritten either by employees of the Seller or by contracted
mortgage insurance companies or delegated conduit sellers. Under the Progressive
Express(TM) Program, the Seller underwrites single family dwellings with loan-
to-value ratios at origination of up to 100%. For loans that exceed a 97%
loan-to-value ratio to a maximum of a 100% loan-to-value ratio, (i) such loans
must be for purchase transactions only, (ii) the borrower must have a minimum
credit score of 720, (iii) the mortgaged property must be an owner-occupied,
primary residence, (iv) the borrower must state income and assets on the
Residential Loan Application and meet a debt ratio not to exceed 50% and (v)
such loan must be underwritten utilizing the Impac Direct Access System for
Lending (IDASL) automated underwriting system. Condominiums are not allowed on
the 100% loan-to-value ratio feature. In order for the property to be eligible
for the Progressive Express(TM) Program, it must be a single family residence (1
unit only) or on Express I and II 2-units, condominium, and/or planned unit
development (PUD). Progressive Express(TM) I loans are permitted on non-owner
occupied properties subject to a maximum loan-to-value ratio of 90%. Progressive
Express(TM) II loans are permitted on non- owner occupied properties subject to
a maximum loan-to-value ratio of 80%. Progressive Express(TM) Programs I through
IV loans with loan-to-value ratios at origination in excess of 80% are insured
by Radian or RMIC. The borrower can elect to have primary mortgage insurance
covered by their loan payment. If the borrower makes such election, a
loan-to-value ratio between 80.01% and 89.99% requires 22% coverage, and a
loan-to-value ratio between 90.00% and 95.00% requires 30% coverage and a
loan-to-value ratio between 95.01% and 100% requires 35% coverage. If the
borrower does not make such election, the related mortgage loan will be covered
by a modified primary mortgage insurance policy issued by Radian to the Seller
providing coverage in the amount of (i) 22% for a mortgage loan with a
loan-to-value ratio between 80.01% and 89.99%, (ii) 30% for a mortgage loan with
a loan-to-value ratio between 90% and 95% and (iii) 35% for mortgage loan with a
loan-to-value ratio between 95.01% and 100%.
Each borrower completes a Residential Loan Application (Fannie Mae 1003
or Freddie Mac Form 65). The borrower must disclose employment and assets on the
application, however, there is no verification of the information. The conduit
seller obtains a verbal verification of employment on each borrower.
The Seller uses the foregoing parameters as guidelines only. Sellers
may include certain provisions in the note that the Seller may not enforce,
particularly, when a fixed rate loan provides in the addendum to the note for a
prepayment penalty. Full documentation is requested by the underwriter if it is
the judgment of the underwriter that the compensating factors are insufficient
for loan approval under the Progressive Express(TM) Product Line.
CREDIT HISTORY. The Progressive Express(TM) Program defines an
acceptable credit history in each of the programs I through VI. Progressive
Express(TM) I defines an acceptable credit history as a borrower who has "A+"
credit, meaning a minimum of four trade accounts including a mortgage and/or
rental history, along with one non-traditional trade account to satisfy five
trades, no 30-day delinquent mortgage payments in the past 12 months, and a
maximum of one 30-day delinquent payments on any revolving credit accounts
within the past 12 months and one 30-day delinquent payment on any installment
credit accounts within the past 12 months. However, if the Loan-to-Value Ratio
of the loan is 90% or less, consumer credit is disregarded. All bankruptcies
must be at least 24 months old, fully discharged and the borrower must have
re-established or re-affirmed satisfactory credit history. Foreclosures are not
allowed in the past 3 years. No judgments, suits liens, collections or
charge-offs in the past 24 months, generally older items must be paid prior to
or at closing. Tax liens are not allowed within the last 24 months.
S-51
With respect to Progressive Express(TM) II, a borrower must have a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, and no late
mortgage payments for the past 12 months. In addition, a borrower must have a
maximum of two 30-day delinquent payments on any revolving credit accounts
within the past 12 months and one 30-day delinquent payment on any installment
credit accounts within the past 12 months. However, if the loan-to-value ratio
of the loan is 90% or less, revolving and installment credit is disregarded. All
bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established or re-affirmed satisfactory credit history.
Foreclosures are not allowed in the past 3 years. No judgments, suits, tax
liens, other liens, collections or charge-offs allowed within the past 24
months, generally older items must be paid prior to or at closing.
With respect to Progressive Express(TM) III, a borrower must have a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, no late mortgage
payments for the past 12 months and may have one 30-day late mortgage payment
within the past 13 and 24 months. All bankruptcies must be at least 24 months
old, fully discharged and the borrower must have re-established or re-affirmed
satisfactory credit history. Foreclosures are not allowed in the past 3 years.
No judgments, suits, tax liens, other liens, collections or charge-offs allowed
within the past 24 months, generally older items must be paid prior to or at
closing.
With respect to Progressive Express(TM) IV, a borrower must have a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, no more than two
30-day late mortgage payments for the past 12 months or three 30-day late
mortgage payments in the past 24 months. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed in the
past 3 years. Tax liens are not allowed within the last 24 months. No judgments,
suits, tax liens, other liens, collections or charge-offs allowed within the
past 24 months, generally older items must be paid prior to or at closing.
With respect to Progressive Express(TM) V, a borrower must have a
minimum of two trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy three trades, with 12 months
credit history, no more than two 30-day late mortgage payments in the past 12
months. All bankruptcies must be at least 24 months old, fully discharged and
the borrower must have re- established or re-affirmed satisfactory credit
history. Foreclosures are not allowed in the past 24 months. Judgments, suits,
liens, collections or charge-offs, may not exceed $500, and must be paid prior
to or at closing. Tax liens are not allowed within the last 12 months.
With respect to Progressive Express(TM) VI, a borrower must have a
minimum of two trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy three trades, with 12 months
credit history, no more than four 30-day or three 30-day and one 60-day late
mortgage payments in the past 12 months. All bankruptcies must be at least 18
months old and fully discharged. Foreclosures are not allowed in the past 18
months. Judgments, suits, liens, collections or charge-offs, may not exceed
$1,000, and must be paid prior to or at closing. Tax liens are not allowed
within the last 12 months.
PROGRESSIVE EXPRESS(TM) NO DOC PROGRAM
In May, 1999, the Seller introduced a Progressive Express(TM) No Doc
Program (the "No Doc program"). The concept of the No Doc program is to
underwrite the loan focusing on the borrower's credit score, ability and
willingness to repay the mortgage loan obligation, and assess the adequacy of
the mortgaged property as collateral for the loan. The No Doc program has a
minimum credit score and does
S-52
not allow for exceptions to the credit score. The credit score requirement is as
follows: 681 for Progressive Express(TM)No Doc I and 620 for Progressive
Express(TM)No Doc II. Each program has a different credit score requirement and
credit criteria.
All of the mortgage loans originated under the Progressive Express(TM)
No Doc program are underwritten either by employees of the Seller or by
contracted mortgage insurance companies or delegated conduit sellers. Under the
Progressive Express(TM) No Doc program, the Seller employees or contracted
mortgage insurance companies or delegated conduit sellers underwrite single
family dwellings with loan-to- value ratios at origination up to 95% and
$400,000. In order for the property to be eligible for the Progressive
Express(TM) No Doc program, it must be a single family residence (single unit
only), condominium and/or planned unit development (PUD) or 2-units to a maximum
loan-to-value ratio of 80%. The borrower can elect to have primary mortgage
insurance covered by their loan payment. If the borrower makes such election,
the loan-to-value ratios at origination in excess of 80%, are insured by Radian.
For loan-to-value ratios of 80.01% to 89.99%, mortgage insurance coverage is 22%
and for loan-to-value ratios of 90% to 95%, mortgage insurance coverage is 30%.
If the borrower does not make such election, the related mortgage loan will be
covered by a modified primary insurance policy issued by Radian to the Seller
providing coverage in the amount of 22% for a mortgage loan with a loan-to-value
ratio between 80.01% and 89.99% and 30% for a mortgage loan with a loan-to-value
ratio of 90% to 95%.
Each borrower completes a Residential Loan Application (Fannie Mae 1003
or Freddie Mac Form 65). The borrower does not disclose income, employment, or
assets and a Verbal Verification of Employment is not provided. Generally,
borrowers provide a daytime telephone number as well as an evening telephone
number.
CREDIT HISTORY. The Progressive Express(TM) No Doc program defines an
acceptable credit history as follows: Progressive Express(TM) No Doc I defines
an acceptable credit history as a borrower who has "A+" credit, meaning a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, and no 30-day
delinquent mortgage payments in the past 12 months and a maximum of one 30-day
delinquent payments on any revolving credit account within the past 12 months
and a maximum of one 30-day delinquent payment on installment credit account
within the past 12 months. However, if the Loan-to-Value Ratio of the loan is
90% or less, revolving and installment credit is disregarded. All bankruptcies
must be at least 24 months old, fully discharged and the borrower must have
re-established or re-affirmed a satisfactory credit history. Foreclosures are
not allowed in the past 3 years. No judgments, suits, liens, collections or
charge-offs are allowed within the past 24 months. Tax liens are not allowed
within the past 24 months.
With respect to Progressive Express(TM) No Doc II a borrower must have
a minimum of four trade accounts including a mortgage and/or rental history,
along with one non-traditional trade account to satisfy five trades, and no late
mortgage payments for the past 12 months and a maximum of two 30-day delinquent
payments on any revolving credit accounts within the past 12 months and a
maximum of one 30-day delinquent payment on installment credit account within
the past 12 months. However, if the Loan-to-Value Ratio of the loan is 90% or
less, revolving and installment credit is disregarded. All bankruptcies must be
at least 24 months old, fully discharged and the borrower must have
re-established or re-affirmed satisfactory credit history. Foreclosures are not
allowed in past 3 years. No judgments, suits, tax liens, other liens,
collections or charge-offs allowed within the past 24 months, generally older
items must be paid prior to or at closing. Tax liens are not allowed within the
past 24 months.
IN ADDITION, SEE "THE MORTGAGE POOLS--UNDERWRITING STANDARDS" IN THE
PROSPECTUS.
S-53
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE SELLER
Based solely upon information provided by the Seller, the following
tables summarize, for the respective dates indicated, the delinquency,
foreclosure, bankruptcy and REO property status with respect to all mortgage
loans originated or acquired by the Seller which were being master serviced by
the Seller at the dates indicated. The indicated periods of delinquency are
based on the number of days past due on a contractual basis. The monthly
payments under all of such mortgage loans are due on the first day of each
calendar month. A mortgage loan is considered "30 days" delinquent if a payment
due on the first of the month is not received by the second day of the following
month, and so forth.
A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing- released basis. The following information does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased
delinquency percentages for the total portfolio of mortgage loans serviced as of
December 31, 1999.
S-54
At December 31, 1997 At December 31, 1998 At December 31, 1999
---------------------------- --------------------------- ----------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Total Loans Outstanding.... 28,494 $3,028,554 33,414 $3,713,986 26,002 $2,878,701
DELINQUENCY 1 2
Period of Delinquency:
30-59 Days........... 1,167 $136,427 1,677 $172,723 1,103 $124,875
60-89 Days........... 282 33,203 506 46,719 286 27,997
90 Days or More...... 69 6,454 799 51,454 369 21,113
----- ----------- ------- ----------- ------ ----------
Total Delinquencies...... 1,518 $176,084 2,982 $270,896 1,758 $173,985
===== ======== ===== ======== ===== ========
Delinquencies as a
Percentage of Total
Loans Outstanding.......... 5.33% 5.81% 8.92% 7.29% 6.76% 6.04%
At December 31, 2000 At December 31, 2001
---------------------------- ----------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Total Loans Outstanding.... 31,971 $4,042,859 37,972 $5,568,740
DELINQUENCY 1 2
Period of Delinquency:
30-59 Days........... 1,941 $242,081 2,064 $287,616
60-89 Days........... 529 65,809 531 72,460
90 Days or More...... 266 25,952 705 72,544
------ ---------- ---- ----------
Total Delinquencies...... 2,736 $333,842 3,300 $432,620
===== ======== ===== ========
Delinquencies as a
Percentage of Total
Loans Outstanding.......... 8.56% 8.26% 8.69% 7.77%
- --------
1 The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were in foreclosure at
the respective dates indicated ("Foreclosure Loans"), (b) delinquent
mortgage loans as to which the related mortgagor was in bankruptcy
proceedings at the respective dates indicated ("Bankruptcy Loans") and (c)
REO properties that have been purchased upon foreclosure of the related
mortgage loans. All Foreclosure Loans, Bankruptcy Loans and REO properties
have been segregated into the sections of the table entitled "Foreclosures
Pending," "Bankruptcies Pending" and "REO Properties," respectively, and are
not included in the "30-59 Days," "60-89 Days," "90 Days or More" and "Total
Delinquencies" sections of the table. See the section of the table entitled
"Total Delinquencies plus Foreclosures Pending and Bankruptcies Pending" for
total delinquency balances, percentages and numbers which include
Foreclosure Loans and Bankruptcy Loans, and see the section of the table
entitled "REO Properties" for delinquency balances, percentages and numbers
related to REO properties that have been purchased upon foreclosure of the
related mortgage loans.
2 A substantial majority of mortgage loan sales by the Seller during 1999 were
made on a servicing-released basis. The information on this table does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased
delinquency percentages for the total portfolio of mortgage loans serviced
as of December 31, 1999.
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At December 31, 1997 At December 31, 1998 At December 31, 1999
---------------------------- ---------------------------- ---------------------------- -
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
FORECLOSURES PENDING3............ 378 $ 41,792 459 $ 54,678 334 $ 46,969
Foreclosures Pending as a
Percentage of Total Loans
Outstanding...................... 1.33% 1.38% 1.37% 1.47% 1.28% 1.63%
BANKRUPTCIES PENDING4............ 140 $ 15,517 362 $ 25,973 419 $ 33,188
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 0.49% 0.51% 1.08% 0.70% 1.61% 1.15%
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending............. 2,036 $233,393 3,803 $351,547 2,511 $254,142
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 7.15% 7.71% 11.38% 9.47% 9.66% 8.83%
REO PROPERTIES5.................. 80 $ 9,276 116 $ 13,958 119 $ 13,882
REO Properties as a Percentage
of Total Loans Outstanding....... 0.28% 0.31% 0.35% 0.38% 0.46% 0.48%
At December 31, 2000 At December 31, 2001
--------------------------- ---------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
FORECLOSURES PENDING3............ 396 $ 57,133 931 $132,571
Foreclosures Pending as a
Percentage of Total Loans
Outstanding...................... 1.24% 1.41% 2.45% 2.38%
BANKRUPTCIES PENDING4............ 227 $ 22,556 259 $ 22,054
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 0.71% 0.56% 0.68% 0.40%
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending............. 3,359 $413,531 4,490 $587,245
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 10.51% 10.23% 11.82% 10.55%
REO PROPERTIES5.................. 105 $ 13,944 223 $ 37,631
REO Properties as a Percentage
of Total Loans Outstanding....... 0.33% 0.34% 0.59% 0.68%
- --------
3 Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It is
generally the Master Servicer's policy, with respect to mortgage loans
originated by the Seller, to commence foreclosure proceedings when a
mortgage loan is 60 days or more delinquent. However, the Master Servicer
may delay the foreclosure process as a result of loss mitigation efforts.
4 Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
5 REO properties that have been purchased upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by the
Seller after the respective dates indicated.
S-56
The above data on delinquency, foreclosure, bankruptcy and REO property
status as of December 31, 1999, include mortgage loans which were sold
servicing-released by the Seller, but for which the servicing had not yet been
transferred as of such date.
A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing- released basis. The following information does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased loss
percentages for the total portfolio of mortgage loans serviced as of December
31, 1999.
Based solely on information provided by the Seller, the following table
presents the changes in the Seller's charge-offs and recoveries for the periods
indicated.
S-57
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------------- ----------------------- ------------------------
(DOLLARS IN (DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS) THOUSANDS)
Charge-offs:
Mortgage Loan Properties.. $ 291 $ 2,684 $ 7,026
REO Properties............ 4,862 (153) 2,165
Recoveries:
Mortgage Loan Properties.. 62 0 713
REO Properties............ 18 0 0
Net charge-offs:............... 5,073 2,531* 8,478
Ratio of net charge-offs to
average loans outstanding during
the indicated period***........ 0.22%** 0.08%** 0.34%**
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
------------------------ -------------------------
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)
Charge-offs:
Mortgage Loan Properties.. $ 12,785 $ 6,475
REO Properties............ 4,779 4,584
Recoveries:
Mortgage Loan Properties.. 409 849
REO Properties............ 0 0
Net charge-offs:............... 17,155 10,210
Ratio of net charge-offs to
average loans outstanding during
the indicated period***........ 0.51%** 0.21%**
- ---------------
* Does not include losses of $358,354 from the sale of delinquent loans
recorded by the Seller during the twelve months ended December 31,
1998.
** The ratio of net charge-offs was based upon annualized charge-offs for
the indicated periods. The average loans outstanding was computed using
monthly balances for the indicated periods.
*** The information on this table does not include statistical information
on mortgage loans which have recently been sold on a servicing-released
basis by the Seller to third parties. In addition, it does not include
statistical information for mortgage loans for which the servicing
rights were sold by the Seller in 1999. As a result, the aggregate
principal balance of non-delinquent mortgage loans serviced has
decreased, resulting in increased loss percentages for mortgage loans
serviced as of December 31, 1998 and December 31, 1999.
S-58
The above data on charge-offs and recoveries are calculated on the
basis of the total mortgage loans originated or acquired by the Seller. However,
the total amount of mortgage loans on which the above data are based includes
many mortgage loans which were not, as of the respective dates indicated,
outstanding long enough to give rise to some of the indicated charge-offs. In
the absence of such mortgage loans, the charge-off percentages indicated above
would be higher and could be substantially higher. Because the mortgage pool
will consist of a fixed group of mortgage loans, the actual charge-off
percentages with respect to the mortgage pool may therefore be expected to be
higher, and may be substantially higher, than the percentages indicated above.
The information set forth in the preceding paragraphs concerning the
Seller has been provided by the Seller.
ADDITIONAL INFORMATION
The description in this prospectus supplement of the mortgage pool and
the mortgaged properties is based upon the mortgage pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before this 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 company deems this removal necessary or
desirable, and may be prepaid at any time. In no event, however, will more than
5% (by principal balance at the Cut-off Date) of the mortgage loans deviate from
the characteristics of the mortgage loans set forth in the related prospectus
supplement.
YIELD ON THE CERTIFICATES
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 principal 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
Relief Act to any mortgage loan will adversely affect, for an indeterminate
period of time, the ability of the Master Servicer to collect full amounts of
interest on the mortgage loan. SEE "LEGAL ASPECTS OF THE MORTGAGE
LOANS--SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940" IN THE PROSPECTUS. The
Master Servicer is obligated to pay from its own funds only those interest
shortfalls attributable to full and partial prepayments by the mortgagors on the
mortgage loans master serviced by it, but only to the extent of its aggregate
Servicing Fee for the related Due Period. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" in this
prospectus supplement. Accordingly, the effect of (1) any principal prepayments
on the mortgage loans, to the extent that any resulting Prepayment Interest
Shortfall exceeds any Compensating Interest or (2) 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 holders of the
Certificates. Any resulting shortfalls will be allocated among the Certificates
as provided in this prospectus supplement under "Description of the
Certificates--Interest Distributions."
GENERAL YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the offered certificates will be sensitive to
defaults on the mortgage loans.
S-59
If a purchaser of an offered certificate calculates its anticipated yield based
on an assumed rate of default and amount of losses that is lower than the
default rate and amount of losses actually incurred, its actual yield to
maturity will be lower than that so calculated. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There can
be no assurance as to the delinquency, foreclosure or loss experience with
respect to the mortgage loans. Because the mortgage loans were underwritten in
accordance with standards less stringent than those generally acceptable to
Fannie Mae and Freddie Mac with regard to a borrower's credit standing and
repayment ability, the risk of delinquencies with respect to, and losses on, the
mortgage loans will be greater than that of mortgage loans underwritten in
accordance with Fannie Mae and Freddie Mac standards.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the offered certificates will be affected by 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 and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the mortgage loans due to defaults, casualties or condemnations
and repurchases by the Seller). Certain of the mortgage loans contain prepayment
charge provisions. The rate of principal payments may or may not be less than
the rate of principal payments for mortgage loans that did not have prepayment
charge provisions. The mortgage loans are subject to the "due- on-sale"
provisions included therein. SEE "THE MORTGAGE POOL" HEREIN.
Prepayments, liquidations and purchases of the mortgage loans
(including any optional purchases) will result in distributions on the offered
certificates (other than the Class A-IO Certificates) of principal amounts which
would otherwise be distributed over the remaining terms of the mortgage loans.
Since the rate of payment of principal on the mortgage loans will depend on
future events and a variety of other factors, no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of a class of offered certificates may vary from the anticipated yield
will depend, in the case of the offered certificates (other than the Class A-IO
Certificates), upon the degree to which such class of certificates is purchased
at a discount or premium. Further, an investor should consider the risk that, in
the case of any offered certificate (other than the Class A-IO Certificates)
purchased at a discount, a slower than anticipated rate of principal payments
(including prepayments) on the mortgage loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of any
offered certificate (other than the Class A-IO Certificates) purchased at a
premium, a faster than anticipated rate of principal payments on the mortgage
loans could result in an actual yield to such investor that is lower than the
anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the mortgage rates on the
mortgage loans, such mortgage loans could be subject to higher prepayment rates
than if prevailing interest rates were to remain at or above the mortgage rates
on such mortgage loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such mortgage loans would generally be
expected to decrease. The mortgage loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors may be inclined to refinance
their mortgage loans with a fixed-rate loan to "lock in" a lower interest rate
or to refinance their Mortgage Loans with adjustable-rate mortgage loans with
low introductory interest rates. No assurances can be given as to the rate of
prepayments on the mortgage loans in stable or changing interest rate
environments.
The portion of the Principal Distribution Amount paid to the Class
A-I-1, Class A-I-2, Class A-I-3,
S-60
Class A-I-4, Class A-I-5 and Class A-I-6 Certificates, including the portion of
Principal Distribution Amount consisting of the Net Monthly Excess Cashflow
payable as part of the Overcollateralization Increase Amount, will be equal to
the Group I Principal Fraction of the Principal Distribution Amount, which
fraction is based on the proportion of the Principal Remittance Amount from the
Group 1 Loans to the Principal Remittance Amount received from all of the
mortgage loans. The portion of the Principal Distribution Amount paid to the
Class A-II Certificates, including the portion of Principal Distribution Amount
consisting of the Net Monthly Excess Cashflow payable as part of the
Overcollateralization Increase Amount, will be equal to the Group II Principal
Fraction of the Principal Distribution Amount, which fraction is based on the
proportion of the Principal Remittance Amount from the Group 2 Loans to the
Principal Remittance Amount received from all of the mortgage loans. In
addition, if on any distribution date the Certificate Principal Balance of the
Class A Certificates related to a loan group has been reduced to zero, the
portion of the Principal Distribution Amount otherwise payable to the Class A
Certificates will be allocated to the remaining classes of Class A Certificates.
Because principal distributions are paid to certain classes of offered
certificates before other such 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.
To the extent the related Net WAC Rate becomes the Pass-Through Rate on
the Class A-I Certificates, Class A-II Certificates or Mezzanine Certificates,
or to the extent the Class A-IO Cap Rate becomes the Pass-Through Rate on the
Class A-IO Certificates, then in any such case, less interest will accrue on
such certificates than would otherwise be the case. For the February 2002
distribution date through the July 2004 distribution date, the Net WAC Rate on
the Class A-I Certificates, Class A-II Certificates and Mezzanine Certificates
will be calculated by reference to the weighted average net mortgage rate of the
mortgage loans, as adjusted for interest payable to the Class A-IO Certificates.
However, on and after the August 2004 distribution date, the Net WAC Rate on the
Class A-I Certificates will be equal to the weighted average of the net mortgage
rates on the Group 1 Loans, the Net WAC Rate on the Class A-II Certificates will
be equal to the weighted average of the net mortgage rates on the Group 2 Loans,
and the Net WAC Rate on the Mezzanine Certificates will be equal to the lesser
of the weighted average of the net mortgage rates on the Group 1 Loans and the
weighted average of the net mortgage rates on the Group 2 Loans. The holders of
the offered certificates WILL NOT be entitled to recover interest in excess of
any applicable limited rate on any future distribution date from Net Monthly
Excess Cashflow or from any other source, other than from the Net WAC Shortfall
Reserve Fund. For a discussion of factors that could limit the Pass-Through Rate
on the Certificates, see "Risk Factors--The Pass-Through Rates on the Offered
Certificates are Subject to Limitation" in this prospectus supplement.
Approximately 72.35% of the initial mortgage loans, 73.58% of the Group
1 Loans and 69.64% of the Group 2 Loans provide for payment by the borrower of a
prepayment charge in limited circumstances on certain prepayments. The holders
of the Class P 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. The Master Servicer may waive the
collection of any otherwise applicable prepayment charge or reduce the amount
thereof actually collected, but only if the Master Servicer does so in
compliance with the prepayment charge waiver standards set forth in the
Agreement. If the Master Servicer waives any prepayment charge other than in
accordance with the standards set forth in the Agreement, the Master Servicer
will be required to pay the amount of the waived prepayment charge. There can be
no assurance that the prepayment charges will have any effect on the prepayment
performance of the mortgage loans. Investors should conduct their own analysis
of the effect, if any, that the prepayment premiums, and decisions by the master
servicer with respect to the waiver thereof, may have on the prepayment
performance of the mortgage loans.
S-61
MARKET INTEREST RATE CONSIDERATIONS
Because the mortgage rates on the mortgage loans are fixed interest
rates and the Pass-Through Rates on the offered certificates (other than the
Class A-I-1 Certificates) are fixed rates (which may be subject to limitation or
increase as described herein), these rates will not change in response to
changes in market interest rates. Accordingly, if mortgage market interest rates
or market yields for securities similar to these offered certificates were to
rise, the market value of these offered certificates may decline.
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the overcollateralization and the certificate principal balances of
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 overcollateralization and the certificate
principal balance of 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 overcollateralization has 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 evidenced by the
Class M-1 Certificates, the Class M-2 Certificates and the Class B Certificates
are approximately 3.00%, approximately 2.00% and approximately 1.75%,
respectively. The sum of the aggregate principal balance of the mortgage loans
as of the Cut-off Date and the Original Pre-Funded Amount will approximately
equal the aggregate certificate principal balance of the certificates on the
Closing Date, and therefore the initial overcollateralization will be
considerably below the Overcollateralization Target Amount of $1,000,000.
The recording of mortgages in the name of MERS is a new practice in the
mortgage lending industry. While the company expects that the master servicer or
applicable subservicer will be able to commence foreclosure proceedings on the
mortgaged properties, when necessary and appropriate, public recording officers
and others, however, may have limited, if any, experience with lenders seeking
to foreclose mortgages, assignments of which are registered with MERS.
Accordingly, delays and additional costs in commencing, prosecuting and
completing foreclosure proceedings, defending litigation commenced by third
parties and conducting foreclosure sales of the mortgaged properties could
result. Those delays and additional costs could in turn delay the distribution
of liquidation proceeds to the certificateholders and increase the amount of
Realized Losses on the mortgage loans. In addition, if, as a result of MERS
discontinuing or becoming unable to continue operations in connection with the
MERS(R) System, it becomes necessary to remove any mortgage loan from
registration on the MERS(R) System and to arrange for the assignment of the
related mortgages to the trustee, then any related expenses shall be
reimbursable by the trust to the master servicer, which will reduce the amount
available to pay principal of and interest on the Mezzanine Certificates. For
additional information regarding the recording of mortgages in the name of MERS
see "The Mortgage Pool--Mortgage Loan Characteristics" in this prospectus
supplement.
Investors in the Mezzanine Certificates should fully consider the risk
that Realized Losses on the Mortgage Loans could result in the failure of such
investors to fully recover their investments. In addition, once Realized Losses
have been allocated to the Mezzanine Certificates, such amounts with respect to
such Certificates will no longer accrue interest and will not be reinstated
thereafter. However, Allocated
S-62
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 Balances of the Class A Certificates
have 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 the Class A
Certificates and Mezzanine 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 could result from either delinquencies or losses, it is possible
for the Mezzanine Certificates to receive no principal distributions (unless the
certificate principal balances of the Class A Certificates have been reduced to
zero) on and after the Stepdown Date even if no losses have occurred on the
mortgage loans.
YIELD SENSITIVITY OF THE CLASS A-I-1 CERTIFICATES
The yield to investors on the Class A-I-1 Certificates will be
sensitive to fluctuations in the level of One-Month LIBOR. The Pass-Through Rate
on the Class A-I-1 Certificates will vary with LIBOR. Changes in the level of
One-Month LIBOR may not correlate with changes in prevailing mortgage interest
rates or changes in other indices. It is possible that lower prevailing mortgage
interest rates, which might be expected to result in faster prepayments, could
occur concurrently with an increased level of One-Month LIBOR. Investors in the
Class A-I-1 Certificates should also fully consider the effect on the yields on
those certificates of changes in the level of One-Month LIBOR.
SPECIAL YIELD CONSIDERATIONS RELATING TO THE CLASS A-IO CERTIFICATES
If, at any time prior to July 1, 2002, the aggregate Stated Principal
Balance of the mortgage loans and the amount on deposit in the Pre-Funding
Account is reduced to $26,750,000, if, at any time prior to January 1, 2003, the
aggregate Stated Principal Balance of the mortgage loans is reduced to
$25,000,000 and if, at any time prior to July 1, 2004, the aggregate Stated
Principal Balance of the mortgage loans is reduced to $20,000,000, the yield to
investors in the Class A-IO Certificates will become extremely sensitive to the
rate and timing of principal payments on the mortgage loans (including
prepayments, defaults and liquidations), which rate may fluctuate significantly
over time. Further, if the holder of the Class C Certificates (or, if there is
no single holder, the majority holder of the Class C Certificates) is permitted
to exercise, and exercises, its option to terminate the trust as described under
"Pooling and Servicing Agreement--Termination" in this prospectus supplement and
such action results in the retirement of the certificates prior to the
distribution date in July 2004, then the holders of the Class A-IO Certificates
will receive fewer than the thirty distributions of interest that they would
otherwise have been entitled to receive. Investors in the Class A-IO
Certificates should fully consider the risk that an extremely rapid rate of
prepayments on the Mortgage Loans could result in the failure of such investors
to fully recover their investments.
In addition, if the weighted average of the Net Mortgage Rates of the
mortgage loans falls below 7.75% per annum as of the Due Date of any month prior
to January 2003, 7.00% per annum as of the Due Date of any month prior to
January 2003, 5.00% per annum as of the Due Date of any month prior to January
2004, and 4.00% per annum as of the Due Date of any month prior to July 2004,
the Pass-Through Rate on the Class A-IO Certificates will be the Class A-IO Cap
Rate, resulting in a diminution of the amount of interest that will accrue on
the Class A-IO Certificates. See "--General Yield and Prepayment Considerations"
above.
S-63
Based upon the Structuring Assumptions, and further assuming (i)
prepayments at approximately 64% CPR, (ii) an assumed Purchase Price of
$3,428,417.32 and (iii) the majority holder of the Class C Certificates
exercises its option to purchase the assets of the trust on the first possible
distribution date, the pre-tax yield of the Class A-IO Certificates would be
approximately 0%. If the actual prepayment rate on the Mortgage Loans were to
exceed such rate, then assuming the mortgage loans behave in conformity with all
other Structuring Assumptions, initial investors in the Class A-IO Certificates
would not fully recover their initial investment. Timing of changes in the rate
of prepayments may significantly affect the actual yield to investors, even if
the average rate of principal prepayments is consistent with the expectations of
investors. Investors must make their own decisions as to the appropriate
prepayment assumption to be used in deciding whether to purchase any Class A-IO
Certificates.
The 0% pre-tax yield described above was calculated by determining the
monthly discount rates which, when applied to the assumed stream of cash flow to
be paid on the Class A-IO Certificates, would cause the discounted present value
of such assumed stream of cash flow to the Closing Date to equal the assumed
purchase price (which includes accrued interest), and converting such monthly
rate to a corporate bond equivalent rate. Such calculations do not take into
account the interest rates at which funds received by holders of the Class A-IO
Certificates may be reinvested and consequently does not purport to reflect the
return on any investment in the Class A-IO Certificates when such reinvestment
rates are considered.
For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the
mortgage loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
mortgage loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the offered
certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The weighted average life of an offered certificate (other than an
Class A-IO Certificate) is the average amount of time that will elapse from the
Closing Date, until each dollar of principal is repaid to the investors in such
certificate. Because it is expected that there will be prepayments and defaults
on the mortgage loans, the actual weighted average lives of these certificates
are expected to vary substantially from the weighted average remaining terms to
stated maturity of the mortgage loans as set forth herein under "The Mortgage
Pool."
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the Prepayment Assumption. The Prepayment Assumption does not purport to be
either an historical description of the prepayment experience of any pool of
mortgage loans or a prediction of the anticipated rate of prepayment of any
mortgage loans, including the mortgage loans to be included in the trust.
The tables entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of the Prepayment Assumption" were
prepared on the basis of the assumptions in the following paragraph and the
table set forth below. There are certain differences between the loan
characteristics included in such assumptions and the characteristics of the
actual mortgage loans. Any such discrepancy may have an effect upon the
percentages of original certificate principal balances outstanding and weighted
S-64
average lives of the Class A Certificates (other than the Class A-IO
Certificates) and the Mezzanine Certificates set forth in the tables. In
addition, since the actual mortgage loans in the trust will have characteristics
that differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Class A Certificates (other than the Class
A-IO Certificates) and the Mezzanine Certificates may be made earlier or later
than indicated in the table.
The percentages and weighted average lives in the tables entitled
"Percent of Initial Certificate Principal Balance Outstanding at the Following
Percentages of the Prepayment Assumption" were determined assuming that (the
"Structuring Assumptions"): (i) the mortgage pool consists of fifteen Group 1
Loans and six Group 2 Loans having the characteristics set forth in the table
below, (ii) the closing date for the offered certificates occurs on January 31,
2002 and the offered certificates are sold to investors on such date, (iii)
distributions on the certificates are made on the 25th day of each month
regardless of the day on which the distribution date actually occurs, commencing
in February 2002, in accordance with the allocation of the Available
Distribution Amount set forth above under "Description of the
Certificates--Allocation of Available Funds," (iv) the prepayment rates are the
percentages of the related Prepayment Assumption set forth in the "Percent of
Initial Certificate Principal Balance Outstanding at the Following Percentages
of the Prepayment Assumption" tables below, (v) prepayments representing payment
in full of individual mortgage loans are received on the last day of each month
commencing in January 2002, and include 30 days' interest thereon, (vi) none of
the Company, the Seller, the Master Servicer or any other person purchases from
the trust fund any mortgage loan pursuant to any obligation or option under the
Agreement and, except as indicated in the row for each table entitled "Weighted
Average Life to Call," no optional termination is exercised, (vii) the
Overcollateralization Target Amount is equal to $1,000,000, (viii) scheduled
payments for all mortgage loans are received on the first day of each month
commencing in February 2002, the principal portion of such payments is computed
prior to giving effect to prepayments received in such month, there are no
losses, defaults or delinquencies with respect to the mortgage loans and no
shortfalls due to the application of the Relief Act are incurred, (ix) the
scheduled monthly payment for each mortgage loan is calculated based on its
principal balance, mortgage rate and remaining term to maturity so that such
mortgage loan will amortize in amounts sufficient to repay the remaining
principal balance of such mortgage loan by its remaining term to maturity, (x)
the Pass-Through Rates for the offered certificates are as set forth herein and
(xi) One-Month LIBOR is constant at 1.83000%. Nothing contained in the foregoing
assumptions should be construed as a representation that the Mortgage Loans will
not experience delinquencies or losses or will otherwise behave in accordance
with any of the Structuring Assumptions.
S-65
ASSUMED MORTGAGE LOAN CHARACTERISTICS
GROUP 1 LOANS
ORIGINAL ORIGINAL REMAINING
MORTIZATION TERM TO TERM TO
TERM MATURITY MATURITY
PRINCIPAL BALANCE MORTGAGE RATE NET MORTGAGE RATE (MONTHS) (MONTHS) (MONTHS)
----------------- ------------- ----------------- -------- -------- --------
$34,762,778.52 8.321510% 7.967427% 349 349 348
6,725,290.52 8.798942 8.327239 345 345 344
2,142,007.89 8.783532 8.493532 360 180 177
77,027,351.52 8.365624 8.005126 349 349 349
2,458,291.96 8.392104 7.996582 351 351 351
6,707,110.09 8.947321 8.579995 355 355 354
894,541.46 8.176415 7.886415 360 360 358
2,811,536.47 8.885921 8.575155 359 180 178
566,195.03 8.999420 8.171066 359 359 359
274,885.53 8.250000 7.960000 360 180 177
1,558,838.89 8.571674 8.281674 360 180 178
1,354,418.15 8.356311 7.907230 360 360 359
297,193.11 8.375000 8.085000 360 360 360
200,415.95 11.700000 10.610000 360 360 359
67,792.19 7.500000 7.210000 361 180 178
GROUP 2 LOANS
ORIGINAL ORIGINAL REMAINING
AMORTIZATION TERM TO TERM TO
TERM MATURITY MATURITY
PRINCIPAL BALANCE MORTGAGE RATE NET MORTGAGE RATE (MONTHS) (MONTHS) (MONTHS)
----------------- ------------- ----------------- -------- -------- --------
$ 834,988.93 7.862821% 7.572821% 356 180 178
35,314,756.56 7.484045 7.167167 353 353 353
18,870,186.34 7.814087 7.497320 338 338 337
3,909,966.81 7.369303 7.079303 333 333 332
2,021,628.54 7.220869 6.930869 360 360 359
1,199,825.54 9.648990 8.958357 300 300 298
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each class of the offered certificates
(other than the Class A-IO Certificates) and set forth the percentages of the
original Certificate Principal Balance of each such class of offered
certificates that would be outstanding after each of the dates shown, at various
constant percentages of the Prepayment Assumption.
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-I-1 CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 94 68 55 42 29 16 3 0
January 25, 2004......................... 90 27 0 0 0 0 0 0
January 25, 2005......................... 86 0 0 0 0 0 0 0
January 25, 2006......................... 81 0 0 0 0 0 0 0
January 25, 2007......................... 76 0 0 0 0 0 0 0
January 25, 2008......................... 70 0 0 0 0 0 0 0
January 25, 2009......................... 64 0 0 0 0 0 0 0
January 25, 2010......................... 57 0 0 0 0 0 0 0
January 25, 2011......................... 50 0 0 0 0 0 0 0
January 25, 2012......................... 42 0 0 0 0 0 0 0
January 25, 2013......................... 33 0 0 0 0 0 0 0
January 25, 2014......................... 24 0 0 0 0 0 0 0
January 25, 2015......................... 14 0 0 0 0 0 0 0
January 25, 2016......................... 3 0 0 0 0 0 0 0
January 25, 2017......................... 0 0 0 0 0 0 0 0
January 25, 2018......................... 0 0 0 0 0 0 0 0
January 25, 2019......................... 0 0 0 0 0 0 0 0
January 25, 2020......................... 0 0 0 0 0 0 0 0
January 25, 2021......................... 0 0 0 0 0 0 0 0
January 25, 2022......................... 0 0 0 0 0 0 0 0
January 25, 2023......................... 0 0 0 0 0 0 0 0
January 25, 2024......................... 0 0 0 0 0 0 0 0
January 25, 2025......................... 0 0 0 0 0 0 0 0
January 25, 2026......................... 0 0 0 0 0 0 0 0
January 25, 2027......................... 0 0 0 0 0 0 0 0
January 25, 2028......................... 0 0 0 0 0 0 0 0
January 25, 2029......................... 0 0 0 0 0 0 0 0
January 25, 2030......................... 0 0 0 0 0 0 0 0
January 25, 2031......................... 0 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 8.4 1.5 1.1 0.9 0.8 0.7 0.6 0.6
Weighted Average Life
in years (to Call)**..................... 8.4 1.5 1.1 0.9 0.8 0.7 0.6 0.6
- ----------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-67
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-I-2 CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 100 100 100 100 100 100 100 81
January 25, 2004......................... 100 100 96 46 0 0 0 0
January 25, 2005......................... 100 82 10 0 0 0 0 0
January 25, 2006......................... 100 24 0 0 0 0 0 0
January 25, 2007......................... 100 0 0 0 0 0 0 0
January 25, 2008......................... 100 0 0 0 0 0 0 0
January 25, 2009......................... 100 0 0 0 0 0 0 0
January 25, 2010......................... 100 0 0 0 0 0 0 0
January 25, 2011......................... 100 0 0 0 0 0 0 0
January 25, 2012......................... 100 0 0 0 0 0 0 0
January 25, 2013......................... 100 0 0 0 0 0 0 0
January 25, 2014......................... 100 0 0 0 0 0 0 0
January 25, 2015......................... 100 0 0 0 0 0 0 0
January 25, 2016......................... 100 0 0 0 0 0 0 0
January 25, 2017......................... 54 0 0 0 0 0 0 0
January 25, 2018......................... 32 0 0 0 0 0 0 0
January 25, 2019......................... 9 0 0 0 0 0 0 0
January 25, 2020......................... 0 0 0 0 0 0 0 0
January 25, 2021......................... 0 0 0 0 0 0 0 0
January 25, 2022......................... 0 0 0 0 0 0 0 0
January 25, 2023......................... 0 0 0 0 0 0 0 0
January 25, 2024......................... 0 0 0 0 0 0 0 0
January 25, 2025......................... 0 0 0 0 0 0 0 0
January 25, 2026......................... 0 0 0 0 0 0 0 0
January 25, 2027......................... 0 0 0 0 0 0 0 0
January 25, 2028......................... 0 0 0 0 0 0 0 0
January 25, 2029......................... 0 0 0 0 0 0 0 0
January 25, 2030......................... 0 0 0 0 0 0 0 0
January 25, 2031......................... 0 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 15.6 3.6 2.5 2.0 1.7 1.4 1.3 1.2
Weighted Average Life
in years (to Call)**..................... 15.6 3.6 2.5 2.0 1.7 1.4 1.3 1.2
- ---------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-68
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-I-3 CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 100 100 100 100 100 100 100 100
January 25, 2004......................... 100 100 100 100 99 56 15 0
January 25, 2005......................... 100 100 100 47 0 0 0 0
January 25, 2006......................... 100 100 40 0 0 0 0 0
January 25, 2007......................... 100 73 0 0 0 0 0 0
January 25, 2008......................... 100 28 0 0 0 0 0 0
January 25, 2009......................... 100 0 0 0 0 0 0 0
January 25, 2010......................... 100 0 0 0 0 0 0 0
January 25, 2011......................... 100 0 0 0 0 0 0 0
January 25, 2012......................... 100 0 0 0 0 0 0 0
January 25, 2013......................... 100 0 0 0 0 0 0 0
January 25, 2014......................... 100 0 0 0 0 0 0 0
January 25, 2015......................... 100 0 0 0 0 0 0 0
January 25, 2016......................... 100 0 0 0 0 0 0 0
January 25, 2017......................... 100 0 0 0 0 0 0 0
January 25, 2018......................... 100 0 0 0 0 0 0 0
January 25, 2019......................... 100 0 0 0 0 0 0 0
January 25, 2020......................... 85 0 0 0 0 0 0 0
January 25, 2021......................... 59 0 0 0 0 0 0 0
January 25, 2022......................... 30 0 0 0 0 0 0 0
January 25, 2023......................... 0 0 0 0 0 0 0 0
January 25, 2024......................... 0 0 0 0 0 0 0 0
January 25, 2025......................... 0 0 0 0 0 0 0 0
January 25, 2026......................... 0 0 0 0 0 0 0 0
January 25, 2027......................... 0 0 0 0 0 0 0 0
January 25, 2028......................... 0 0 0 0 0 0 0 0
January 25, 2029......................... 0 0 0 0 0 0 0 0
January 25, 2030......................... 0 0 0 0 0 0 0 0
January 25, 2031......................... 0 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 19.3 5.5 3.9 3.0 2.5 2.1 1.8 1.6
Weighted Average Life
in years (to Call)**..................... 19.3 5.5 3.9 3.0 2.5 2.1 1.8 1.6
- ---------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-69
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-I-4 CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 100 100 100 100 100 100 100 100
January 25, 2004......................... 100 100 100 100 100 100 100 85
January 25, 2005......................... 100 100 100 100 94 61 32 6
January 25, 2006......................... 100 100 100 82 48 19 0 0
January 25, 2007......................... 100 100 89 47 13 0 0 0
January 25, 2008......................... 100 100 61 19 0 0 0 0
January 25, 2009......................... 100 92 37 0 0 0 0 0
January 25, 2010......................... 100 72 16 0 0 0 0 0
January 25, 2011......................... 100 53 0 0 0 0 0 0
January 25, 2012......................... 100 37 0 0 0 0 0 0
January 25, 2013......................... 100 22 0 0 0 0 0 0
January 25, 2014......................... 100 8 0 0 0 0 0 0
January 25, 2015......................... 100 0 0 0 0 0 0 0
January 25, 2016......................... 100 0 0 0 0 0 0 0
January 25, 2017......................... 100 0 0 0 0 0 0 0
January 25, 2018......................... 100 0 0 0 0 0 0 0
January 25, 2019......................... 100 0 0 0 0 0 0 0
January 25, 2020......................... 100 0 0 0 0 0 0 0
January 25, 2021......................... 100 0 0 0 0 0 0 0
January 25, 2022......................... 100 0 0 0 0 0 0 0
January 25, 2023......................... 100 0 0 0 0 0 0 0
January 25, 2024......................... 81 0 0 0 0 0 0 0
January 25, 2025......................... 62 0 0 0 0 0 0 0
January 25, 2026......................... 40 0 0 0 0 0 0 0
January 25, 2027......................... 17 0 0 0 0 0 0 0
January 25, 2028......................... 0 0 0 0 0 0 0 0
January 25, 2029......................... 0 0 0 0 0 0 0 0
January 25, 2030......................... 0 0 0 0 0 0 0 0
January 25, 2031......................... 0 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 23.5 9.4 6.6 5.0 4.1 3.4 2.9 2.5
Weighted Average Life
in years (to Call)**..................... 23.5 9.4 6.6 5.0 4.1 3.4 2.9 2.5
- ----------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-70
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-I-5 CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 100 100 100 100 100 100 100 100
January 25, 2004......................... 100 100 100 100 100 100 100 93
January 25, 2005......................... 100 100 100 100 97 80 66 53
January 25, 2006......................... 100 100 100 91 74 59 47 37
January 25, 2007......................... 100 100 94 73 56 43 32 23
January 25, 2008......................... 100 100 80 59 43 30 21 14
January 25, 2009......................... 100 96 68 48 32 22 14 8
January 25, 2010......................... 100 86 58 38 24 15 9 5
January 25, 2011......................... 100 77 49 31 18 11 6 3
January 25, 2012......................... 100 68 41 24 14 7 3 1
January 25, 2013......................... 100 61 35 19 10 5 2 *
January 25, 2014......................... 100 54 29 15 7 3 1 0
January 25, 2015......................... 100 47 24 12 5 2 * 0
January 25, 2016......................... 100 42 20 9 4 1 0 0
January 25, 2017......................... 100 35 16 7 2 * 0 0
January 25, 2018......................... 100 30 13 5 1 0 0 0
January 25, 2019......................... 100 26 11 4 1 0 0 0
January 25, 2020......................... 100 22 9 3 * 0 0 0
January 25, 2021......................... 100 19 7 2 0 0 0 0
January 25, 2022......................... 100 16 5 1 0 0 0 0
January 25, 2023......................... 100 13 4 1 0 0 0 0
January 25, 2024......................... 91 11 3 * 0 0 0 0
January 25, 2025......................... 81 9 2 0 0 0 0 0
January 25, 2026......................... 70 7 1 0 0 0 0 0
January 25, 2027......................... 58 5 1 0 0 0 0 0
January 25, 2028......................... 46 3 0 0 0 0 0 0
January 25, 2029......................... 32 2 0 0 0 0 0 0
January 25, 2030......................... 17 0 0 0 0 0 0 0
January 25, 2031......................... 1 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 25.5 13.8 10.2 8.0 6.4 5.3 4.5 3.9
Weighted Average Life
in years (to Call)**..................... 25.4 13.1 9.5 7.3 5.9 4.9 4.1 3.6
- ---------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-71
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-I-6 CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 100 100 100 100 100 100 100 100
January 25, 2004......................... 100 100 100 100 100 100 100 100
January 25, 2005......................... 100 100 100 100 100 100 100 100
January 25, 2006......................... 100 100 100 100 100 100 95 74
January 25, 2007......................... 100 100 100 100 100 86 63 46
January 25, 2008......................... 100 100 100 100 86 61 42 28
January 25, 2009......................... 100 100 100 96 65 43 28 17
January 25, 2010......................... 100 100 100 77 49 30 18 10
January 25, 2011......................... 100 100 99 61 37 21 11 5
January 25, 2012......................... 100 100 83 49 28 15 7 3
January 25, 2013......................... 100 100 70 39 20 10 4 1
January 25, 2014......................... 100 100 59 31 15 6 2 0
January 25, 2015......................... 100 95 49 24 11 4 * 0
January 25, 2016......................... 100 84 41 19 7 2 0 0
January 25, 2017......................... 100 70 32 13 5 1 0 0
January 25, 2018......................... 100 61 26 10 3 0 0 0
January 25, 2019......................... 100 52 21 7 2 0 0 0
January 25, 2020......................... 100 45 17 5 1 0 0 0
January 25, 2021......................... 100 38 14 4 0 0 0 0
January 25, 2022......................... 100 32 11 2 0 0 0 0
January 25, 2023......................... 100 27 8 1 0 0 0 0
January 25, 2024......................... 100 22 6 * 0 0 0 0
January 25, 2025......................... 100 17 4 0 0 0 0 0
January 25, 2026......................... 100 13 2 0 0 0 0 0
January 25, 2027......................... 100 10 1 0 0 0 0 0
January 25, 2028......................... 92 6 0 0 0 0 0 0
January 25, 2029......................... 64 3 0 0 0 0 0 0
January 25, 2030......................... 34 * 0 0 0 0 0 0
January 25, 2031......................... 2 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 27.5 18.3 14.0 10.9 8.8 7.3 6.2 5.4
Weighted Average Life
in years (to Call)**..................... 27.2 16.9 12.5 9.6 7.7 6.4 5.4 4.7
- ---------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-72
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-II CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 98 92 89 86 83 80 77 73
January 25, 2004......................... 97 82 75 68 62 55 49 44
January 25, 2005......................... 96 73 63 54 45 38 31 25
January 25, 2006......................... 95 65 53 43 35 28 22 17
January 25, 2007......................... 93 57 44 34 26 20 15 11
January 25, 2008......................... 92 51 37 28 20 14 10 7
January 25, 2009......................... 90 45 32 22 15 10 6 4
January 25, 2010......................... 88 40 27 18 11 7 4 2
January 25, 2011......................... 86 35 23 14 8 5 3 1
January 25, 2012......................... 84 31 19 11 6 3 2 1
January 25, 2013......................... 82 28 16 9 5 2 1 *
January 25, 2014......................... 79 25 13 7 3 1 * 0
January 25, 2015......................... 77 22 11 5 2 1 * 0
January 25, 2016......................... 74 19 9 4 2 * 0 0
January 25, 2017......................... 69 16 7 3 1 * 0 0
January 25, 2018......................... 66 14 6 2 1 0 0 0
January 25, 2019......................... 63 12 5 2 * 0 0 0
January 25, 2020......................... 59 10 4 1 * 0 0 0
January 25, 2021......................... 55 9 3 1 0 0 0 0
January 25, 2022......................... 50 7 2 * 0 0 0 0
January 25, 2023......................... 45 6 2 * 0 0 0 0
January 25, 2024......................... 41 5 1 0 0 0 0 0
January 25, 2025......................... 36 4 1 0 0 0 0 0
January 25, 2026......................... 30 3 * 0 0 0 0 0
January 25, 2027......................... 25 2 * 0 0 0 0 0
January 25, 2028......................... 19 1 0 0 0 0 0 0
January 25, 2029......................... 13 * 0 0 0 0 0 0
January 25, 2030......................... 6 0 0 0 0 0 0 0
January 25, 2031......................... 1 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 18.6 8.1 6.0 4.7 3.8 3.2 2.7 2.4
Weighted Average Life
in years (to Call)**..................... 18.5 7.8 5.6 4.4 3.5 3.0 2.5 2.2
- ---------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-73
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-1 CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 100 100 100 100 100 100 100 100
January 25, 2004......................... 100 100 100 100 100 100 100 100
January 25, 2005......................... 100 100 100 100 100 100 100 100
January 25, 2006......................... 100 100 100 94 76 62 49 38
January 25, 2007......................... 100 100 97 76 58 44 33 24
January 25, 2008......................... 100 100 83 61 45 32 22 15
January 25, 2009......................... 100 98 70 49 34 23 15 10
January 25, 2010......................... 100 88 60 40 26 16 10 6
January 25, 2011......................... 100 79 51 32 20 12 7 4
January 25, 2012......................... 100 70 43 26 15 8 5 2
January 25, 2013......................... 100 62 36 21 11 6 3 1
January 25, 2014......................... 100 55 31 16 9 4 2 0
January 25, 2015......................... 100 49 26 13 6 3 1 0
January 25, 2016......................... 100 43 22 10 5 2 0 0
January 25, 2017......................... 100 36 17 8 3 1 0 0
January 25, 2018......................... 100 32 14 6 3 0 0 0
January 25, 2019......................... 100 28 12 5 2 0 0 0
January 25, 2020......................... 100 24 10 4 1 0 0 0
January 25, 2021......................... 100 20 8 3 0 0 0 0
January 25, 2022......................... 100 17 6 2 0 0 0 0
January 25, 2023......................... 100 14 5 2 0 0 0 0
January 25, 2024......................... 92 12 4 1 0 0 0 0
January 25, 2025......................... 82 10 3 0 0 0 0 0
January 25, 2026......................... 71 8 2 0 0 0 0 0
January 25, 2027......................... 59 6 2 0 0 0 0 0
January 25, 2028......................... 46 4 1 0 0 0 0 0
January 25, 2029......................... 32 3 0 0 0 0 0 0
January 25, 2030......................... 17 1 0 0 0 0 0 0
January 25, 2031......................... 3 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 25.5 14.1 10.6 8.2 6.7 5.6 4.9 4.4
Weighted Average Life
in years (to Call)**..................... 25.4 13.3 9.7 7.4 6.0 5.0 4.4 4.0
- ---------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-74
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-2 CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 100 100 100 100 100 100 100 100
January 25, 2004......................... 100 100 100 100 100 100 100 100
January 25, 2005......................... 100 100 100 100 100 100 100 100
January 25, 2006......................... 100 100 100 94 76 62 49 38
January 25, 2007......................... 100 100 97 76 58 44 33 24
January 25, 2008......................... 100 100 83 61 45 32 22 15
January 25, 2009......................... 100 98 70 49 34 23 15 10
January 25, 2010......................... 100 88 60 40 26 16 10 6
January 25, 2011......................... 100 79 51 32 20 12 7 4
January 25, 2012......................... 100 70 43 26 15 8 5 2
January 25, 2013......................... 100 62 36 21 11 6 3 1
January 25, 2014......................... 100 55 31 16 9 4 2 0
January 25, 2015......................... 100 49 26 13 6 3 1 0
January 25, 2016......................... 100 43 22 10 5 2 0 0
January 25, 2017......................... 100 36 17 8 3 1 0 0
January 25, 2018......................... 100 32 14 6 3 0 0 0
January 25, 2019......................... 100 28 12 5 2 0 0 0
January 25, 2020......................... 100 24 10 4 1 0 0 0
January 25, 2021......................... 100 20 8 3 0 0 0 0
January 25, 2022......................... 100 17 6 2 0 0 0 0
January 25, 2023......................... 100 14 5 2 0 0 0 0
January 25, 2024......................... 92 12 4 1 0 0 0 0
January 25, 2025......................... 82 10 3 0 0 0 0 0
January 25, 2026......................... 71 8 2 0 0 0 0 0
January 25, 2027......................... 59 6 2 0 0 0 0 0
January 25, 2028......................... 46 4 1 0 0 0 0 0
January 25, 2029......................... 32 3 0 0 0 0 0 0
January 25, 2030......................... 17 1 0 0 0 0 0 0
January 25, 2031......................... 3 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 25.5 14.1 10.6 8.2 6.7 5.6 4.9 4.4
Weighted Average Life
in years (to Call)**..................... 25.4 13.3 9.7 7.4 6.0 5.0 4.4 4.0
- ---------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-75
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS B CERTIFICATES
PREPAYMENT ASSUMPTION 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------- -- --- --- ---- ---- ---- ---- ----
PAYMENT DATE
- ------------
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2003......................... 100 100 100 100 100 100 100 100
January 25, 2004......................... 100 100 100 100 100 100 100 100
January 25, 2005......................... 100 100 100 100 100 100 100 100
January 25, 2006......................... 100 100 100 94 76 62 49 38
January 25, 2007......................... 100 100 97 76 58 44 33 24
January 25, 2008......................... 100 100 83 61 45 32 22 15
January 25, 2009......................... 100 98 70 49 34 23 15 10
January 25, 2010......................... 100 88 60 40 26 16 10 6
January 25, 2011......................... 100 79 51 32 20 12 7 4
January 25, 2012......................... 100 70 43 26 15 8 5 2
January 25, 2013......................... 100 62 36 21 11 6 3 1
January 25, 2014......................... 100 55 31 16 9 4 2 0
January 25, 2015......................... 100 49 26 13 6 3 1 0
January 25, 2016......................... 100 43 22 10 5 2 0 0
January 25, 2017......................... 100 36 17 8 3 1 0 0
January 25, 2018......................... 100 32 14 6 3 1 0 0
January 25, 2019......................... 100 28 12 5 2 0 0 0
January 25, 2020......................... 100 24 10 4 1 0 0 0
January 25, 2021......................... 100 20 8 3 1 0 0 0
January 25, 2022......................... 100 17 6 2 0 0 0 0
January 25, 2023......................... 100 14 5 2 0 0 0 0
January 25, 2024......................... 92 12 4 1 0 0 0 0
January 25, 2025......................... 82 10 3 0 0 0 0 0
January 25, 2026......................... 71 8 2 0 0 0 0 0
January 25, 2027......................... 59 6 2 0 0 0 0 0
January 25, 2028......................... 46 4 1 0 0 0 0 0
January 25, 2029......................... 32 3 0 0 0 0 0 0
January 25, 2030......................... 17 1 0 0 0 0 0 0
January 25, 2031......................... 3 0 0 0 0 0 0 0
January 25, 2032 and thereafter.......... 0 0 0 0 0 0 0 0
Weighted Average Life
in years (to Maturity)**................. 25.5 14.1 10.6 8.2 6.7 5.6 4.9 4.3
Weighted Average Life
in years (to Call)**..................... 25.4 13.3 9.7 7.4 6.0 5.0 4.4 3.9
- ---------------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to
the related distribution date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the
Certificate Principal Balance described in (i) above.
S-76
There is no assurance that prepayments of the mortgage loans will conform
to any of the percentages of the Prepayment Assumption indicated in the tables
above or to any other level, or that the actual weighted average life of any
class of offered certificates will conform to any of the weighted average lives
set forth in the tables above. Furthermore, the information contained in the
tables with respect to the weighted average life of each specified class of
offered certificates is not necessarily indicative of the weighted average life
that might be calculated or projected under different or varying prepayment
assumptions or other structuring assumptions.
The characteristics of the mortgage loans will differ from those assumed
in preparing the table above. In addition, it is unlikely that any mortgage loan
will prepay at any constant percentage of the Prepayment Assumption until
maturity or 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.
FINAL SCHEDULED DISTRIBUTION DATES
Using the Structuring Assumptions and assuming a 0.00% Prepayment
Assumption, no losses or delinquencies on the mortgage loans, and an
Overcollateralization Target Amount of $0, the final scheduled distribution date
on each class of offered certificates will be as follows:
o for the Class A-I-1 Certificates, the distribution date in June 2016;
o for the Class A-I-2 Certificates, the distribution date in August 2019;
o for the Class A-I-3 Certificates, the distribution date in March 2023;
o for the Class A-I-4 Certificates, the distribution date in November
2027; and
o for the Class A-IO Certificates, the distribution date in July 2004.
The final scheduled distribution date with respect to the Class A-I-5,
Class A-I-6, Class A-II, Class M and Class B Certificates will be the
distribution date in April 2032, which is the distribution date following the
last possible scheduled monthly payment of a mortgage loan. Due to losses and
prepayments on the mortgage loans, the final scheduled distribution date on each
class of certificates may be substantially earlier. In addition, the actual
final distribution date may be later than the final scheduled distribution date.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 2002-1 Certificates will consist of fourteen classes of
certificates, eleven of which are offered hereby. Only the offered certificates
are offered by this prospectus supplement.
The Class C Certificates and the Class R Certificates, which are not
offered hereby, will be entitled to distributions on any distribution date only
after all required distributions have been made on the offered certificates. The
Certificate Principal Balance of the Class C Certificates as of any date of
determination will be equal to sum of the aggregate principal balance of the
mortgage loans and the amount on deposit in the Pre-Funding Account minus the
aggregate Certificate Principal Balance of all other classes of certificates and
will be entitled to distributions of interest as provided in the Agreement. The
Class R
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Certificates will not have principal balances and will not be entitled to
distributions of interest.
The Class P Certificates, which are not offered hereby, will have an
initial Certificate Principal Balance of $100 and will not be entitled to
distributions in respect of interest. The Class P Certificates will be entitled
to all prepayment charges received in respect of the mortgage loans.
The certificates represent in the aggregate the entire beneficial
ownership interest in a trust fund consisting primarily of a pool of initial
mortgage loans with an aggregate principal balance as of the Cut-off Date, after
application of scheduled payments due whether or not received, of approximately
$155,898,142 and a pool of approximately $44,101,959 in subsequent mortgage
loans that will be delivered after the Closing Date, subject to a permitted
variance as described in this prospectus supplement under "The Mortgage Pool."
Each class of the offered certificates will have the approximate initial
Certificate Principal Balance or Notional Amount, as applicable, as set forth on
page S-4 hereof and will have the Pass-Through Rate as defined under "Glossary"
in this prospectus supplement. The Pass-Through Rate on each class of the
offered certificates (other than the Class A-IO Certificates) will be limited to
the related Net WAC Rate. The Pass-Through Rate on the Class A-IO Certificates
will be limited to the Class A-IO Cap Rate. In addition, the Pass-Through Rate
on the Class A-I-4, Class A-I-5, Class A-I-6 and Class A-II Certificates and on
each class of the Mezzanine Certificates will be subject to increase after the
Optional Termination Date. The holders of the offered certificates WILL NOT be
entitled to recover interest in excess of any applicable limitation on the
Pass-Through Rate thereof on any future distribution date from excess cashflow
or from any other source, other than the Net WAC Shortfall Reserve Fund.
The offered certificates will be issued, maintained and transferred on
the book-entry records of DTC and its participants in minimum denominations
representing Certificate Principal Balances or Notional Amounts of $25,000 and
integral multiples of $1 in excess thereof.
The Book-Entry Certificates will initially be represented by one or more
global certificates registered in the name of a nominee of DTC. The company has
been informed by DTC that DTC's nominee will be Cede & Co. No person acquiring
an interest in any class of the Book-Entry Certificates will be entitled to
receive a certificate representing such person's interest, except as set forth
below under "--Definitive Certificates." Unless and until definitive
certificates are issued under the limited circumstances described in this
prospectus supplement, all references to actions by certificateholders with
respect to the Book-Entry Certificates shall refer to actions taken by DTC upon
instructions from its participants and all references in this prospectus
supplement to distributions, notices, reports and statements to
certificateholders with respect to the Book-Entry Certificates shall refer to
distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Book-Entry Certificates, for distribution to
Certificate Owners in accordance with DTC procedures. SEE "--REGISTRATION OF THE
BOOK-ENTRY CERTIFICATES" AND "--DEFINITIVE CERTIFICATES" IN THIS PROSPECTUS
SUPPLEMENT.
The definitive certificates, if ever issued, will be transferable and
exchangeable at the offices of the Trustee designated by the Trustee from time
to time for these purposes. The Trustee has initially designated its offices
located at 123 Washington Street, New York, New York 10006 for such purpose. No
service charge will be imposed for any registration of transfer or exchange, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
All distributions to holders of the certificates, other than the final
distribution on any class of certificates, will be made on each distribution
date by or on behalf of the Trustee to the persons in whose names the
certificates are registered at the close of business on the related Record Date.
Distributions will
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be made by wire transfer in immediately available funds to the account of the
certificateholders specified in the request. The final distribution on any class
of Certificates will be made in like manner, but only upon presentment and
surrender of the class at the location specified by the Trustee in the notice to
certificateholders of the final distribution.
REGISTRATION OF THE BOOK-ENTRY CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions between
participants through electronic book entries, thereby eliminating the need for
physical movement of certificates.
Certificate Owners that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Book-Entry Certificates may do so only through participants and indirect
participants. In addition, Certificate Owners will receive all distributions of
principal of and interest on the Book-Entry Certificates from the Trustee
through DTC and DTC participants. Accordingly, Certificate Owners may experience
delays in their receipt of payments. Unless and until definitive certificates
are issued, it is anticipated that the only certificateholders of the Book-Entry
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will not
be recognized by the Trustee as certificateholders, as such term is used in the
Agreement and Certificate Owners will be permitted to exercise the rights of
certificateholders only indirectly through DTC and its participants.
Under the Rules, DTC is required to make book-entry transfers of
Book-Entry Certificates among participants and to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with which Certificate Owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit these payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess definitive certificates, the Rules provide a mechanism by which
Certificate Owners, through their participants and indirect participants, will
receive payments and will be able to transfer their interest in the Book-Entry
Certificates.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of certain banks, the ability of a
Certificate Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to
Book-Entry Certificates, may be limited due to the absence of physical
certificates for the Book-Entry Certificates. In addition, under a book-entry
format, Certificate Owners may experience delays in their receipt of payments
since distribution will be made by the Trustee to Cede & Co., as nominee for
DTC.
Under the Rules, DTC will take action permitted to be taken by a
certificateholders under the Agreement only at the direction of one or more
participants to whose DTC account the Book-Entry Certificates are credited.
Additionally, under the Rules, DTC will take actions with respect to specified
Voting Rights only at the direction of and on behalf of participants whose
holdings of Book-Entry Certificates evidence these specified Voting Rights. DTC
may take conflicting actions with respect to Voting Rights, to the extent that
participants whose holdings of Book-Entry Certificates evidence Voting Rights,
authorize divergent action.
The company, the Master Servicer and the Trustee will have no liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Book-Entry Certificates
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held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive certificates will be issued to Certificate Owners or their
nominees, respectively, rather than to DTC or its nominee, only if (1) the
company advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as clearing agency with respect to the
Book-Entry Certificates and the company is unable to locate a qualified
successor, (2) the company, at its option, elects to terminate the book-entry
system through DTC, or (3) after the occurrence of an Event of Default,
Certificate Owners representing in the aggregate not less than 51% of the Voting
Rights of the Book-Entry Certificates advise the Trustee and DTC through
participants, in writing, that the continuation of a book- entry system through
DTC (or a successor thereto) is no longer in the Certificate Owners' best
interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to notify all Certificate Owners through
participants of the availability of definitive certificates. Upon surrender by
DTC of the definitive certificates representing the Book-Entry Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Book-Entry Certificates as definitive certificates issued in the respective
principal amounts owned by individual Certificate Owners, and thereafter the
Trustee will recognize the holders of definitive certificates as
certificateholders under the Agreement. Definitive certificates will be issued
in minimum denominations of $25,000, except that any beneficial ownership
represented by a Book-Entry Certificate in an amount less than $25,000
immediately prior to the issuance of a definitive certificate shall be issued in
a minimum denomination equal to the amount of the beneficial ownership.
CALCULATION OF ONE-MONTH LIBOR FOR THE CLASS A-I-1 CERTIFICATES
On each LIBOR Determination Date, the Trustee will determine One-Month
LIBOR for the next Accrual Period for the Class A-I-1 Certificates on the basis
of the offered rates of the Reference Banks for one-month United States dollar
deposits, as such rate appears on the Telerate Screen Page 3750, as of 11:00
a.m. (London time) on such LIBOR Determination Date.
On each LIBOR Determination Date, if the rate does not appear or is not
available on Telerate Screen Page 3750, One-Month LIBOR for the related Accrual
Period for the Class A-I-1 Certificates will be established by the Trustee as
follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual
Period shall be the arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual
Period shall be the higher of (x) One-Month LIBOR as determined on the
previous LIBOR Determination Date and (y) the Reserve Interest Rate.
The establishment of One-Month LIBOR on each LIBOR Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Class A-I-1 Certificates for the related Accrual Period shall (in the
absence of manifest error) be final and binding.
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ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of offered certificates will be
made on each Distribution Date from the Available Distribution Amount.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each distribution date the Trustee shall withdraw from the Certificate
Account that portion of the Available Distribution Amount for such distribution
date consisting of the Interest Remittance Amount for such distribution date,
and make the following disbursements and transfers in the order of priority
described below, in each case to the extent of the Interest Remittance Amount
remaining for such distribution date.
(i) to the holders of the Class A-IO Certificates, the related Monthly
Interest Distributable Amount for each such class for such Distribution Date;
(ii) to the holders of the Class A-IO Certificates, the related Unpaid
Interest Shortfall Amount, if any, for such class for such Distribution Date;
(iii) (a) from the remaining Interest Remittance Amount in respect of the
Group 1 Loans, to the Class A-I-1, Class A-I-2, Class A-I-3, Class A-I-4, Class
A-I-5 and Class A-I-6 Certificates, pro rata, the related Monthly Interest
Distributable Amount for such classes for such Distribution Date, and (b) from
the remaining Interest Remittance Amount in respect of the Group 2 Loans, to the
holders of the Class A-II Certificates, the related Monthly Interest
Distributable Amount for such class for such Distribution Date;
(iv) (a) from the remaining Interest Remittance Amount in respect of the
Group 1 Loans, to the holders of the Class A-I-1, Class A-I-2, Class A-I-3,
Class A-I-4, Class A-I-5 and Class A-I-6 Certificates, pro rata, the related
Unpaid Interest Shortfall for such classes for such Distribution Date, and (b)
from the remaining Interest Remittance Amount in respect of the Group 2 Loans,
to the holders of the Class A-II Certificates, the related Unpaid Interest
Shortfall for such class for such Distribution Date;
(v) (a) from the remaining Interest Remittance Amount in respect of the
Group 1 Loans, to the holders of the Class A-II Certificates, any remaining
Unpaid Interest Shortfall for such class for such Distribution Date, and (b)
from the remaining Interest Remittance Amount in respect of the Group 2 Loans,
to the holders of the Class A-I-1, Class A-I-2, Class A-I-3, Class A-I-4, Class
A-I-5 and Class A-I-6 Certificates, pro rata, any remaining Unpaid Interest
Shortfall for such classes for such Distribution Date;
(vi) to the holders of the Class M-1 Certificates, the Monthly Interest
Distributable Amount for such class;
(vii) to the holders of the Class M-2 Certificates, the Monthly Interest
Distributable Amount for such class; and
(viii) to the holders of the Class B Certificates, the Monthly Interest
Distributable Amount for such class.
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 Master Servicer will be allocated,
first, in reduction of amounts otherwise distributable to the Class C
Certificates and Class R Certificates, and thereafter, to the Monthly Interest
Distributable Amounts with respect to the offered certificates on a pro rata
basis based on the respective amounts of interest accrued on such
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certificates for such distribution date. The holders of the offered certificates
will not be entitled to reimbursement for any such interest shortfalls.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each distribution date (a) prior to the Stepdown Date or (b) on which
a Trigger Event is 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 Principal Distribution Amount in the following amounts and order of
priority:
(i) first, (a) to the Class A-I-1, Class A-I-2 and Class A-I-3
Certificates, sequentially, in that order, the Group I Principal Fraction of the
Principal Distribution Amount and (b) to the holders of the Class A-II
Certificates, the Group II Principal Fraction of the Principal Distribution
Amount, in each case until the Certificate Principal Balances thereof are
reduced to zero; provided, that if on any distribution date, the Class A-I
Certificates or Class A-II Certificates are no longer outstanding, the Principal
Distribution Amount will be allocated to the Class A-II Certificates and Class
A-I Certificates, respectively, in the order described above, in each case until
the Certificate Principal Balances thereof are reduced to zero;
(ii) second, (a) to the Class A-I-4, Class A-I-5 and Class A-I-6
Certificates, pro rata, the Group I Principal Fraction of the Principal
Distribution Amount until the Certificate Principal Balances thereof are reduced
to zero; provided, that with respect to the Class A-I-6 Certificates, such
distributions shall be made to the Class A-I-4 Certificates and Class A-I-6
Certificates, sequentially, in that order, until the Certificate Principal
Balances thereof are reduced to zero; provided further, that if on any
distribution date, the Class A-I Certificates or Class A-II Certificates are no
longer outstanding, the Principal Distribution Amount will be allocated to the
Class A-II Certificates or Class A-I Certificates, respectively, in the order
described above with respect to the Class A-I Certificates, in each case until
the Certificate Principal Balances thereof are reduced to zero;
(iii) third, to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iv) fourth, to the holders of the Class M-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(v) fifth, to the holders of the Class B Certificates, until the
Certificate Principal Balance thereof 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 holders of each class of offered
certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Distribution Amount in the following amounts and
order of priority:
(i) first, the Class A Principal Distribution Amount shall be distributed
as follows:
(a) to the Class A-I-1, Class A-I-2 and Class A-I-3
Certificates, sequentially, in that order, the Group I
Principal Fraction of the Class A Principal Distribution
Amount, in each case until the Certificate Principal Balances
thereof are reduced to zero;
(b) to the Class A-I-4, Class A-I-5 and Class A-I-6
Certificates, pro rata, the Group I Principal Fraction of the
Class A Principal Distribution Amount, in each case until the
Certificate Principal Balances thereof are reduced to zero;
provided, that with respect to the Class A-I-6 Certificates,
such distributions shall be made to the Class A-I-4
Certificates and
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Class A-I-6 Certificates, sequentially, in that order, until
the Certificate Principal Balances thereof are reduced to
zero; and
(c) to the holders of the Class A-II Certificates, the Group
II Principal Fraction of the Class A Principal Distribution
Amount, until the Certificate Principal Balance thereof is
reduced to zero;
provided, that if on any distribution date, the Class A-I Certificates or Class
A-II Certificates are no longer outstanding, the Class A Principal Distribution
Amount will be allocated to the Class A-II Certificates or Class A-I
Certificates, respectively, in the order described above with respect to the
Class A-I Certificates, in each case until the Certificate Principal Balances
thereof are reduced to zero;
(ii) second, to the holders of the Class M-1 Certificates, the Class M-1
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero;
(iii) third, to the holders of the Class M-2 Certificates, the Class M-2
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero; and
(iv) fourth, to the holders of the Class B Certificates, the Class B
Principal Distribution Amount until the Certificate Principal Balance thereof
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 Mezzanine Certificates. Increasing the
respective percentage interest in the trust 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 below, and excess
interest and overcollateralization, as described under "--Overcollateralization
Provisions" herein.
The rights of the holders of the Mezzanine Certificates and the Class C
Certificates to receive distributions will be subordinated, to the extent
described herein, to the rights of the holders of the Class A Certificates.
The protection afforded to the holders of the Class A Certificates by
means of the subordination of the Mezzanine Certificates and Class C
Certificates will be accomplished by (i) the preferential right of the holders
of the Class A Certificates (other than the Class A-IO Certificates) to receive
on any distribution date, prior to distributions on the Mezzanine Certificates
and Class C Certificates, distributions in respect of interest and principal,
and the preferential right of the holders of the Class A-IO Certificates to
receive on any distribution date, prior to distribution on the Mezzanine
Certificates and Class C Certificates, distributions in respect of interest, in
each case subject to funds available for such distributions 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 Mezzanine Certificates and Class C Certificates.
In addition, the rights of the holders of Mezzanine Certificates with
higher payment priorities to
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receive distributions will be senior to the rights of holders of Mezzanine
Certificates with lower payment priorities, and the rights of the holders of the
Mezzanine Certificates to receive distributions will be senior to the rights of
the holders of the Class C Certificates, in each case to the extent described
herein.
The subordination feature 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 such holders protection against
Realized Losses.
OVERCOLLATERALIZATION PROVISIONS
Interest collections on the mortgage loans are expected to be generated
in excess of the fees and expenses payable by the trust and the amount of
interest payable to the holders of the offered certificates. The Agreement
requires that, on each distribution date, the Net Monthly Excess Cashflow, if
any, be applied on such 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 prospectus supplement.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
shall be paid as follows:
(i) to the holders of the class or classes of offered certificates then
entitled to receive distributions in respect of principal, in an amount equal to
any Extra Principal Distribution Amount, payable to such holders as part of the
Principal Distribution Amount as described under "--Allocation of Available
Funds--Principal Distributions on the Offered Certificates" above;
(ii) to the holders of the Class M-1 Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount for such certificates;
(iii) to the holders of the Class M-1 Certificates, in an amount equal to
the Allocated Realized Loss Amount for the Class M-1 Certificates;
(iv) to the holders of the Class M-2 Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount for such certificates;
(v) to the holders of the Class M-2 Certificates, in an amount equal to
the Allocated Realized Loss Amount for the Class M-2 Certificates;
(vi) to the holders of the Class B Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount for such certificates;
(vii) to the holders of the Class B Certificates, in an amount equal to
the Allocated Realized Loss Amount for the Class B Certificates; and
(viii) to the holders of the Class C Certificates as provided in the
Agreement.
NET WAC SHORTFALL RESERVE FUND
On the Closing Date, the Trustee shall establish and maintain in its
name, in trust for the benefit of the Offered Certificates, other than the Class
A-IO Certificates and Class A-I-1 Certificates, the Net WAC Shortfall Reserve
Fund. In addition, on the Closing Date, the Trustee shall deposit into the Net
WAC Shortfall Reserve Fund an amount equal to $210,000.
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On each distribution date up to and including the 30th distribution date,
the Offered Certificates, other than the Class A-IO Certificates and Class A-I-1
Certificates, will be entitled to receive the Net WAC Shortfall Amount from the
Net WAC Shortfall Reserve Fund, to the extent funds are available therein. On
each such distribution date, amounts in the Net WAC Shortfall Reserve Fund shall
be used first, to pay any Net WAC Shortfall on the Class A Certificates on a pro
rata basis, and then to the Class M-1, Class M-2 and Class B Certificates, in
that order, in each case until the Net WAC Shortfall Amount for such classes is
reduced to zero. On the 30th distribution date, after the distribution of any
Net WAC Shortfall Amount for that distribution date, the Trustee shall withdraw
from the Net WAC Shortfall Reserve Fund any amounts remaining therein and
distribute them to the holders of the Class C Certificates. In addition, the
Trustee shall pay the holders of the Class C Certificates any interest earned on
amounts on deposit in the Net WAC Shortfall Reserve Fund.
There can be no assurance that the amounts on deposit in the Net WAC
Shortfall Reserve Fund will be sufficient to cover the Net WAC Shortfall Amount
on any class of these Offered Certificates. No entity will have any obligation
to deposit additional amounts into the Net WAC Shortfall Reserve Fund after the
Closing Date.
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Losses on the mortgage loans will be allocated on any
distribution date, first, to Net Monthly Excess Cashflow, second, in reduction
of the Overcollateralized Amount, third, to the Class B Certificates, fourth, to
the Class M-2 Certificates, and fifth, to the Class M-1 Certificates.
The 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.
Realized Losses allocated to the Mezzanine Certificates will no longer
accrue interest nor will such interest 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 thereof by the amount so allocated as
of the distribution date in the month following the calendar month in which such
Realized Loss was incurred. Notwithstanding anything to the contrary described
herein, 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
such certificate in respect of Realized Losses and (ii) payable as principal to
the holder of such certificate from Net Monthly Excess Cashflow.
MANDATORY PREPAYMENTS ON CLASS A CERTIFICATES
The Class A Certificates will be prepaid on the distribution date
immediately following the end of the Funding Period to the extent of any amounts
remaining on deposit in the Pre-Funding Account on such distribution date.
Although no assurance can be given, it is anticipated by the Company that the
principal amount of subsequent mortgage loans sold to the Trust will require the
application of substantially all of the Original Pre-Funded Amount and that
there will be no material amount of principal prepaid to the holders of the
Class A Certificates from the Pre-Funding Account. It is unlikely, however, that
the Company will be able to deliver subsequent mortgage loans with an aggregate
principal balance identical to the Original Pre-
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Funded Amount. Accordingly, a small amount of principal is likely to be prepaid
on the Class A Certificates on the distribution date immediately following the
end of the Funding Period.
INTEREST COVERAGE ACCOUNT
On the Closing Date, the Company will deliver to the Trustee for deposit
in the Interest Coverage Account a cash amount as specified in the Agreement. On
each Distribution Date during the Funding Period and on the Distribution Date
immediately following, funds on deposit in the Interest Coverage Account will be
applied by the Trustee to cover shortfalls in the amount of interest generated
by the assets in the Trust attributable to the pre-funding feature. Such
shortfall will exist during the Funding Period because the interest accruing on
the aggregate principal balance of the mortgage loans during such period will be
less than the amount of interest which would have accrued on the mortgage loans
if the subsequent mortgage loans were included in the Trust as of the Closing
Date. The Agreement permits funds in the Interest Coverage Account, to the
extent that they will not be needed to fund any shortfall of the kind described
above, to be released by the Trustee to the Company or its designee.
P&I ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each distribution date
its own funds, advances made by a Subservicer or funds in the Certificate
Account that are not included in the Available Distribution Amount for such
distribution date, in an amount equal to the P&I Advances for such distribution
date. With respect to a delinquent balloon payment, the Master Servicer is not
required to make a P&I Advance of such delinquent balloon payment. The Master
Servicer will, however, make monthly Advances with respect to balloon loans with
delinquent balloon payments, in each case in an amount equal to the assumed
monthly principal and interest payment (net of the related Servicing Fees) that
would have been due on the related Due Date based on the original principal
amortization schedule for such balloon loan.
P&I Advances are required to be made only to the extent they are deemed,
in the good faith judgment of the Master Servicer, to be recoverable from
related late collections, Insurance Proceeds or Liquidation Proceeds. The
purpose of making P&I Advances is to maintain a regular cash flow to the
certificateholders, rather than to guarantee or insure against losses. The
Master Servicer will not be required to make any P&I Advances with respect to
reductions in the amount of the monthly payments due on the mortgage loans due
to bankruptcy proceedings or the application of the Relief Act.
All P&I Advances will be reimbursable to the Master 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 Master
Servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the Master Servicer out of any
funds in the Certificate Account prior to the distributions on the Certificates.
In the event the Master Servicer fails in its obligation to make any such
advance, the Trustee, as successor Master Servicer, will be obligated to make
any such advance, to the extent required in the Agreement.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued pursuant to the Agreement, a form of
which is filed as an exhibit to the
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registration statement. A Current Report on Form 8-K relating to the
certificates containing a copy of the Agreement as executed will be filed by the
company with the Securities and Exchange Commission within fifteen days of the
initial issuance of the certificates. The trust fund created under the Agreement
will consist of the following: (1) the mortgage loans; (2) collections in
respect of principal and interest on the mortgage loans received after the
Cut-off Date (other than payments due on or before the Cut-off Date); (3) the
amounts on deposit in any Certificate Account (as defined in the prospectus);
(4) certain insurance policies maintained by the related mortgagors or by or on
behalf of the Master Servicer or related subservicer in respect of the mortgage
loans; (5) an assignment of the company's rights under the Mortgage Loan
Purchase Agreement; (6) the Net WAC Shortfall Reserve Fund; and (7) proceeds of
the foregoing. 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 Agreement and the offered certificates.
The offered certificates will be transferable and exchangeable at the office
designated by the Trustee for such purposes located in New York. The company
will provide to prospective or actual certificateholders without charge, on
written request, a copy (without exhibits) of the Agreement. Requests should be
addressed to the Secretary, Impac Secured Assets Corp., 1401 Dove Street,
Newport Beach, CA 92660 and its phone number is (949) 475-3600.
ASSIGNMENT OF THE MORTGAGE LOANS
The company will deliver to the Trustee with respect to each mortgage
loan (1) the mortgage note endorsed without recourse to the Trustee to reflect
the transfer of the mortgage loan, (2) the original mortgage with evidence of
recording indicated thereon and (3) an assignment of the mortgage in recordable
form to the Trustee, reflecting the transfer of the mortgage loan.
THE TRUSTEE
Bankers Trust Company of California, N.A., will act as Trustee for the
Certificates pursuant to the Agreement. The Trustee's offices for notices under
the Agreement are located at 1761 East St. Andrew Place, Santa Ana, California
92705, Attention: Impac Secured Assets Corp., Series 2002-1 (IM02S1).
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to the Trustee's Fee. The Trustee
and any director, officer, employee or agent of the Trustee shall be indemnified
and held harmless by the trust fund against any claim, loss, liability, fee or
expense incurred in connection with any Event of Default, any breach of the
Agreement or any claim or legal action (including any pending or threatened
claim or legal action) relating to the acceptance or administration of its
obligations and duties under the Agreement or the certificates, other than any
claim, loss, liability or expense (i) sustained in connection with the Agreement
related to the willful misfeasance, bad faith or negligence of the Master
Servicer in the performance of its duties under the Agreement or (ii) incurred
in connection with a breach constituting willful misfeasance, bad faith or
negligence of the Trustee in the performance of its duties under the Agreement
or by reason of reckless disregard of its obligations and duties under the
Agreement.
The Trustee will make no representation or warranty, express or implied,
and will have no liability as to the validity, adequacy or accuracy of any of
the information contained in this prospectus supplement.
REPORTS TO CERTIFICATEHOLDERS
On each distribution date, the Trustee will make the monthly statements
discussed in the prospectus under "Description of the Securities--Reports to
Securityholders" available on its website located at
http://www-apps.gis.deutsche-bank.com/invr. Investors may obtain assistance in
operating the Trustee's
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website by calling the Trustee's investor relations desk at (800) 735-7777.
THE SUBSERVICERS
All of the mortgage loans will initially be subserviced by Wendover
Funding, Inc. However, the Master Servicer has entered into a contract to
transfer the subservicing with respect to the initial mortgage loans to GMAC
Mortgage Corporation on or about April 1, 2002, and with respect to the
subsequent mortgage loans, no later than three months after they are transferred
to the trust.
Wendover Funding, Inc. is a subservicer of residential, consumer and
commercial mortgage loans in 50 states. Wendover Funding, Inc. provides
origination and servicing for Federal Housing Administration home equity
conversion mortgages, specialized asset management and default servicing for
non-performing product, and special servicing activities for government
entities. Wendover Funding, Inc. is located in Greensboro, North Carolina.
Wendover Funding, Inc. is an approved servicer in good standing with Freddie
Mac.
GMAC Mortgage Corporation is to become the subservicer for all of the
mortgage loans. GMAC Mortgage Corporation is an indirect wholly-owned subsidiary
of General Motors Acceptance Corporation and is one of the nation's largest
mortgage bankers. GMAC Mortgage Corporation is engaged in the mortgage banking
business, including the origination, purchase, sale and servicing of residential
loans. GMAC Mortgage Corporation maintains its executive and principal offices
at 100 Witmer Road, Horsham, Pennsylvania 19044, and its telephone number is
(215) 682-1000.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its master servicing activities for the mortgage loans will be equal to the
Master Servicing Fee. The principal compensation to be paid to any subservicer
of the mortgage loans will be equal to the Subservicing Fee. As additional
servicing compensation, the Master Servicer or any subservicer is entitled to
retain all assumption fees and late payment charges in respect of mortgage loans
serviced by it, to the extent collected from mortgagors, together with any
interest or other income earned on funds held in the Certificate Account and any
escrow accounts in respect of mortgage loans serviced by it. Neither the Master
Servicer nor any subservicer is entitled to retain any prepayment charges or
penalties; prepayment charges will be distributed to the holders of the Class P
Certificates. The Master Servicer is obligated to offset any Prepayment Interest
Shortfall in respect of the mortgage loans on any distribution date with
Compensating Interest to the extent of the sum of its aggregate Master Servicing
Fee and the Subservicing Fee for such distribution date. The Master Servicer or
the related subservicer is obligated to pay insurance premiums and ongoing
expenses associated with the mortgage pool in respect of mortgage loans serviced
by it and incurred by the Master Servicer or such subservicer in connection with
its responsibilities under the Agreement or the related subservicing agreement.
However, the Master Servicer or such subservicer is entitled to reimbursement
therefor as provided in the Agreement or the related subservicing agreement.
Each subservicer will be required to represent that it will accurately
and fully report its borrower credit files to all three credit repositories in a
timely manner.
VOTING RIGHTS
At all times 97% of all Voting Rights will be allocated among the holders
of the Class A Certificates (other than the Class A-IO Certificates), the
Mezzanine Certificates and the Class C Certificates in proportion to the then
outstanding Certificate Principal Balances of their respective certificates. At
all times
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1% of all Voting Rights will be allocated to the holders of the Class A-IO
Certificates. At all times 1% of all Voting Rights will be allocated to the
holders of the Class P Certificates. At all times 1% of all Voting Rights will
be allocated to the holders of the Class R Certificates. The Voting Rights
allocated to any class of certificates shall be allocated among all holders of
the certificates of such class in proportion to the outstanding percentage
interests in such class represented thereby.
TERMINATION
The circumstances under which the obligations created by the Agreement
will terminate in respect of the certificates are described in "The
Agreements--Termination; Retirement of Securities" in the prospectus. The holder
of the Class C Certificates (or, if there is no single holder, the majority
holder of the Class C Certificates) will have the option, on any distribution
date on which the sum of the aggregate Stated Principal Balance of the mortgage
loans and the amount on deposit in the Pre-Funding Account is less than or equal
to 10% of the sum of the aggregate principal balance of the initial mortgage
loans as of the Cut-off Date and the Original Pre-Funded Amount, to purchase all
remaining mortgage loans and other assets in the trust, thereby effecting early
retirement of the certificates.
Any such purchase of mortgage loans and other assets of the trust fund
shall be made at a price equal to the sum of (a) 100% of the unpaid principal
balance of each mortgage loan (or the fair market value of the related
underlying mortgaged properties with respect to defaulted mortgage loans as to
which title to such mortgaged properties has been acquired if such fair market
value is less than such unpaid principal balance) (net of any unreimbursed P&I
Advance attributable to principal) as of the date of repurchase plus (b) accrued
interest thereon at the mortgage rate to, but not including, the first day of
the month in which such repurchase price is distributed. In the event the holder
of the Class C Certificates (or, if there is no single holder, the majority
holder of the Class C Certificates) 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 or Notional Amount, as applicable, of the
offered certificates at the then applicable Pass-Through Rate
for each class of offered certificates, plus
(iii) any previously accrued but unpaid interest thereon to which
the holders of the offered certificates are entitled, plus
(iv) in the case of the Mezzanine Certificates, any previously
unpaid Allocated Realized Loss Amounts.
The proceeds of any such distribution may not be sufficient to distribute the
full amount to each class of certificates if the purchase price is based in part
on the fair market value of the underlying mortgaged property and such fair
market value is less than 100% of the unpaid principal balance of the related
mortgage loan.
FEDERAL INCOME TAX CONSEQUENCES
Elections will be made to treat the trust fund, exclusive of the Net WAC
Shortfall Reserve Fund, as two or more separate REMICs for federal income tax
purposes. Upon the issuance of the offered certificates, Thacher Proffitt &
Wood, counsel to the company, will deliver its opinion generally to the
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effect that, assuming compliance with all provisions of the Agreement, for
federal income tax purposes, the trust fund will consist of two or more REMICs,
and each REMIC elected by the trust fund will qualify as a REMIC under Sections
860A through 860G of the Code.
For federal income tax purposes, (i) the Class R Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the trust fund and (ii) except as described
below with respect to the Net WAC Shortfall Reserve Fund, the Class A
Certificates, the Mezzanine Certificates, the Class P Certificates and the Class
C Certificates will represent the "regular interests" in, and which generally
will be treated as debt instruments of, a REMIC. SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMIC--CLASSIFICATION OF REMICS" IN THE PROSPECTUS.
For federal income tax reporting purposes, based on expected issue
prices, the Class A Certificates (other than the Class A-IO Certificates) and
the Class M-1 Certificates will not, and the Class A-IO, Class M-2 and Class B
Certificates will, 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, premium and market discount, 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 100% of the
Prepayment Assumption. No representation is made that the mortgage loans will
prepay at that rate or at any other rate. SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMICS--TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES--ORIGINAL
ISSUE DISCOUNT" IN THE PROSPECTUS.
The IRS has issued OID Regulations under Sections 1271 to 1275 of the
Code generally addressing the treatment of debt instruments issued with original
issue discount. Purchasers of the 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. Because
of the uncertainty concerning the application of Section 1272(a)(6) of the Code
to the offered certificates, 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.
If the method of computing original issue discount described in the
prospectus results in a negative amount for any period with respect to any
certificateholders, in particular, the holders of the Class A-IO Certificates,
the amount of original issue discount allocable to such period would be zero,
and such certificateholders will be permitted to offset such amounts only
against the respective future income (if any) from such certificate. Although
uncertain, a certificateholder may be permitted to deduct a loss to the extent
that his or her respective remaining basis in such certificate exceeds the
maximum amount of future payments to which such certificateholders is entitled,
assuming no further prepayments of the mortgage loans. Although the matter is
not free from doubt, any such loss might be treated as a capital loss.
The OID Regulations in some circumstances permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that of the issuer. Accordingly, it is possible that holders of offered
certificates issued with original issue discount may be able to select a method
for recognizing original issue discount that differs from that used in preparing
reports to certificateholders and the IRS. Prospective purchasers of offered
certificates issued with original issue discount are advised to consult their
tax advisors concerning the tax treatment of such certificates in this regard.
Some classes of offered certificates may be treated for federal income
tax purposes as having been issued with a premium. Certificateholders may elect
to amortize such premium under a constant yield method in which case such
amortizable premium will generally be allocated among the interest payments on
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such certificates and will be applied as an offset against such interest
payments. SEE "FEDERAL INCOME TAX CONSEQUENCES-- REMICS--TAXATION OF OWNERS OF
REMIC REGULAR CERTIFICATES--PREMIUM" IN THE PROSPECTUS.
Each holder of an offered certificates (other than the Class A-IO
Certificates and the Class A-I-1 Certificates) is deemed to own an undivided
beneficial ownership interest in two assets, a REMIC regular interest and the
right to receive payments in respect of the Net WAC Shortfall Reserve Fund. The
treatment of amounts received by a holder of an offered certificates (other than
the Class A-IO Certificates and the Class A-I-1 Certificates) under such
certificateholder's right to receive the Net WAC Shortfall Amount will depend on
the portion, if any, of such Certificateholder's purchase price allocable
thereto. Under the REMIC Regulations, each holder of an offered certificates
(other than the Class A-IO Certificates and the Class A-I-1 Certificates) must
allocate its purchase price for that certificate between its undivided interest
in the REMIC regular interest and its undivided interest in the right to receive
payments in respect of the Net WAC Shortfall Amount in accordance with the
relative fair market values of each property right. The trustee intends to treat
payments made to the holders of the offered certificates (other than the Class
A-IO Certificates and the Class A-I-1 Certificates) with respect to the Net WAC
Shortfall Amount as includible in income based on the tax 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 Underwriter estimates that
the right to receive Net WAC Shortfall Amount has a value of 0.54% of the
initial Certificate Principal Balance of each of the Class A-I-6 Certificates,
the Class M-1 Certificates, the Class M-2 Certificates and Class B Certificates,
and a DE MINIMIS value with respect to the other offered certificates entitled
to receive the Net WAC Shortfall Amount. Under the REMIC Regulations, the
trustee is required to account for the REMIC regular interest and the right to
receive payments in respect of the Net WAC Shortfall Amount 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 their Certificates.
Treasury regulations have been promulgated under section 1275 of the Code
generally providing for the integration of a "qualifying debt instrument" with a
hedge if the combined cash flows of the components are substantially equivalent
to the cash flows on a variable rate debt instrument. However, such regulations
specifically disallow integration of debt instruments subject to Section
1272(a)(6) of the Code. Therefore, holders of such offered certificates will be
unable to use the integration method provided for under such regulations with
respect to such Certificates. If the trustee's treatment of Net WAC Shortfall
Amount is respected, ownership of the right to the Net WAC Shortfall Amount will
nevertheless entitle the owner to amortize the separate price paid for the right
to the Net WAC Shortfall Amount under the notional principal contract
regulations.
In the event that the right to receive the Net WAC Shortfall Amount is
characterized as a "notional principal contract" for federal income tax
purposes, upon the sale of an offered certificate (other than a Class A-IO
Certificate and a Class A-I-1 Certificate), the amount of the sale allocated to
the selling certificateholder's right to receive payments in respect of the Net
WAC Shortfall Amount would be considered a "termination payment" under the
notional principal contract regulations allocable to the related certificate. A
holder of an offered certificate (other than a Class A-IO Certificate and a
Class A-I-1 Certificate) would have gain or loss from such a termination of the
right to receive payments in respect of the Net WAC Shortfall Amount equal to
(i) any termination payment it received or is deemed to have received minus (ii)
the unamortized portion of any amount paid, or deemed paid, by the
certificateholder upon entering into or acquiring its interest in the right to
receive payments in respect of the Net WAC Shortfall Amount.
Gain or loss realized upon the termination of the right to receive
payments in respect of the Net WAC Shortfall Amount will generally be treated as
capital gain or loss. Moreover, in the case of a bank or thrift
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institution, Code section 582(c) would likely not apply to treat such gain or
loss as ordinary.
With respect to the offered certificates (other than the Class A-IO
Certificates and the Class A-I-1 Certificates), this paragraph applies exclusive
of any rights in respect of the Net WAC Shortfall Amount. 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 in the related trust fund 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, generally 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 also will be treated as "qualified mortgages"
under Section 860G(a)(3) of the Code. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" HEREIN AND "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--REMICS-- CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES" IN
THE PROSPECTUS. SEE "FEDERAL INCOME TAX CONSEQUENCES--REMICS--CHARACTERIZATION
OF INVESTMENTS IN REMIC CERTIFICATES" IN THE PROSPECTUS.
It is not anticipated that any REMIC elected by the trust will engage in
any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on any such REMIC, such tax will be borne (1) by the Trustee, if
the Trustee has breached its obligations with respect to REMIC compliance under
the Agreement, (2) by the Master Servicer, if the Master Servicer has breached
its obligations with respect to REMIC compliance under the Agreement and (3)
otherwise by the trust fund, with a resulting reduction in amounts otherwise
distributable to holders of the offered certificates. SEE "DESCRIPTION OF THE
CERTIFICATES-- GENERAL" AND "FEDERAL INCOME TAX CONSEQUENCES--REMICS--PROHIBITED
TRANSACTIONS TAX AND OTHER TAXES" IN THE PROSPECTUS.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee. SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMICS--REPORTING AND OTHER ADMINISTRATIVE MATTERS" IN THE
PROSPECTUS.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE OFFERED CERTIFICATES, SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMICS" IN THE PROSPECTUS.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement, dated January 29, 2002, the Underwriter has agreed to purchase and
the company has agreed to sell to the Underwriter the offered certificates. It
is expected that delivery of the offered certificates will be made only in
book-entry form through the Same Day Funds Settlement System of DTC on or about
January 31, 2002, against payment therefor in immediately available funds.
The offered certificates will be purchased from the company by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the company from the sale of the
offered certificates are expected to be approximately 101.43% of the aggregate
initial Certificate Principal Balance of the offered certificates, plus accrued
interest from the Cut-off Date on the offered certificates, other than the Class
A-I-1 Certificates, less expenses expected to equal approximately $340,000. The
Underwriter may effect such transactions by selling the offered certificates to
or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter.
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In connection with the sale of the offered certificates, the Underwriter may be
deemed to have received compensation from the company in the form of
underwriting compensation. The Underwriter and any dealers that participate with
the Underwriter in the distribution of the offered certificates may be deemed to
be underwriters and any profit on the resale of the offered certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
The underwriting agreement provides that the company, the Seller and
Impac Holdings will jointly and severally indemnify the Underwriter, and that
under limited circumstances the Underwriter will indemnify the company, the
Seller and Impac Holdings against certain civil liabilities under the Securities
Act of 1933, as amended, or contribute to payments required to be made in
respect thereof.
An officer of Bear, Stearns & Co. Inc. is also a director of Impac
Holdings.
SECONDARY MARKET
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
primary source of information available to investors concerning the offered
certificates will be the monthly statements discussed in the prospectus under
"Description of the Securities--Reports to Securityholders", which will include
information as to the outstanding principal balance of the offered certificates
and the status of the applicable form of credit enhancement. There can be no
assurance that any additional information regarding the offered certificates
will be available through any other source. In addition, the company is not
aware of any source through which price information about the offered
certificates will be generally available on an ongoing basis. The limited nature
of 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.
LEGAL OPINIONS
Legal matters relating to the offered certificates will be passed upon
for the company by Thacher Proffitt & Wood, New York, New York and for the
Underwriter by Sidley Austin Brown & Wood LLP, New York, New York. Sidley Austin
Brown & Wood LLP represents Impac Holdings on certain matters from time to time.
RATINGS
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated "AAA" by S&P, "Aaa" by Moody's, and "AAA" by Fitch, that
the Class M-1 Certificates be rated at least "AA" by S&P, "Aa2" by Moody's, and
"AA" by Fitch, that the Class M-2 Certificates be rated at least "A" by S&P,
"A2" by Moody's, and "A" by Fitch, and that the Class B Certificates be rated at
least "BBB" by S&P, "Baa2" by Moody's, and "BBB" by Fitch.
The ratings of S&P, Moody's, and Fitch 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 the rate and timing principal prepayments will differ from that
originally anticipated. The
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ratings do not address the possibility that certificateholders might suffer a
lower than anticipated yield due to non-credit events or that the holders of the
Class A-IO Certificates may fail to recover fully 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. 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 company has not requested that any rating agency rate any class of
the offered certificates other than as stated above. However, there can be no
assurance as to whether any other rating agency will rate any class of the
offered certificates, or, if it does, what rating would be assigned by any other
rating agency. A rating on any class of the offered certificates by another
rating agency, if assigned at all, may be lower than the ratings assigned to the
offered certificates as stated above.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA for so long as they are
rated not lower than the second highest rating category by a Rating Agency (as
defined in the prospectus) and, as such, will be legal investments for entities
to the extent provided in SMMEA. SMMEA, however, provides for state limitation
on the authority of these entities to invest in "mortgage related securities"
provided that restrictive legislation by the state was enacted prior to October
3, 1991. Some states 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 company 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.
ERISA CONSIDERATIONS
A fiduciary of any Plan and any person investing Plan Assets of any Plan
should carefully review with its legal advisors whether the purchase, sale or
holding of certificates will give rise to a prohibited transaction under ERISA
or Section 4975 of the Code.
The U.S. Department of Labor has issued an Exemption, as described under
"ERISA Considerations" in the prospectus, to the Underwriter. The Exemption
generally exempts from the application of certain of the prohibited transaction
provisions of Section 406 of ERISA, and the excise taxes imposed on such
prohibited transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions
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relating to the purchase, sale and holding of pass-through certificates rated at
least "BBB-" (or its equivalent) by S&P, Fitch or Moody's at the time of
purchase and underwritten by the Underwriter, such as the offered certificates,
and the servicing and operation of asset pools, such as the mortgage loans,
provided that the conditions of the Exemption are satisfied. The purchase of the
offered certificates by, on behalf of or with the Plan Assets of any Plan may
qualify for exemptive relief under the Exemption, as amended and as currently in
effect. However, the Exemption contains a number of conditions which must be met
for the Exemption, as amended, to apply (as described in the prospectus),
including the requirement that any such Plan must be an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended. A fiduciary of a Plan
contemplating purchasing an offered certificate must make its own determination
that the conditions set forth in the Exemption, as amended, will be satisfied
with respect to such certificates, including the requirement that the rating on
a particular class of certificates be "BBB-" or higher at the time of purchase.
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 the application of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
the ERISA and the Code to the proposed investment. SEE "ERISA CONSIDERATIONS" IN
THE PROSPECTUS.
The sale of any class of offered certificates to a Plan is in no respect
a representation by the company, the Trustee or the Underwriter that such an
investment meets all relevant legal requirements with respect to investments by
Plans generally or any particular Plan, or that such an investment is
appropriate for Plans generally or any particular Plan.
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GLOSSARY
ACCRUAL PERIOD -- For any class of offered certificates, other than the Class
A-I-1 Certificates, and any distribution date, the calendar month preceding the
month of such distribution date. With respect to any distribution date and the
Class A-I-1 Certificates, (i) with respect to the distribution date in February
2002, the period commencing on the closing date and ending on the day preceding
the distribution date in February 2002, and (ii) with respect to any
distribution date after the distribution date in February 2002, the period
commencing on the distribution date in the month immediately preceding the month
in which that distribution date occurs and ending on the day preceding that
distribution date.
AGREEMENT -- The pooling and servicing agreement, dated as of January 1, 2002,
among Impac Secured Assets Corp., as company, Impac Funding Corporation, as
master servicer, and Bankers Trust Company of California, N.A., as trustee.
ALLOCATED REALIZED LOSS AMOUNT -- With respect to any class of the Mezzanine
Certificates and any distribution date, an amount equal to the sum of any
Realized Loss allocated to that class of Certificates on that distribution date
and any Allocated Realized Loss Amount for that class remaining unpaid from the
previous distribution date.
ALLOWABLE CLAIM -- For any mortgage loan covered by a Primary Insurance Policy,
the current principal balance of such mortgage loan plus accrued interest and
allowable expenses at the time of the claim.
APPRAISED VALUE -- The appraised value of the related mortgaged property at the
time of origination of such mortgage loan.
AVAILABLE DISTRIBUTION AMOUNT -- For any distribution date, an amount equal to
the amount received by the Trustee and available in the Certificate Account on
that distribution date. The Available Distribution Amount will generally be
equal to the sum of (1) the aggregate amount of scheduled payments on the
mortgage loans received or advanced that were due during the related Due Period,
(2) any unscheduled payments and receipts, including mortgagor prepayments on
such mortgage loans, Insurance Proceeds and Liquidation Proceeds, received
during the related Prepayment Period, in each case net of amounts reimbursable
therefrom to the Trustee, the Master Servicer and any Subservicer and reduced by
Master Servicing Fees, Subservicing Fees, the fees of the Trustee and any
amounts in respect of the premiums payable to Radian under the Radian
Lender-Paid PMI Policies and (3) amounts transferred from the Interest Coverage
Account and, at the end of the Funding Period, any excess amounts transferred
from the Pre- Funding Account.
BASIC PRINCIPAL DISTRIBUTION AMOUNT -- With respect to any distribution date,
the excess of (i) the Principal Remittance Amount for such distribution date
over (ii) the Overcollateralization Release Amount, if any, for such
distribution date.
BOOK-ENTRY CERTIFICATES -- Each class of the offered certificates for so long as
they are issued, maintained and transferred at the DTC.
CERTIFICATE PRINCIPAL BALANCE -- With respect to any offered certificate (other
than the Class A-IO Certificates) as of any date of determination, the initial
Certificate Principal Balance thereof, reduced by the aggregate of (a) all
amounts allocable to principal previously distributed with respect to such
offered certificate and (b) in the case of any Mezzanine Certificate, any
reductions in the Certificate Principal Balance thereof deemed to have occurred
in connection with allocations of Realized Losses in the manner
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described herein.
CLASS A CERTIFICATES -- The Class A-I-1, Class A-I-2, Class A-I-3, Class A-I-4,
Class A-I-5, Class A-I-6 Class A-II and Class A-IO Certificates.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT -- For any applicable distribution date,
an amount equal to the excess (if any) of (x) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
distribution date over (y) the difference between (a) the sum of the aggregate
Stated Principal Balance of the mortgage loans as of the last day of the related
Due Period (after giving effect to scheduled payments of principal due during
the related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period, and
after reduction for Realized Losses incurred during the related Prepayment
Period) and the amount on deposit in the Pre- Funding Account and (b) the sum of
the aggregate Stated Principal Balance of the mortgage loans as of the last day
of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period, and after reduction for Realized Losses incurred during the related
Prepayment Period) and the amount on deposit in the Pre-Funding Account
multiplied by the sum of (A) approximately 13.50% and (B) the Current Specified
Overcollateralization Percentage.
CLASS A-I CERTIFICATES -- The Class A-I-1, Class A-I-2, Class A-I-3, Class
A-I-4, Class A-I-5 and Class A-I- 6 Certificates.
CLASS A-IO CAP RATE -- For any distribution date, a per annum rate equal to the
weighted average of the Net Mortgage Rates of the mortgage loans as of the first
day of the month preceding the month in which such distribution date occurs.
CLASS B PRINCIPAL DISTRIBUTION AMOUNT -- For any applicable distribution date,
an amount equal to the excess (if any) of (x) the Certificate Principal Balance
of the Class B Certificates immediately prior to such distribution date over (y)
the difference between (a) the sum of the aggregate Stated Principal Balance of
the mortgage loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period, and after reduction for Realized
Losses incurred during the related Prepayment Period) and the amount on deposit
in the Pre-Funding Account and (b) the sum of (1) the aggregate Certificate
Principal Balance of the Class A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such distribution date),
(2) 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 such distribution date), (3) 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 such distribution date), and (4) the sum of the
aggregate Stated Principal Balance of the mortgage loans as of the last day of
the related Due Period (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period, and after reduction for Realized Losses incurred during the related
Prepayment Period) and the amount on deposit in the Pre-Funding Account
multiplied by the Current Specified Overcollateralization Percentage.
CLASS C CERTIFICATES-- The Class C Certificates.
CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT -- For any applicable distribution date,
an amount equal to the excess (if any) of (x) the Certificate Principal Balance
of the Class M-1 Certificates immediately prior to such distribution date over
(y) the difference between (a) the sum of the aggregate Stated Principal Balance
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of the mortgage loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period, and after reduction for Realized
Losses incurred during the related Prepayment Period) and the amount on deposit
in the Pre-Funding Account and (b) the sum of (1) the aggregate Certificate
Principal Balance of the Class A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such distribution date)
and (2) the sum of the aggregate Stated Principal Balance of the mortgage loans
as of the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period, and after reduction for Realized Losses incurred
during the related Prepayment Period) and the amount on deposit in the
Pre-Funding Account multiplied by the sum of (A) approximately 7.50% and (B) the
Current Specified Overcollateralization Percentage.
CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT -- For any applicable distribution date,
an amount equal to the excess (if any) of (x) the Certificate Principal Balance
of the Class M-2 Certificates immediately prior to such distribution date over
(y) the difference between (a) the sum of the aggregate Stated Principal Balance
of the mortgage loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period, and after reduction for Realized
Losses incurred during the related Prepayment Period) and the amount on deposit
in the Pre-Funding Account, and (b) the sum of (1) the aggregate Certificate
Principal Balance of the Class A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such distribution date),
(2) 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 such distribution date), and (3) the sum of the aggregate Stated Principal
Balance of the mortgage loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period, and after reduction for
Realized Losses incurred during the related Prepayment Period) and the amount on
deposit in the Pre- Funding Account multiplied by the sum of (A) approximately
3.50% and (B) the Current Specified Overcollateralization Percentage.
CLASS P CERTIFICATES-- The Class P Certificates.
CLASS R CERTIFICATES-- The Class R Certificates.
CODE-- The Internal Revenue Code of 1986.
COMPENSATING INTEREST -- Any payments made by the Master Servicer from its own
funds to cover Prepayment Interest Shortfalls.
CPR -- A constant rate of prepayment on the mortgage loans.
CREDIT SCORE -- A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
CURRENT SPECIFIED OVERCOLLATERALIZATION PERCENTAGE -- For any distribution date,
a percentage equal to (a) the Overcollateralization Target Amount divided by (b)
the sum of the aggregate Stated Principal Balance of the mortgage loans as of
the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and
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unscheduled collections of principal received during the related Prepayment
Period, and after reduction for Realized Losses incurred during the related
Prepayment Period) and the amount on deposit in the Pre- Funding Account.
CUT-OFF DATE -- January 1, 2002.
DETERMINATION DATE -- With respect to any distribution date is on the 15th day
of the month in which such distribution date occurs or, if such day is not a
business day, on the immediately preceding business day.
DUE DATE -- With respect to each mortgage loan, the first day of the month.
DUE PERIOD -- With respect to any distribution date commences on the second day
of the month immediately preceding the month in which such distribution date
occurs and ends on the first day of the month in which such distribution date
occurs.
ERISA -- The Employee Retirement Income Security Act of 1974, as amended.
EXTRA PRINCIPAL DISTRIBUTION AMOUNT -- For any distribution date, the lesser of
(x) the Net Monthly Excess Cashflow for such distribution date and (y) the
Overcollateralization Deficiency Amount for such distribution date.
EXEMPTION -- Prohibited Transaction Exemption 90-30, as amended.
FINAL DISPOSITION -- With respect to a defaulted mortgage loan, when a
determination is made by the Master Servicer that it has received all Insurance
Proceeds, Liquidation Proceeds and other payments or cash recoveries which the
Master Servicer reasonably and in good faith expects to be finally recoverable
with respect to such mortgage loan.
FITCH-- Fitch, Inc.
FUNDING PERIOD -- The period from the Closing Date until the earliest of (i) the
date on which the amount on deposit in the Pre-Funding Account (exclusive of
investment income) is reduced to zero or (ii) March 31, 2002.
GROUP I NET WAC RATE -- (A) For the February 2002 distribution date through the
July 2004 distribution date, a per annum rate equal to (1) the weighted average
of the Net Mortgage Rates of the mortgage loans as of the first day of the month
preceding the month in which such distribution date occurs minus (2) the Pass-
Through Rate for the Class A-IO Certificates for such distribution date
multiplied by a fraction, the numerator of which is (x) the Notional Amount of
the Class A-IO Certificates immediately prior to such distribution date, and the
denominator of which is (y) the sum of the aggregate Stated Principal Balance of
the mortgage loans as of the first day of the month preceding the month in which
such distribution date occurs and the amount on deposit in the Pre-Funding
Account and (B) for each distribution date thereafter, the weighted average of
the Net Mortgage Rates of the Group 1 Loans as of the first day of the month
preceding the month in which such distribution date occurs.
GROUP II NET WAC RATE -- (A) For the February 2002 distribution date through the
July 2004 distribution date, a per annum rate equal to (1) the weighted average
of the Net Mortgage Rates of the mortgage loans as of the first day of the month
preceding the month in which such distribution date occurs minus (2) the
Pass-Through Rate for the Class A-IO Certificates for such distribution date
multiplied by a fraction, the numerator of which is (x) the Notional Amount of
the Class A-IO Certificates immediately
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prior to such distribution date, and the denominator of which is (y) the sum of
the aggregate Stated Principal Balance of the mortgage loans as of the first day
of the month preceding the month in which such distribution date occurs and the
amount on deposit in the Pre-Funding Account and (B) for each distribution date
thereafter, the weighted average of the Net Mortgage Rates of the Group 2 Loans
as of the first day of the month preceding the month in which such distribution
date occurs.
GROUP I PRINCIPAL FRACTION -- With respect to any distribution date, a fraction
equal to (x) the Principal Remittance Amount received from the Group 1 Loans for
that distribution date over (y) the Principal Remittance Amount received from
all of the mortgage loans for that distribution date.
GROUP II PRINCIPAL FRACTION -- With respect to any distribution date, a fraction
equal to (x) the Principal Remittance Amount received from the Group 2 Loans for
that distribution date over (y) the Principal Remittance Amount received from
all of the mortgage loans for that distribution date.
IMPAC HOLDINGS-- Impac Mortgage Holdings, Inc., an affiliate of the company and
the Seller.
INTEREST COVERAGE ACCOUNT -- A trust account that the Trustee will establish for
the benefit of the Certificateholders.
INTEREST REMITTANCE AMOUNT -- For any distribution date, that portion of the
Available Distribution Amount for such distribution date that represents
interest received or advanced on the mortgage loans or the Interest Coverage
Account.
IRS-- The Internal Revenue Service.
LIBOR BUSINESS DAY -- A day on which banks are open for dealing in foreign
currency and exchange in London and New York City.
LIBOR DETERMINATION DATE -- With respect to each Distribution Date, the second
LIBOR Business Day immediately preceding the commencement of the related Accrual
Period.
MASTER SERVICER -- Impac Funding Corporation, in its capacity as master servicer
under the Agreement.
MASTER SERVICING FEE -- With respect to each mortgage loan, an amount, payable
out of any payment of interest on the mortgage loan, equal to interest at the
Master Servicing Fee Rate on the Stated Principal Balance of such mortgage loan
for the calendar month preceding the month in which the payment is due. The
Master Servicing Fee consists of servicing compensation payable to the Master
Servicer in respect of its master servicing responsibilities.
MASTER SERVICING FEE RATE -- On each mortgage loan, a rate equal to 0.03% per
annum.
MEZZANINE CERTIFICATES -- The Class M-1, Class M-2 and Class B Certificates.
MEZZANINE NET WAC RATE -- (A) For the February 2002 distribution date through
the July 2004 distribution date, a per annum rate equal to (1) the weighted
average of the Net Mortgage Rates of the mortgage loans as of the first day of
the month preceding the month in which such distribution date occurs minus (2)
the Pass-Through Rate for the Class A-IO Certificates for such distribution date
multiplied by a fraction, the numerator of which is (x) the Notional Amount of
the Class A-IO Certificates immediately prior to such distribution date, and the
denominator of which is (y) the sum of the aggregate Stated Principal Balance of
the mortgage loans as of the first day of the month preceding the month in which
such
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distribution date occurs and the amount on deposit in the Pre-Funding Account;
(B) for each distribution date thereafter, the lesser of (1) the weighted
average of the Net Mortgage Rates of the Group 1 Loans as of the first day of
the month preceding the month in which such distribution date occurs and (2) the
weighted average of the Net Mortgage Rates of the Group 2 Loans as of the first
day of the month preceding the month in which such distribution date occurs.
MONTHLY INTEREST DISTRIBUTABLE AMOUNT -- For any distribution date and each
class of offered certificates, the amount of interest accrued during the related
Accrual Period at the related Pass-Through Rate on the Certificate Principal
Balance or Notional Amount of such Class immediately prior to such distribution
date, in each case, reduced by any Prepayment Interest Shortfalls to the extent
not covered by Compensating Interest payable by the Master Servicer and any
shortfalls resulting from the application of the Relief Act (in each case to the
extent allocated to such class of offered certificates as described under
"Description of the Certificates--Allocation of Available Funds--Interest
Distributions on the Offered Certificates" in this prospectus supplement. The
Monthly Interest Distributable Amount on the offered certificates, other than
the Class A-I-1 Certificates, will be calculated on the basis of a 360-day year
consisting of twelve 30-day months. Accrued Certificate Interest for the Class
A-I-1 Certificates will be calculated on the basis of the actual number of days
in the related Accrual Period and a 360-day year.
MOODY'S-- Moody's Investors Service, Inc.
MORTGAGE LOAN PURCHASE AGREEMENT -- The Mortgage Loan Purchase Agreement among
the Seller, Impac Holdings and the company, whereby the mortgage loans are being
sold to the company.
NET MONTHLY EXCESS CASHFLOW -- For any distribution date, the sum of (a) any
Overcollateralization Release Amount and (b) the excess of (x) the Available
Distribution Amount for such distribution date over (y) the sum for such
distribution date of (A) the Monthly Interest Distributable Amounts for the
offered certificates, (B) the Unpaid Interest Shortfall Amounts for the Class A
Certificates and (C) the Principal Remittance Amount.
NET MORTGAGE RATE -- On any mortgage loan, the then applicable mortgage rate
thereon minus the sum of (1) the Master Servicing Fee Rate, (2) the Subservicing
Fee Rate, (3) the Trustee's Fee Rate and (4) the related Radian PMI Rate, if
such mortgage loan is a Radian PMI Insured Loan.
NET WAC RATE -- For any distribution date and the Class A-I Certificates, the
Group I Net WAC Rate. For any distribution date and the Class A-II Certificates,
the Group II Net WAC Rate. For any distribution date and the Mezzanine
Certificates, the Mezzanine Net WAC Rate.
NET WAC SHORTFALL AMOUNT -- With respect to the Offered Certificates, other than
the Class A-IO Certificates and Class A-I-1 Certificates, and any distribution
date on which the related Net WAC Rate is used to determined the Pass-Through
Rate of that class of Offered Certificates, an amount equal to the excess of (x)
Accrued Certificate Interest calculated at the fixed Pass-Through Rate for that
class of Offered Certificates (i.e. assuming that the related Net WAC Rate is
not in effect on that distribution date) over (y) the related Net WAC Rate.
NET WAC SHORTFALL RESERVE FUND -- A reserve fund established by the Trustee for
the benefit of the Offered Certificateholders, other than the Class A-IO
Certificateholders and Class A-I-1 Certificateholders, and funded on the Closing
Date by or on behalf of the Company with $210,000.
NOTIONAL AMOUNT -- With respect to the Class A-IO Certificates immediately prior
to any distribution date occurring in February 2002 through July 2002 the lesser
of (i) $26,750,000 and (ii) the sum of the aggregate
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principal balance of the mortgage loans (prior to giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) and the amount on deposit in the Pre-Funding Account,
for the August 2002 distribution date through the January 2003 distribution
date, the lesser of (i) $25,000,000 and (ii) the aggregate principal balance of
the mortgage loans (prior to giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and for the February 2003 distribution date through the July 2004
distribution date, the lesser of (i) $20,000,000 and (ii) the aggregate
principal balance of the mortgage loans (prior to giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period). The Class A-IO Certificates will only be entitled to
interest for the first 30 distribution dates.
OFFERED CERTIFICATES-- The Class A Certificates and the Mezzanine Certificates.
OID REGULATIONS -- Treasury regulations under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with original
issue discount.
ONE-MONTH LIBOR -- The London interbank offered rate for one-month United States
dollar deposits, determined as described in "Description of the
Certificates--Calculation of One-Month LIBOR for the Class A-I-1 Certificates"
in this prospectus supplement.
OPTIONAL TERMINATION DATE -- The first distribution date on which the trust fund
may be terminated at the option of the holder of the Class C Certificates (or,
if there is no single holder, the majority holder of the Class C Certificates)
as described under "Pooling and Servicing Agreement--Termination" in this
prospectus supplement.
ORIGINAL PRE-FUNDED AMOUNT -- The amount, not in excess of $44,101,959,
deposited in the Pre-Funding Account on the Closing Date by the Trustee. Of this
amount, approximately $30,468,264 will be used to purchase conforming loans for
Group 1 Loans and approximately $13,633,695 will be used to purchase non-
conforming loans for Group 2 Loans.
OVERCOLLATERALIZATION DEFICIENCY AMOUNT -- With respect to any distribution
date, the amount, if any, by which the Overcollateralization Target Amount
exceeds the Overcollateralized Amount on such distribution date (after giving
effect to distributions in respect of the Basic Principal Distribution Amount on
such distribution date).
OVERCOLLATERALIZATION RELEASE AMOUNT -- With respect to any distribution date,
the lesser of (x) the Principal Remittance Amount for such distribution date and
(y) the excess, if any, of (i) the Overcollateralized Amount for such
distribution date (assuming that 100% of the Principal Remittance Amount is
applied as a principal payment on such distribution date) over (ii) the
Overcollateralization Target Amount for such distribution date.
OVERCOLLATERALIZATION TARGET AMOUNT -- With respect to any distribution date,
$1,000,000.
OVERCOLLATERALIZED AMOUNT -- For any distribution date, the amount, if any, by
which (i) the sum of (A) the aggregate principal balance of the mortgage loans
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and the amount on
deposit in the Pre-Funding Account and (B) the Pre-Funded Amount the exceeds
(ii) the aggregate Certificate Principal Balance of the
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offered certificates (other than the Class A-IO Certificates) and the Class P
Certificates as of such distribution date (after giving effect to distributions
to be made on such distribution date).
P&I ADVANCE -- The aggregate of all payments of principal and interest, net of
the Master Servicing Fee and the Subservicing Fee, that were due during the
related Due Period on the mortgage loans master serviced by it and that were
delinquent on the related Determination Date.
PASS-THROUGH RATE-- With respect to any distribution date and
o the Class A-I-1 Certificates, the lesser of (x) One-Month LIBOR plus
the 0.23% per annum and (y) the Group I Net WAC Rate;
o the Class A-I-2 Certificates, the lesser of (x) 4.59% per annum and (y)
the Group I Net WAC Rate;
o the Class A-I-3 Certificates, the lesser of (x) 5.57% per annum and (y)
the Group I Net WAC Rate;
o the Class A-I-4 Certificates, (A) in the case of any distribution date
up to and including the Optional Termination Date, the lesser of (x)
6.29% per annum and (y) the Group I Net WAC Rate and (B) in the case of
any distribution date after the Optional Termination Date, the lesser
of (x) 6.79% per annum and (y) the Group I Net WAC Rate;
o the Class A-I-5 Certificates, (A) in the case of any distribution date
up to and including the Optional Termination Date, the lesser of (x)
6.75% per annum and (y) the Group I Net WAC Rate and (B) in the case of
any distribution date after the Optional Termination Date, the lesser
of (x) 7.25% per annum and (y) the Group I Net WAC Rate;
o the Class A-I-6 Certificates, (A) in the case of any distribution date
up to and including the Optional Termination Date, the lesser of (x)
7.03% per annum and (y) the Group I Net WAC Rate and (B) in the case of
any distribution date after the Optional Termination Date, the lesser
of (x) 7.53% per annum and (y) the Group I Net WAC Rate;
o the Class A-II Certificates, (A) in the case of any distribution date
up to and including the Optional Termination Date, the lesser of (x)
6.50% per annum and (y) the Group II Net WAC Rate and (B) in the case
of any distribution date after the Optional Termination Date, the
lesser of (x) 7.00% per annum and (y) the Group II Net WAC Rate;
o the Class A-IO Certificates, (i) in the case of any distribution date
up to and including the 30th distribution date, the lesser of (x) (A)
7.75% per annum for the February 2002 through January 2003 distribution
date, (B) 7.00% per annum for the February 2003 through July 2003
distribution date, (C) 5.00% per annum for the August 2003 through
January 2004 distribution date and (D) 4.00% per annum for the February
2004 through July 2004 distribution date and (y) the Class A-IO Cap
Rate and (ii) in the case of any distribution date after the July 2004
distribution date, 0% per annum;
o the Class M-1 Certificates, (A) in the case of any distribution date up
to and including the Optional Termination Date, the lesser of (x) 7.00%
per annum and (y) the Mezzanine Net WAC Rate and (B) in the case of any
distribution date after the Optional Termination Date, the lesser of
(x) 7.50% per annum and (y) the Mezzanine Net WAC Rate;
o the Class M-2 Certificates, (A) in the case of any distribution date up
to and including the Optional Termination Date, the lesser of (x) 7.00%
per annum and (y) the Mezzanine Net WAC Rate and (B)
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in the case of any distribution date after the Optional Termination
Date, the lesser of (x) 7.50% per annum and (y) the Mezzanine Net WAC
Rate; and
o the Class B Certificates, (A) in the case of any distribution date up
to and including the Optional Termination Date, the lesser of (x) 7.00%
per annum and (y) the Mezzanine Net WAC Rate and (B) in the case of any
distribution date after the Optional Termination Date, the lesser of
(x) 7.50% per annum and (y) the Mezzanine Net WAC Rate.
PLAN -- Any employee benefit plan subject to Title IV of ERISA and any plan or
other arrangement described in Section 4975(e)(1) of the Code.
PLAN ASSETS -- The assets of a Plan as determined under Department of Labor
regulation section 2510.3- 101 or other applicable law.
PRE-FUNDED AMOUNT -- The amount on deposit in the Pre-Funding Account on any
date of determination.
PRE-FUNDING ACCOUNT -- An account established by the Trustee for the benefit of
the Certificateholders and funded on the Closing Date by the Company with the
Original Pre-Funded Amount.
PREPAYMENT PERIOD -- With respect to any distribution date is the calendar month
immediately preceding the month in which such distribution date occurs.
PREPAYMENT ASSUMPTION -- A Prepayment Assumption of 100% assumes that the
outstanding balance of a pool of mortgage loans prepays at a rate of 4% CPR in
the first month of the life of such pool, such rate increasing by an additional
approximate 1.27% CPR (precisely 14/11 percent) each month thereafter through
the eleventh month of the life of such pool, and such rate thereafter remaining
constant at 18% CPR for the remainder of the life of such pool.
PRINCIPAL DISTRIBUTION AMOUNT -- For any distribution date, the Basic Principal
Distribution Amount plus the Extra Principal Distribution Amount.
PRINCIPAL REMITTANCE AMOUNT-- For any distribution date, the sum of
(1) the principal portion of all scheduled monthly payments on the
mortgage loans due on the related Due Date, to the extent received or advanced;
(2) the principal portion of all proceeds of the repurchase of a
mortgage loan (or, in the case of a substitution, certain amounts representing a
principal adjustment) as required by the Agreement during the preceding calendar
month;
(3) the principal portion of all other unscheduled collections received
during the preceding calendar month, including full and partial prepayments,
Liquidation Proceeds and Insurance Proceeds, in each case to the extent applied
as recoveries of principal; and
(4) any amount remaining on deposit in the Pre-Funding Account at the
end of the Funding Period.
RADIAN-- Radian Guaranty, Inc., formerly known as Commonwealth Mortgage
Assurance Company.
RADIAN LENDER-PAID PMI POLICY -- A Primary Insurance Policy issued by Radian in
accordance with a May 1, 2000 letter between the Seller and Radian.
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RADIAN PMI INSURED LOANS -- The mortgage loans covered by a Radian Lender-Paid
PMI Policy.
RADIAN PMI RATE -- With respect to each Radian PMI Insured Loan, the per annum
rate payable to Radian under the related Radian Lender-Paid PMI Policy.
RATING AGENCIES-- S&P, Fitch and Moody's.
RECORD DATE -- For each distribution date and any class of offered certificates
(other than the Class A-I-1 Certificates), the close of business on the last
business day of the month preceding the month in which such distribution date
occurs. For each distribution date and the Class A-I-1 Certificates, the
business day prior to such distribution date.
REFERENCE BANKS -- Leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
the Telerate Screen Page 3750 on the applicable LIBOR Determination Date, (iii)
which have been designated as such by the Trustee and (iv) not controlling,
controlled by, or under common control with, the Company or the Seller.
REMIC -- A real estate mortgage investment conduit within the meaning of Section
860D of the Code.
REMIC REGULATIONS -- Treasury regulations under Sections 860A to 860G of the
Code generally addressing the treatment of REMICs.
RESERVE INTEREST RATE -- The rate per annum that the Trustee determines to be
either (i) the arithmetic mean (rounded upwards if necessary to the nearest
whole multiple of 0.0625%) of the one-month United States dollar lending rates
which New York City banks selected by the Trustee are quoting on the relevant
LIBOR Determination Date to the principal London offices of leading banks in the
London interbank market or (ii) in the event that the Trustee can determine no
such arithmetic mean, the lowest one-month United States dollar lending rate
which New York City banks selected by the Trustee are quoting on such LIBOR
Determination Date to leading European banks.
RULES -- The rules, regulations and procedures creating and affecting DTC and
its operations.
S&P -- Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
SELLER -- Impac Funding Corporation, in its capacity as seller under the
Mortgage Loan Purchase Agreement.
STATED PRINCIPAL BALANCE -- With respect to any mortgage loan as of any date of
determination, the principal balance thereof 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 all amounts allocable to principal
that have been distributed to certificateholders with respect to such mortgage
loan on or before such date, and as further reduced to the extent that any
Realized Loss thereon has been allocated to one or more classes of certificates
on or before the date of determination.
STEPDOWN DATE -- The earlier to occur of (i) the distribution date on which the
aggregate Certificate Principal Balance of the Class A Certificates has been
reduced to zero and (ii) the later to occur of (x) the distribution date
occurring in February 2005 and (y) the first distribution date for which the sum
of the aggregate Certificate Principal Balance of the Mezzanine Certificates
divided by the sum of the aggregate Stated Principal Balance of the mortgage
loans as of the last day of the related Due Period (after giving
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effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period, and after reduction for Realized
Losses incurred during the related Prepayment Period) and the amount on deposit
in the Pre-Funding Account is greater than or equal to 13.50%.
SUBSEQUENT CUT-OFF DATE -- The date, as designated by the Company, that is the
later of (i) the first day of the month in which the related Subsequent Transfer
Date occurs and (ii) the origination date of such Mortgage Loan as the cut-off
date with respect to the related subsequent mortgage loans.
SUBSEQUENT TRANSFER DATE -- The dates upon which the Trustee will purchase the
subsequent mortgage loans.
SUBSEQUENT TRANSFER INSTRUMENT-- The subsequent transfer instrument between
Impac Secured Assets Corp., as company, and Bankers Trust Company of California,
N.A., as trustee, or such other instrument as agreed upon by the Company and the
Trustee.
SUBSERVICERS-- Wendover Funding, Inc. and GMAC Mortgage Corporation.
SUBSERVICING FEE -- With respect to each mortgage loan, accrued interest at the
Servicing Fee Rate with respect to the mortgage loan on the same principal
balance on which interest on the mortgage loan accrues for the calendar month.
The Subservicing Fee consists of subservicing and other related compensation
payable to the Subservicer or to the Master Servicer if the Master Servicer is
directly servicing the loan.
SUBSERVICING FEE RATE -- On each mortgage loan, a rate equal to 0.25% per annum.
TELERATE SCREEN PAGE 3750 -- The display designated as page 3750 on the Telerate
service (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks).
TRIGGER EVENT-- A Trigger Event is in effect with respect to any distribution
date if
(1) the aggregate principal balance of mortgage loans that are 60 or
more days delinquent (including for this purpose any such mortgage loans in
foreclosure and mortgage loans with respect to which the related mortgaged
property has been acquired by the trust) as of the close of business on the last
day of the preceding calendar month exceeds 2.25% (in the case of the 36th
distribution date through the 60th distribution date) or 3.25% (in the case of
any distribution date thereafter) of the sum of the aggregate principal balance
of the mortgage loans as of such distribution date (prior to giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and the amount on deposit in the Pre-Funding
Account; or
(2) in the case of any distribution date after the 36th distribution
date, the cumulative amount of Realized Losses incurred on the mortgage loans
from the Cut-off Date through the end of the calendar month immediately
preceding such distribution date exceeds 10.00% of the sum of (x) the aggregate
Certificate Principal Balance of the Mezzanine Certificates (or, if the
aggregate Certificate Principal Balances of the Class A Certificates have been
reduced to zero, the aggregate Certificate Principal Balance of the Mezzanine
Certificates other than the class of Mezzanine Certificates with the highest
payment priority) after giving effect to distributions that would be made on
such distribution date if no Trigger Event were in effect and (y) the
Overcollateralized Amount.
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For purposes of the foregoing calculation, a mortgage loan is considered "60
days" delinquent if a payment due on the first day of a month has not been
received by the second day of the second following month.
TRUSTEE-- Bankers Trust Company of California, N.A.
TRUSTEE'S FEE -- As to each mortgage loan and distribution date, an amount equal
to interest at the Trustee's Fee Rate on the Stated Principal Balance of such
mortgage loan as of the Due Date in the month immediately preceding the month in
which such distribution date occurs.
TRUSTEE'S FEE RATE -- On each mortgage loan plus any amounts held in the
Pre-Funding Account, a rate equal to 0.01% per annum.
UNDERWRITER-- Bear, Stearns & Co. Inc.
UNPAID INTEREST SHORTFALL AMOUNT -- For each class of offered certificates and
the first distribution date, zero, and (ii) with respect to each class of
offered certificates and any distribution date after the first distribution
date, the amount, if any, by which (a) the sum of (1) the Monthly Interest
Distributable Amount for such class for the immediately preceding distribution
date and (2) the outstanding Unpaid Interest Shortfall Amount, if any, for such
class for such preceding distribution date exceeds (b) the aggregate amount
distributed on such class in respect of interest pursuant to clause (a) of this
definition on such preceding distribution date, plus interest on the amount of
interest due but not paid on the certificates of such class on such preceding
distribution date, to the extent permitted by law, at the Pass-Through Rate for
such class for the related Accrual Period.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Impac
Mortgage Pass-Through Certificates, Series 2002-1 Class A-I-1, Class A-I-2,
Class A-I-3, Class A-I-4, Class A-I-5, Class A-I-6, Class A-II, Class A-IO,
Class M-1, Class M-2 and Class B (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold interests
in 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. Capitalized terms used but not defined in this
Annex I have the meanings assigned to them in the prospectus supplement and the
prospectus.
Secondary market trading between investors holding interests in Global
Securities through Clearstream and Euroclear will be conducted 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 interests in 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 investors holding interests in
Global Securities through Clearstream or Euroclear and investors holding
interests in Global Securities through DTC participants will be effected on a
delivery-against-payment basis through the respective depositories 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. Clearstream and Euroclear will hold
positions on behalf of their participants through their respective depositories,
which in turn will hold such positions in accounts as DTC participants.
Investors electing to hold interests in Global Securities through DTC
participants will be subject to the settlement practices applicable to similar
issues of pass-through certificates. Investors' securities custody accounts will
be credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold interests in 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
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desired value date.
TRANSFERS BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
participants will be settled using the DTC procedures applicable to similar
issues of pass-through certificates in same-day funds.
TRANSFERS 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.
TRANSFERS 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 its respective depository
to receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last distribution date
to but excluding the settlement date. Payment will then be made by the
respective depository to the DTC participant's account against delivery of the
Global Securities. After such 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 Global Securities credit
will appear on the next business day (European time) and the cash debit 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 through DTC on the intended value date
(i.e., the trade fails), the Clearstream or Euroclear cash debit will be valued
instead as of the actual settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing system the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring with 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 pre-position 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, to the extent 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, the investment income on the interest in
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 cost of funds.
Since the settlement through DTC will take place during New York business
hours, DTC participants can employ their usual procedures for sending Global
Securities to the respective depository 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 participant, a
cross-market transaction will settle no differently than a trade between two DTC
participants.
TRANSFERS 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
I-2
the respective depository, to a DTC participant. The seller will send
instructions to Clearstream or the Euroclear Operator through a Clearstream
participant or Euroclear participant at least one business day prior to
settlement. Clearstream or Euroclear will instruct its respective depository, 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 distribution date to but excluding the settlement date. The
payment will then be reflected in the account of the Clearstream participant or
Euroclear participant the following business 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 through DTC 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 charges
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 purchase
Global Securities from DTC participants for delivery to Clearstream participants
or Euroclear participants should note that these trades will automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be available to eliminate this potential problem:
(a) borrowing Global Securities through Clearstream or Euroclear for
one day (until the purchase side of the day trade is reflected in the
relevant Clearstream or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing Global Securities in the United States from a DTC
participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in the relevant
Clearstream or Euroclear accounts 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 (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax, complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial Holders of
Global Securities that are Non-U.S. Persons (as defined below) can obtain a
complete exemption from the withholding tax by filing a signed Form W-8BEN
(Certificate of Foreign Status). 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 (as defined below), including a non-U.S. corporation
or bank with a U.S. branch, for which the
I-3
interest income is effectively connected with its conduct of a trade or business
in the United States, can obtain an exemption from the withholding tax by filing
Form W-8ECI (Exemption from Withholding of Tax on Income Effectively Connected
with the Conduct of a Trade or Business in the United States) or a substitute
form.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non- U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form W-8BEN (Ownership, Exemption or
Reduced Rate Certificate). Form W-8BEN may be filed by a beneficial owner or its
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 beneficial owner of a
Global Security or, in the case of a Form W-8BEN or a Form W-8ECI filer, his
agent, files by submitting the appropriate form to the person through whom it
holds the security (the clearing agency, in the case of persons holding directly
on the books of the clearing agency). Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date the form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, a partnership or other entity treated as a
corporation or a partnership for United States federal income tax purposes,
organized in or under the laws of the United States or any state thereof,
including for this purpose the District of Columbia, (iii) an estate, the income
of which is includible in gross income for United States tax purposes,
regardless of its source, (iv) a trust if a court within the United States is
able to exercise primary supervision of the administration of the trust and one
or more United States fiduciaries have the authority to control all substantial
decisions of the trust; or (v) to the extent provided in Treasury regulations,
certain trusts in existence on August 20, 1996 that are treated as United States
persons prior to such date and elect to continue to be treated as United States
persons. The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
I-4
S-108
IMPAC SECURED ASSETS CORP.
Company
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS IN THE PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
THE OFFERED SECURITIES
The company proposes to establish one or more trusts to issue and sell from time
to time one or more classes of offered securities, which shall be mortgage
pass-through certificates or mortgage-backed notes.
THE TRUST FUND
Each series of securities will be secured by a trust fund consisting primarily
of a segregated pool of mortgage loans, including:
o mortgage loans secured by first and junior liens on the
related mortgage property; o home equity revolving lines of
credit; o mortgage loans where the borrower has little or no
equity in the related mortgaged property;
o mortgage loans secured by one-to-four-family residential
properties;
o mortgage loans secured by multifamily properties, commercial
properties and mixed residential and commercial properties,
provided that the concentration of these properties is less
than 10% of the pool; and
o manufactured housing conditional sales contracts and
installment loan agreements or interests therein;
in each case acquired by the company from one or more affiliated or unaffiliated
institutions.
CREDIT ENHANCEMENT
If so specified in the related prospectus supplement, the trust for a series of
securities may include any one or any combination of a financial guaranty
insurance policy, mortgage pool insurance policy, letter of credit, special
hazard insurance policy or reserve fund, and currency or interest rate exchange
agreements. In addition to or in lieu of the foregoing, credit enhancement maybe
provided by means of subordination of one or more classes of securities, by
cross-support or by overcollateralization.
The offered securities may be offered to the public through different methods as
described in "Methods of Distribution" in this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED HEREBY OR
DETERMINED THAT THIS PROSPECTUS OR THE PROSPECTUS SUPPLEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is September 25, 2001.
TABLE OF CONTENTS
Caption Page
- ------- ----
INTRODUCTION......................................................................................................3
General..........................................................................................................3
THE MORTGAGE POOLS................................................................................................4
General..........................................................................................................4
The Mortgage Loans...............................................................................................6
Underwriting Standards..........................................................................................10
Qualifications of Originators and Sellers.......................................................................12
Representations by Sellers......................................................................................12
SERVICING OF MORTGAGE LOANS......................................................................................16
General.........................................................................................................16
The Master Servicer.............................................................................................16
Collection and Other Servicing Procedures; Mortgage Loan
Modifications...................................................................................................16
Subservicers....................................................................................................19
Special Servicers...............................................................................................19
Realization Upon or Sale of Defaulted Mortgage Loans............................................................19
Servicing and Other Compensation and Payment of Expenses;
Retained Interest...............................................................................................22
Evidence as to Compliance.......................................................................................23
DESCRIPTION OF THE SECURITIES....................................................................................23
General.........................................................................................................23
Form of Securities..............................................................................................25
Global Securities...............................................................................................26
Assignment of Trust Fund Assets.................................................................................29
Certificate Account.............................................................................................32
Distributions...................................................................................................36
Distributions of Interest and Principal on the Securities.......................................................36
Pre-Funding Account.............................................................................................37
Distributions on the Securities in Respect of
Prepayment Premium..............................................................................................38
Allocation of Losses and Shortfalls.............................................................................38
Advances........................................................................................................38
Reports to Securityholders......................................................................................39
DESCRIPTION OF CREDIT ENHANCEMENT................................................................................40
General ........................................................................................................40
Subordinate Securities..........................................................................................41
Cross-Support...................................................................................................41
Overcollateralization...........................................................................................42
Financial Guaranty Insurance Policy ............................................................................42
Mortgage Pool Insurance Policies................................................................................42
Letter of Credit ...............................................................................................44
Special Hazard Insurance Policies ..............................................................................44
Reserve Funds...................................................................................................45
Cash Flow Agreements............................................................................................46
Maintenance of Credit Enhancement ..............................................................................46
Reduction or Substitution of Credit Enhancement ................................................................48
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
SECURITIES.......................................................................................................49
Swaps and Yield Supplement Agreements...........................................................................49
Purchase Obligations ...........................................................................................49
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER................................................................................................50
General.........................................................................................................50
Primary Mortgage Insurance Policies ............................................................................50
Hazard Insurance Policies.......................................................................................51
FHA Insurance...................................................................................................52
VA Mortgage Guaranty............................................................................................53
THE COMPANY .....................................................................................................54
IMPAC FUNDING CORPORATION........................................................................................54
IMPAC MORTGAGE HOLDINGS, INC.....................................................................................54
THE AGREEMENTS...................................................................................................55
General.........................................................................................................55
Certain Matters Regarding the Master Servicer and the Company...................................................55
Events of Default and Rights Upon Event Default.................................................................56
Amendment.......................................................................................................60
Termination; Retirement of Securities...........................................................................61
The Trustee.....................................................................................................62
Duties of the Trustee...........................................................................................62
Some Matters Regarding the Trustee..............................................................................63
Resignation and Removal of the Trustee..........................................................................63
YIELD CONSIDERATIONS.............................................................................................63
MATURITY AND PREPAYMENT CONSIDERATIONS...........................................................................66
LEGAL ASPECTS OF MORTGAGE LOANS..................................................................................67
Mortgages.......................................................................................................68
Cooperative Mortgage Loans......................................................................................68
Tax Aspects of Cooperative Ownership............................................................................69
Leases and Rents ...............................................................................................70
Contracts.......................................................................................................70
Foreclosure on Mortgages and Some Contracts.....................................................................72
Foreclosure on Shares of Cooperatives...........................................................................73
Repossession with respect to Contracts..........................................................................75
Rights of Redemption............................................................................................76
Anti-Deficiency Legislation and Other Limitations on Lenders....................................................77
Environmental Legislation.......................................................................................78
Consumer Protection Laws with Respect to Contracts..............................................................79
Enforceability of Some Provisions...............................................................................80
Subordinate Financing...........................................................................................81
Installment Contracts...........................................................................................81
Applicability of Usury Laws.....................................................................................82
Alternative Mortgage Instruments................................................................................83
Formaldehyde Litigation with Respect to Contracts...............................................................83
Soldiers' and Sailors' Civil Relief Act of 1940.................................................................84
Forfeitures in Drug and RICO Proceedings........................................................................84
Junior Mortgages................................................................................................84
Negative Amortization Loans.....................................................................................85
FEDERAL INCOME TAX CONSEQUENCES..................................................................................85
General.........................................................................................................85
REMICS..........................................................................................................86
Notes..........................................................................................................103
Grantor Trust Funds............................................................................................104
STATE AND OTHER TAX CONSEQUENCES ...............................................................................113
ERISA CONSIDERATIONS............................................................................................113
Representation from Plans Investing in Notes with "Substantial
Equity Features"or Non-exempt Certificates.....................................................................118
Tax Exempt Investors...........................................................................................119
Consultation with Counsel......................................................................................119
LEGAL INVESTMENT MATTERS........................................................................................119
USE OF PROCEEDS.................................................................................................121
METHODS OF DISTRIBUTION.........................................................................................121
LEGAL MATTERS...................................................................................................122
FINANCIAL INFORMATION...........................................................................................122
RATING..........................................................................................................122
AVAILABLE INFORMATION...........................................................................................123
REPORTS TO SECURITYHOLDERS......................................................................................123
INCORPORATION OF INFORMATION BY REFERENCE.......................................................................123
GLOSSARY........................................................................................................124
2
INTRODUCTION
ALL CAPITALIZED TERMS IN THIS PROSPECTUS ARE DEFINED IN THE
GLOSSARY AT THE END.
GENERAL
The mortgage pass-through certificates or mortgage-backed notes offered
by this prospectus and the prospectus supplement will be offered from time to
time in series. The securities of each series will consist of the offered
securities of the series, together with any other mortgage pass-through
certificates or mortgage-backed notes of the series.
Each series of certificates will represent in the aggregate the entire
beneficial ownership interest in, and each series of notes will represent
indebtedness of, a trust fund to be established by the company. Each trust fund
will consist primarily of a mortgage pool of mortgage loans or interests
therein, which may include mortgage securities, acquired by the company from one
or more affiliated or unaffiliated sellers. See "The Company" and "The Mortgage
Pools." The mortgage loans may include sub-prime mortgage loans. The trust fund
assets may only include, if applicable, the mortgage loans, reinvestment income,
reserve funds, cash accounts and various forms of credit enhancement as
described in this prospectus and will be held in trust for the benefit of the
related securityholders pursuant to: (1) with respect to each series of
certificates, a pooling and servicing agreement or other agreement, or (2) with
respect to each series of notes, an indenture, in each case as more fully
described in this prospectus and in the related prospectus supplement.
Information regarding the offered securities of a series, and the general
characteristics of the mortgage loans and other trust fund assets in the related
trust fund, will be set forth in the related prospectus supplement.
Each series of securities will include one or more classes. Each class
of securities of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
securities, to receive a specified portion of payments of principal or interest
or both on the mortgage loans and the other trust fund assets in the related
trust fund in the manner described in this prospectus under "Description of the
Securities" and in the related prospectus supplement. A series may include one
or more classes of securities entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. A
series may include two or more classes of securities which differ as to the
timing, sequential order, priority of payment, pass-through rate or amount of
distributions of principal or interest or both.
The company's only obligations with respect to a series of securities
will be pursuant to representations and warranties made by the company, except
as provided in the related prospectus supplement. The master servicer for any
series of securities will be named in the related prospectus supplement. The
principal obligations of the master servicer will be pursuant to its contractual
servicing obligations, which include its limited obligation to make advances in
the event of delinquencies in payments on the related mortgage loans. See
"Description of the Securities."
If so specified in the related prospectus supplement, the trust fund
for a series of securities may include any one or any combination of a financial
guaranty insurance policy, mortgage pool insurance policy, letter of credit,
special hazard insurance policy, reserve fund or currency or interest rate
exchange agreements. In addition to or in lieu of the foregoing, credit
enhancement may be provided by means of subordination of one or more classes of
securities or by overcollateralization. See "Description of Credit Enhancement."
The rate of payment of principal of each class of securities entitled
to a portion of principal payments on the mortgage loans in the related mortgage
pool and the trust fund assets will depend on the priority of
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payment of the class and the rate and timing of principal payments on the
mortgage loans and other trust fund assets, including by reason of prepayments,
defaults, liquidations and repurchases of mortgage loans. A rate of principal
payments lower or faster than that anticipated may affect the yield on a class
of securities in the manner described in this prospectus and in the related
prospectus supplement. See "Yield Considerations."
With respect to each series of certificates, one or more separate
elections may be made to treat the related trust fund or a designated portion
thereof as a REMIC for federal income tax purposes. If applicable, the
prospectus supplement for a series of certificates will specify which class or
classes of the related series of certificates will be considered to be regular
interests in the related REMIC and which class of certificates or other
interests will be designated as the residual interest in the related REMIC. See
"Federal Income Tax Consequences" in this prospectus.
The offered securities may be offered through one or more different
methods, including offerings through underwriters, as more fully described under
"Methods of Distribution" and in the related prospectus supplement.
There will be no secondary market for the offered securities of any
series prior to the offering thereof. There can be no assurance that a secondary
market for any of the offered securities will develop or, if it does develop,
that it will continue. The offered securities will not be listed on any
securities exchange.
THE MORTGAGE POOLS
GENERAL
Each mortgage pool will consist primarily of mortgage loans, minus any
interest retained by the company or any affiliate of the company. The mortgage
loans may consist of single family loans, multifamily loans, commercial loans,
mixed-use loans and Contracts, each as described below.
The single family loans will be evidenced by mortgage notes and secured
by mortgages that, in each case, create a first or junior lien on the related
mortgagor's fee or leasehold interest in the related mortgaged property. The
related mortgaged property for a single family loan may be owner-occupied or
maybe a vacation, second or non-owner-occupied home.
If specified in the related prospectus supplement relating to a series
of securities, the single family loans may include cooperative apartment loans
evidenced by a mortgage note secured by security interests in the related
mortgaged property including shares issued by cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the related buildings.
The multifamily loans will be evidenced by mortgage notes and secured
by mortgages that create a first or junior lien on residential properties
consisting of five or more dwelling units in high-rise, mid- rise or garden
apartment structures or projects.
The commercial loans will be evidenced by mortgage notes and secured
mortgages that create a first or junior lien on commercial properties including
office building, retail building and a variety of other commercial properties as
may be described in the related prospectus supplement.
The mixed-use loans will be evidenced by mortgage loans and secured by
mortgages that create a first or junior lien on properties consisting of mixed
residential and commercial structures.
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The aggregate concentration by original principal balance of
commercial, multifamily and mixed-use loans in any mortgage pool will be less
than 10% of the original principal balance of the mortgage pool.
Mortgaged properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The mortgage loans will not be guaranteed or insured by the company or
any of its affiliates. However, if so specified in the related prospectus
supplement, the mortgage loans may be insured by the FHA or the VA. See
"Description of Primary Insurance Policies--FHA Insurance" and "--VA Insurance."
A mortgage pool may include mortgage loans that are delinquent as of
the date the related series of securities is issued. In that case, the related
prospectus supplement will set forth, as to each mortgage loan, available
information as to the period of delinquency and any other information relevant
for a prospective purchaser to make an investment decision. No mortgage loan in
a mortgage pool shall be 90 days or more delinquent. Mortgage loans which are
more than 30 and less than 90 days delinquent included in any mortgage pool will
have delinquency data relating to them included in the related prospectus
supplement. No mortgage pool will include a concentration of mortgage loans
which is more than 30 and less than 90 days delinquent of 20% or more.
The mortgage loans may include "sub-prime" mortgage loans. "Sub-prime"
mortgage loans will be underwritten in accordance with underwriting standards
which are less stringent than guidelines for "A" quality borrowers. Mortgagors
may have a record of outstanding judgments, prior bankruptcies and other credit
items that do not satisfy the guidelines for "A" quality borrowers. They may
have had past debts written off by past lenders.
A mortgage pool may include mortgage loans that do not meet the
purchase requirements of Fannie Mae and Freddie Mac. These mortgage loans are
known as nonconforming loans. The mortgage loans may be nonconforming because
they exceed the maximum principal balance of mortgage loans purchased by Fannie
Mae and Freddie Mac, known as jumbo loans, because they are sub-prime mortgage
loans, or because of some other failure to meet the purchase criteria of Fannie
Mae and Freddie Mac. The related prospectus supplement will detail to what
extent the mortgage loans are nonconforming mortgage loans.
Each mortgage loan will be selected by the company for inclusion in a
mortgage pool from among those purchased by the company, either directly or
through its affiliates, from Unaffiliated Sellers or Affiliated Sellers. If a
mortgage pool is composed of mortgage loans acquired by the company directly
from Unaffiliated Sellers, the related prospectus supplement will specify the
extent of mortgage loans so acquired. The characteristics of the mortgage loans
are as described in the related prospectus supplement. Other mortgage loans
available for purchase by the company may have characteristics which would make
them eligible for inclusion in a mortgage pool but were not selected for
inclusion in the mortgage pool.
The mortgage loans may be delivered to the trust fund pursuant to a
Designated Seller Transaction, concurrently with the issuance of the related
series of securities. These securities may be sold in whole or in part to the
Seller in exchange for the related mortgage loans, or may be offered under any
of the other methods described in this prospectus under "Methods of
Distribution." The related prospectus supplement for a mortgage pool composed of
mortgage loans acquired by the company pursuant to a Designated Seller
Transaction will generally include information, provided by the related Seller,
about the Seller, the mortgage loans and the underwriting standards applicable
to the mortgage loans.
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If specified in the related prospectus supplement, the trust fund for a
series of securities may include mortgage securities, as described in this
prospectus. The mortgage securities may have been issued previously by the
company or an affiliate thereof, a financial institution or other entity engaged
generally in the business of mortgage lending or a limited purpose corporation
organized for the purpose of, among other things, acquiring and depositing
mortgage loans into trusts, and selling beneficial interests in trusts. The
mortgage securities will be generally similar to securities offered under this
prospectus. However, any mortgage securities included in a trust fund will (1)
either have been (a) previously registered under the Securities Act, or
(b)eligible for sale under Rule 144(k) under the Exchange Act; and (2) be
acquired in bona fide secondary market transactions. If the mortgage securities
are the securities of the company or an affiliate thereof, they will be
registered under the Securities Act, even if they satisfy the requirements of
the preceding sentence. As to any series of mortgage securities, the related
prospectus supplement will include a description of (1) the mortgage securities
and any related credit enhancement, and (2) the mortgage loans underlying the
mortgage securities.
THE MORTGAGE LOANS
Each of the mortgage loans will be a type of mortgage loan described or
referred to below, with any variations described in the related prospectus
supplement:
o Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans
or otherwise modified) providing for level monthly payments of
principal and interest and terms at origination or
modification of not more than approximately 15 years;
o Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans
or otherwise modified) providing for level monthly payments of
principal and interest and terms at origination or
modification of more than 15 years, but not more than
approximately 30 years;
o Fully-amortizing ARM Loans having an original or modified term
to maturity of not more than approximately 30 years with a
related mortgage rate which generally adjusts initially either
three months, six months or one, two, three, five, seven or
ten years or other intervals subsequent to the initial payment
date, and thereafter at either three- month, six-month,
one-year or other intervals (with corresponding adjustments in
the amount of monthly payments) over the term of the mortgage
loan to equal the sum of the related Note Margin and the Note
Index. The related prospectus supplement will set forth the
relevant Index and the highest, lowest and weighted average
Note Margin with respect to the ARM Loans in the related
mortgage pool. The related prospectus supplement will also
indicate any periodic or lifetime limitations on changes in
any per annum mortgage rate at the time of any adjustment. If
specified in the related prospectus supplement, an ARM Loan
may include a provision that allows the mortgagor to convert
the adjustable mortgage rate to a fixed rate at some point
during the term of the ARM Loan generally not later than six
to ten years subsequent to the initial payment date;
o Negatively-amortizing ARM Loans having original or modified
terms to maturity of not more than approximately 30 years with
mortgage rates which generally adjust initially on the payment
date referred to in the related prospectus supplement, and on
each of specified periodic payment dates thereafter, to equal
the sum of the Note Margin and the Index. The scheduled
monthly payment will be adjusted as and when described in the
related prospectus
6
supplement to an amount that would fully amortize the mortgage
loan over its remaining term on a level debt service basis;
provided that increases in the scheduled monthly payment may
be subject to limitations as specified in the related
prospectus supplement. Any Deferred Interest will be added to
the principal balance of the mortgage loan;
o Fixed-rate, graduated payment mortgage loans having original
or modified terms to maturity of not more than approximately
15 years with monthly payments during the first year
calculated on the basis of an assumed interest rate which is a
specified percentage below the mortgage rate on the mortgage
loan. Monthly payments on these mortgage loans increase at the
beginning of the second year by a specified percentage of the
monthly payment during the preceding year and each year
thereafter to the extent necessary to amortize the mortgage
loan over the remainder of its approximately 15-year term.
Deferred Interest, if any, will be added to the principal
balance of these mortgage loans;
o Fixed-rate, graduated payment mortgage loans having original
or modified terms to maturity of not more than approximately
30 years with monthly payments during the first year
calculated on the basis of an assumed interest rate which is a
specified percentage below the mortgage rate. The monthly
payments on these mortgage loans increase at the beginning of
the second year by a specified percentage of the monthly
payment during the preceding year and each year thereafter to
the extent necessary to fully amortize the mortgage loan
within its approximately 25- or 30-year term. Deferred
Interest, if any, will be added to the principal balance of
these mortgage loans;
o Balloon loans having payment terms similar to those described
in one of the preceding paragraphs, calculated on the basis of
an assumed amortization term, but providing for a balloon
payment of all outstanding principal and interest to be made
at the end of a specified term that is shorter than the
assumed amortization term.
o Mortgage loans that provide for a line of credit pursuant to
which amounts may be advanced to the borrower from time to
time; or
o Another type of mortgage loan described in the related
prospectus supplement.
The mortgage pool may contain mortgage loans secured by junior liens,
and the related senior liens may not be included in the mortgage pool. The
primary risk to holders of mortgage loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related senior liens to satisfy fully both the senior liens
and the mortgage loan. In the event that a holder of a senior lien forecloses on
a mortgaged property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the senior liens. The claims of the holders
of the senior liens will be satisfied in full out of proceeds of the liquidation
of the related mortgaged property, if the proceeds are sufficient, before the
trust fund as holder of the junior lien receives any payments in respect of the
mortgage loan. If the master servicer were to foreclose on a mortgage loan
secured by a junior lien, it would do so subject to any related senior liens. In
order for the debt related to the mortgage loan to be paid in full at the sale,
a bidder at the foreclosure sale of the mortgage loan would have to bid an
amount sufficient to pay off all sums due under the mortgage loan and the senior
liens or purchase the mortgaged property subject to the senior liens. In the
event that the proceeds from a foreclosure or similar sale of the related
mortgaged property are insufficient to satisfy all senior liens and the mortgage
loan in the aggregate, the trust fund, as the holder of the junior
7
lien, and, accordingly, holders of one or more classes of the securities of the
related series bear (1) the risk of delay in distributions while a deficiency
judgment against the borrower is sought and (2) the risk of loss if the
deficiency judgment is not realized upon. Moreover, deficiency judgments may not
be available in some jurisdictions or the mortgage loan may be nonrecourse. In
addition, a junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages.
A mortgage loan may contain a prohibition on prepayment or lock-out
period or require payment of a prepayment penalty. A multifamily, commercial or
mixed-use loan may also contain a provision that entitles the lender to a share
of profits realized from the operation or disposition of the related mortgaged
property. If the holders of any class or classes of offered securities of a
series will be entitled to all or a portion of this type of equity
participation, the related prospectus supplement will describe the equity
participation and the method or methods by which distributions in respect
thereof will be made to such holders.
The mortgage loans may be "equity refinance" mortgage loans, as to
which a portion of the proceeds are used to refinance an existing mortgage loan,
and the remaining proceeds may be retained by the mortgagor or used for purposes
unrelated to the mortgaged property. Alternatively, the mortgage loans may be
rate and term refinance" mortgage loans, as to which substantially all of the
proceeds (net of related costs incurred by the mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The mortgage loans
may be mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a mortgaged property may be
subject to secondary financing at the time of origination of the mortgage loan
or thereafter. In addition, some or all of the single family loans secured by
junior liens may be High LTV Loans.
A mortgage pool may contain convertible ARM Loans which allow the
mortgagors to convert the adjustable rates on these mortgage loans to a fixed
rate at some point during the life of these mortgage loans, generally not later
than six to ten years subsequent to the date of origination, depending upon the
length of the initial adjustment period. If specified in the related prospectus
supplement, upon any conversion, the company, the related master servicer, the
applicable Seller or a third party will purchase the converted mortgage loan as
and to the extent set forth in the related prospectus supplement. Alternatively,
if specified in the related prospectus supplement, the company or the related
master servicer (or another specified party) may agree to act as remarketing
agent with respect to the converted mortgage loans and, in this capacity, to use
its best efforts to arrange for the sale of converted mortgage loans under
specified conditions. Upon the failure of any party so obligated to purchase any
converted mortgage loan, the inability of any remarketing agent to arrange for
the sale of the converted mortgage loan and the unwillingness of the remarketing
agent to exercise any election to purchase the converted mortgage loan for its
own account, the related mortgage pool will thereafter include both fixed rate
and adjustable rate mortgage loans.
If provided for in the related prospectus supplement, the mortgage
loans may include buydown mortgage loans. Under the terms of a buydown mortgage
loan, the monthly payments made by the mortgagor during the early years of the
mortgage loan will be less than the scheduled monthly payments on the mortgage
loan. The resulting difference will made up from:
o funds contributed by the seller of the mortgaged property or
another source and placed in a custodial account,
8
o if funds contributed by the seller are contributed on a
present value basis, investment earnings on these funds or
o additional funds to be contributed over time by the
mortgagor's employer or another source.
See "Description of the Securities--Payments on Mortgage Loans; Deposits to
Certificate Account."
Generally, the mortgagor under each buydown mortgage loan will be
qualified at the applicable lower monthly payment. Accordingly, the repayment of
a buydown mortgage loan is dependent on the ability of the mortgagor to make
larger level monthly payments after the Buydown Funds have been depleted and,
for some buydown mortgage loans, during the Buydown Period.
The prospectus supplement for each series of securities will contain
information, to the extent known or reasonably ascertainable, as to the loss and
delinquency experience of the Seller and/or the master servicer with respect to
mortgage loans similar to those included in the trust fund. Information
generally will be provided when the Seller and/or master servicer have a
seasoned portfolio of mortgage loans.
The prospectus supplement for each series of securities will contain
information as to the type of mortgage loans that will be included in the
related mortgage pool. Each prospectus supplement applicable to a series of
securities will include information, generally as of the cut-off date and to the
extent then available to the company, on an approximate basis, as to the
following:
o the aggregate principal balance of the mortgage loans,
o the type of property securing the mortgage loans,
o the original or modified terms to maturity of the mortgage
loans,
o the range of principal balances of the mortgage loans at
origination or modification,
o the earliest origination or modification date and latest
maturity date of the mortgage loans,
o the loan-to-value ratios of the mortgage loans,
o the mortgage rate or range of mortgage rates borne by the
mortgage loans,
o if any of the mortgage loans are ARM Loans, the applicable
Index, the range of Note Margins and the weighted average Note
Margin,
o the geographical distribution of the mortgage loans,
o the number of buydown mortgage loans, if applicable, and
o the percent of ARM Loans which are convertible to fixed-rate
mortgage loans, if applicable.
A Current Report on Form 8-K will be available upon request to holders of the
related series of securities and will be filed, together with the related
pooling and servicing agreement, with respect to each series of certificates, or
the related servicing agreement, owner trust agreement and indenture, with
respect to each series of notes, with the Commission within fifteen days after
the initial issuance of the securities. In the
9
event that mortgage loans are added to or deleted from the trust fund after the
date of the related prospectus supplement, the addition or deletion will be
noted in the Current Report on Form 8-K. In no event, however, will more than 5%
(by principal balance at the cut-off date) of the mortgage loans or mortgage
securities deviate from the characteristics of the mortgage loans or mortgage
securities set forth in the related prospectus supplement.
The company will cause the mortgage loans constituting each mortgage
pool, or mortgage securities evidencing interests therein, to be assigned,
without recourse, to the trustee named in the related prospectus supplement, for
the benefit of the holders of all of the securities of a series. Except to the
extent that servicing of any mortgage loan is to be transferred to a special
servicer, the master servicer named in the related prospectus supplement will
service the mortgage loans, directly or through subservicers, pursuant to a
pooling and servicing agreement, with respect to each series of certificates, or
a servicing agreement, with respect to each series of notes, and will receive a
fee for these services. See "Servicing of Mortgage Loans," "Description of the
Securities" and "The Agreements." With respect to those mortgage loans serviced
by the master servicer through a subservicer, the master servicer will remain
liable for its servicing obligations under the related pooling and servicing
agreement or servicing agreement as if the master servicer alone were servicing
the mortgage loans. The master servicer's obligations with respect to the
mortgage loans will consist principally of its contractual servicing obligations
under the related pooling and servicing agreement or servicing agreement
(including its obligation to enforce the purchase and other obligations of
subservicers and Sellers, as more fully described in this prospectus under
"--Representations by Sellers" in this prospectus, "Servicing of Mortgage
Loans--Subservicers," and "Description of the Securities--Assignment of Trust
Fund Assets," and, if and to the extent set forth in the related prospectus
supplement, its obligation to make cash advances in the event of delinquencies
in payments on or with respect to the mortgage loans as described in this
prospectus under "Description of the Securities--Advances") or pursuant to the
terms of any mortgage securities.
UNDERWRITING STANDARDS
Mortgage loans to be included in a mortgage pool will have been
purchased by the company, either directly or indirectly from Sellers. The
mortgage loans, as well as mortgage loans underlying mortgage securities, will
have been originated in accordance with underwriting standards acceptable to the
company and generally described below. Any mortgage loan not directly
underwritten by the company or its affiliates will be reunderwritten by the
company or its affiliates, except in the case of a Designated Seller's
Transaction, in which case each mortgage loan will be underwritten by the Seller
or an affiliate thereof. The reunderwriting standards of the company or its
affiliates for these mortgage loans generally will be in accordance with the
same standards as those for mortgage loans directly underwritten, with any
variations described in the related prospectus supplement.
The underwriting standards to be used in originating the mortgage loans
are primarily intended to assess the creditworthiness of the mortgagor, the
value of the mortgaged property and the adequacy of the property as collateral
for the mortgage loan.
The primary considerations in underwriting a mortgage loan are the
mortgagor's employment stability and whether the mortgagor has sufficient
monthly income available (1) to meet the mortgagor's monthly obligations on the
proposed mortgage loan (generally determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the home
(including property taxes and hazard insurance) and (2) to meet monthly housing
expenses and other financial obligations and monthly living expenses. However,
the loan-to-value ratio of the mortgage loan is another critical factor. In
addition,
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a mortgagor's credit history and repayment ability, as well as the type and use
of the mortgaged property, are also considerations.
High LTV Loans are underwritten with an emphasis on the
creditworthiness of the related mortgagor. High LTV Loans are underwritten with
a limited expectation of recovering any amounts from the foreclosure of the
related mortgaged property.
In the case of the multifamily loans, commercial loans or mixed-use
loans, lenders typically look to the debt service coverage ratio of a loan as an
important measure of the risk of default on that loan. Unless otherwise defined
in the related prospectus supplement, the debt service coverage ratio of a
multifamily loan or commercial loan at any given time is the ratio of (1) the
net operating income of the related mortgaged property for a twelve-month period
which is to (2) the annualized scheduled payments on the mortgage loan and on
any other loan that is secured by a lien on the mortgaged property prior to the
lien of the related mortgage. The total operating revenues derived from a
multifamily, commercial or mixed-use property, as applicable, during that
period, minus the total operating expenses incurred in respect of that property
during that period other than (a) non-cash items such as depreciation and
amortization, (b) capital expenditures and (c) debt service on loans (including
the related mortgage loan) secured by liens on that property. The net operating
income of a multifamily, commercial or mixed-use property, as applicable, will
fluctuate over time and may or may not be sufficient to cover debt service on
the related mortgage loan at any given time. As the primary source of the
operating revenues of a multifamily, commercial or mixed-use property, as
applicable, rental income (and maintenance payments from tenant-stockholders of
a cooperatively owned multifamily property) may be affected by the condition of
the applicable real estate market and/or area economy. Increases in operating
expenses due to the general economic climate or economic conditions in a
locality or industry segment, such as increases in interest rates, real estate
tax rates, energy costs, labor costs and other operating expenses, and/or to
changes in governmental rules, regulations and fiscal policies, may also affect
the risk of default on a multifamily, commercial or mixed-use loan. Lenders also
look to the loan-to-value ratio of a multifamily, commercial or mixed-use loan
as a measure of risk of loss if a property must be liquidated following a
default.
Each prospective mortgagor will generally complete a mortgage loan
application that includes information on the applicant's liabilities, income,
credit history, employment history and personal information. One or more credit
reports on each applicant from national credit reporting companies generally
will be required. The report typically contains information relating to credit
history with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcies, repossessions, or judgments. In the
case of a multifamily loan, commercial loan or mixed-use loan, the mortgagor
will also be required to provide certain information regarding the related
mortgaged property, including a current rent roll and operating income
statements (which may be pro forma and unaudited). In addition, the originator
will generally also consider the location of the mortgaged property, the
availability of competitive lease space and rental income of comparable
properties in the relevant market area, the overall economy and demographic
features of the geographic area and the mortgagor's prior experience in owning
and operating properties similar to the multifamily properties or commercial
properties, as the case may be.
Mortgaged properties generally will be appraised by licensed
appraisers. The appraiser will generally address neighborhood conditions, site
and zoning status and condition and valuation of improvements. In the case of
mortgaged properties secured by single family loans, the appraisal report will
generally include a reproduction cost analysis (when appropriate) based on the
current cost of constructing a similar home and a market value analysis based on
recent sales of comparable homes in the area. With respect to multifamily
properties, commercial properties and mixed-use properties, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis was
used. An appraisal employing the income approach to value
11
analyzes a property's projected net cash flow, capitalization and other
operational information in determining the property's value. The market approach
to value analyzes the prices paid for the purchase of similar properties in the
property's area, with adjustments made for variations between those other
properties and the property being appraised. The cost approach to value requires
the appraiser to make an estimate of land value and then determine the current
cost of reproducing the improvements less any accrued depreciation. In any case,
the value of the property being financed, as indicated by the appraisal, must
support, and support in the future, the outstanding loan balance. All appraisals
are required to be on forms acceptable to Fannie Mae or Freddie Mac.
Notwithstanding the foregoing, loan-to-value ratios will not
necessarily constitute an accurate measure of the risk of liquidation loss in a
pool of mortgage loans. For example, the value of a mortgaged property as of the
date of initial issuance of the related series of securities may be less than
the Value determined at loan origination, and will likely continue to fluctuate
from time to time based upon changes in economic conditions and the real estate
market. Mortgage loans which are subject to negative amortization will have
loan-to-value ratios which will increase after origination as a result of
negative amortization. Also, even when current, an appraisal is not necessarily
a reliable estimate of value for a multifamily property or commercial property.
As stated above, appraised values of multifamily, commercial and mixed-use
properties are generally based on the market analysis, the cost analysis, the
income analysis, or upon a selection from or interpolation of the values derived
from those approaches. Each of these appraisal methods can present analytical
difficulties. It is often difficult to find truly comparable properties that
have recently been sold; the replacement cost of a property may have little to
do with its current market value; and income capitalization is inherently based
on inexact projections of income and expenses and the selection of an
appropriate capitalization rate. Where more than one of these appraisal methods
are used and provide significantly different results, an accurate determination
of value and, correspondingly, a reliable analysis of default and loss risks, is
even more difficult.
If so specified in the related prospectus supplement, the underwriting
of a multifamily loan, commercial loan or mixed-use loan may also include
environmental testing. Under the laws of some states, contamination of real
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, this type of lien has priority over an existing mortgage lien
on that property. In addition, under the laws of some states and under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, a lender may be liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances at a
property, if agents or employees of the lender have become sufficiently involved
in the operations of the borrower, regardless of whether or not the
environmental damage or threat was caused by the borrower or a prior owner. A
lender also risks such liability on foreclosure of the mortgage as described
under "Legal Aspects of Mortgage Loans--Environmental Legislation" in this
prospectus.
With respect to any FHA loan or VA loans the mortgage loan Seller will
be required to represent that it has complied with the applicable underwriting
policies of the FHA or VA, respectively. See "Description of Primary Insurance
Policies--FHA Insurance" and "--VA Insurance" in this prospectus.
QUALIFICATIONS OF ORIGINATORS AND SELLERS
Each mortgage loan generally will be originated, directly or through
mortgage brokers and correspondents, by a savings and loan association, savings
bank, commercial bank, credit union, insurance company, or similar institution
which is supervised and examined by a federal or state authority, or by a
mortgagee approved by the Secretary of Housing and Urban Development pursuant to
sections 203 and 211 of the Housing Act.
12
REPRESENTATIONS BY SELLERS
Each Seller will have made representations and warranties in respect of
the mortgage loans and/or mortgage securities sold by the Seller and evidenced
by a series of securities. In the case of mortgage loans, representations and
warranties will generally include, among other things, that as to each mortgage
loan:
o any required hazard and primary mortgage insurance policies
were effective at the origination of the mortgage loan, and
each the policy remained in effect on the date of purchase of
the mortgage loan from the Seller by or on behalf of the
company;
o with respect to each mortgage loan other than a Contract or a
cooperative mortgage loan, either (A) a title insurance policy
insuring (subject only to permissible title insurance
exceptions) the lien status of the mortgage was effective at
the origination of the mortgage loan and the policy remained
in effect on the date of purchase of the mortgage loan from
the Seller by or on behalf of the company or (B) if the
mortgaged property securing the mortgage loan is located in an
area where these policies are generally not available, there
is in the related mortgage file an attorney's certificate of
title indicating (subject to permissible exceptions set forth
therein) the lien status of the mortgage;
o the Seller has good title to the mortgage loan and the
mortgage loan was subject to no offsets, defenses or
counterclaims except as may be provided under the Relief Act
and except to the extent that any buydown agreement exists for
a buydown mortgage loan;
o there are no mechanics' liens or claims for work, labor or
material affecting the related mortgaged property which are,
or may be a lien prior to, or equal with, the lien of the
related mortgage (subject only to permissible title insurance
exceptions);
o the related mortgaged property is free from damage and in good
repair;
o there are no delinquent tax or assessment liens against the
related mortgaged property;
o the mortgage loan is not more than 90 days delinquent as to
any scheduled payment of principal and/or interest;
o if a Primary Insurance Policy is required with respect to the
mortgage loan, the mortgage loan is the subject of the policy;
and
o the mortgage loan was made in compliance with, and is
enforceable under, all applicable local, state and federal
laws in all material respects.
If the mortgage loans include cooperative mortgage loans, representations and
warranties with respect to title insurance or hazard insurance may not be given.
Generally, the cooperative itself is responsible for the maintenance of hazard
insurance for property owned by the cooperative, and the borrowers
(tenant-stockholders) of the cooperative do not maintain hazard insurance on
their individual dwelling units. In the case of mortgage securities,
representations and warranties will generally include, among other things, that
as to each mortgage security: (1) the mortgage security is validly issued and
outstanding and entitled to the benefits of the agreement pursuant to which it
was issued; and (2) the Seller has good title to the mortgage security. In the
event of a breach of a Seller's representation or warranty that materially
adversely affects the interests of the securityholders in a mortgage loan or
mortgage security, the related Seller will be obligated to cure the breach or
repurchase or, if permitted, replace the mortgage loan or mortgage security
13
as described below. However, there can be no assurance that a Seller will honor
its obligation to repurchase or, if permitted, replace any mortgage loan or
mortgage security as to which a breach of a representation or warranty arises.
All of the representations and warranties of a Seller in respect of a
mortgage loan or mortgage security will have been made as of the date on which
the mortgage loan or mortgage security was purchased from the Seller by or on
behalf of the company. As a result, the date as of which the representations and
warranties were made may be a date prior to the date of initial issuance of the
related series of securities or, in the case of a Designated Seller Transaction,
will be the date of closing of the related sale by the applicable Seller. A
substantial period of time may have elapsed between the date as of which there
presentations and warranties were made and the later date of initial issuance of
the related series of securities. Accordingly, the Seller's purchase obligation
(or, if specified in the related prospectus supplement, limited replacement
option) described below will not arise if, during the period commencing on the
date of sale of a mortgage loan or mortgage security by the Seller, an event
occurs that would have given rise to a purchase obligation had the event
occurred prior to sale of the affected mortgage loan or mortgage security, as
the case may be. The only representations and warranties to be made for the
benefit of holders of securities in respect of any related mortgage loan or
mortgage security relating to the period commencing on the date of sale of the
mortgage loan or mortgage security by the Seller to or on behalf of the company
will be the limited representations of the company and the master servicer
described under "Description of the Securities--Assignment of Trust Fund Assets"
below.
The company will assign to the trustee for the benefit of the holders
of the related series of securities all of its right, title and interest in each
purchase agreement by which it purchased a mortgage loan or mortgage security
from a Seller insofar as the purchase agreement relates to the representations
and warranties made by the Seller in respect of the mortgage loan or mortgage
security and any remedies provided for with respect to any breach of
representations and warranties with respect to the mortgage loan or mortgage
security. If a Seller cannot cure a breach of any representation or warranty
made by it in respect of a mortgage loan or mortgage security which materially
and adversely affects the interests of the securityholders therein within a
specified period after having discovered or received notice of a breach, then,
the Seller will be obligated to purchase the mortgage loan or mortgage security
at a purchase price set forth in the related pooling and servicing agreement or
other agreement which purchase price generally will be equal to the principal
balance thereof as of the date of purchase plus accrued and unpaid interest
through or about the date of purchase at the related mortgage rate or
pass-through rate, as applicable (net of any portion of this interest payable to
the Seller in respect of master servicing compensation, special servicing
compensation or subservicing compensation, as applicable, and any interest
retained by the company).
As to any mortgage loan required to be purchased by a Seller as
provided above, rather than repurchase the mortgage loan, the Seller, if so
specified in the related prospectus supplement, will be entitled, at its sole
option, to remove the Deleted Mortgage Loan from the trust fund and substitute
in its place a Qualified Substitute Mortgage Loan; however, with respect to a
series of certificates for which no REMIC election is to be made, the
substitution must be effected within 120 days of the date of the initial
issuance of the related series of certificates. With respect to a trust fund for
which a REMIC election is to be made, the substitution of a defective mortgage
loan must be effected within two years of the date of the initial issuance of
the related series of certificates, and may not be made if the substitution
would cause the trust fund, or any portion thereof, to fail to qualify as a
REMIC or result in a Prohibited Transaction Tax under the Code. Any Qualified
Substitute Mortgage Loan generally will, on the date of substitution:
o have an outstanding principal balance, after deduction of the
principal portion of the monthly payment due in the month of
substitution, not in excess of the outstanding principal
14
balance of the Deleted Mortgage Loan (the amount of any
shortfall to be deposited in the Certificate Account by the
related Seller or the master servicer in the month of
substitution for distribution to the securityholders),
o have a mortgage rate and a Net Mortgage Rate not less than
(and not more than one percentage point greater than) the
mortgage rate and Net Mortgage Rate, respectively, of the
Deleted Mortgage Loan as of the date of substitution,
o have a loan-to-value ratio at the time of substitution no
higher than that of the Deleted Mortgage Loan at the time of
substitution,
o have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Mortgage
Loan and
o comply with all of the representations and warranties made by
the Seller as of the date of substitution.
The related mortgage loan purchase agreement may include additional requirements
relating to ARM Loans or other specific types of mortgage loans, or additional
provisions relating to meeting the foregoing requirements on an aggregate basis
where a number of substitutions occur contemporaneously. No Seller will have any
option to substitute for a mortgage security that it is obligated to repurchase
in connection with a breach of a representation and warranty.
The master servicer will be required under the applicable pooling and
servicing agreement or servicing agreement to use reasonable efforts to enforce
this purchase or substitution obligation for the benefit of the trustee and the
securityholders, following those practices it would employ in its good faith
business judgment and which are normal and usual in its general mortgage
servicing activities; provided, however, that this purchase or substitution
obligation will not become an obligation of the master servicer in the event the
applicable Seller fails to honor the obligation. In instances where a Seller is
unable, or disputes its obligation, to purchase affected mortgage loans and/or
mortgage securities, the master servicer, employing the standards set forth in
the preceding sentence, may negotiate and enter into one or more settlement
agreements with the related Seller that could provide for the purchase of only a
portion of the affected mortgage loans and/or mortgage securities. Any
settlement could lead to losses on the mortgage loans and/or mortgage securities
which would be borne by the related securities. In accordance with the above
described practices, the master servicer will not be required to enforce any
purchase obligation of a Seller arising from any misrepresentation by the
Seller, if the master servicer determines in the reasonable exercise of its
business judgment that the matters related to the misrepresentation did not
directly cause or are not likely to directly cause a loss on the related
mortgage loan or mortgage security. If the Seller fails to repurchase and no
breach of any other party's representations has occurred, the Seller's purchase
obligation will not become an obligation of the company or any other party. In
the case of a Designated Seller Transaction where the Seller fails to repurchase
a mortgage loan or mortgage security and neither the company nor any other
entity has assumed the representations and warranties, the repurchase obligation
of the Seller will not become an obligation of the company or any other party.
The foregoing obligations will constitute the sole remedies available to
securityholders or the trustee for a breach of any representation by a Seller or
for any other event giving rise to the obligations as described above.
Neither the company nor the master servicer will be obligated to
purchase a mortgage loan or mortgage security if a Seller defaults on its
obligation to do so, and no assurance can be given that the Sellers will
carryout their purchase obligations. A default by a Seller is not a default by
the company or by the
15
master servicer. However, to the extent that a breach of there presentations and
warranties of a Seller also constitutes a breach of a representation made by the
company or the master servicer, as described below under "Description of the
Securities--Assignment of Trust Fund Assets," the company or the master servicer
may have a purchase or substitution obligation. Any mortgage loan or mortgage
security not so purchased or substituted for shall remain in the related trust
fund and any losses related thereto shall be allocated to the related credit
enhancement, to the extent available, and otherwise to one or more classes of
the related series of securities.
If a person other than a Seller makes the representations and
warranties referred to in the first paragraph of this "--Representations by
Sellers" section, or a person other than a Seller is responsible for
repurchasing or replacing any mortgage loan or mortgage security for a breach of
those representations and warranties, the identity of that person will be
specified in the related prospectus supplement.
SERVICING OF MORTGAGE LOANS
GENERAL
The mortgage loans and mortgage securities included in each mortgage
pool will be serviced and administered pursuant to either a pooling and
servicing agreement or a servicing agreement. Forms of pooling and servicing
agreements and a form of servicing agreement have been filed as an exhibit to
the registration statement of which this prospectus is a part. However, the
provisions of each pooling and servicing agreement or servicing agreement will
vary depending upon the nature of the related mortgage pool. The following
summaries describe the material servicing-related provisions that may appear in
a pooling and servicing agreement or servicing agreement for a mortgage pool
that includes mortgage loans. The related prospectus supplement will describe
any servicing-related provision of its related pooling and servicing agreement
or servicing agreement that materially differs from the description thereof
contained in this prospectus. If the related mortgage pool includes mortgage
securities, the related prospectus supplement will summarize the material
provisions of the related pooling and servicing agreement and identify the
responsibilities of the parties to that pooling and servicing agreement.
With respect to any series of securities as to which the related
mortgage pool includes mortgage securities, the servicing and administration of
the mortgage loans underlying any mortgage securities will be pursuant to the
terms of those mortgage securities. Mortgage loans underlying mortgage
securities in a mortgage pool will be serviced and administered generally in the
same manner as mortgage loans included in a mortgage pool, however, there can be
no assurance that this will be the case, particularly if the mortgage securities
are issued by an entity other than the company or any of its affiliates. The
related prospectus supplement will describe any material differences between the
servicing described below and the servicing of the mortgage loans underlying
mortgage securities in any mortgage pool.
THE MASTER SERVICER
The master servicer, if any, for a series of securities will be named
in the related prospectus supplement and may be Impac Funding Corporation or
another affiliate of the company. The master servicer is required to maintain a
fidelity bond and errors and omissions policy with respect to its officers and
employees and other persons acting on behalf of the master servicer in
connection with its activities under a pooling and servicing agreement or a
servicing agreement.
16
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
The master servicer for any mortgage pool, directly or through
subservicers, will be obligated under the pooling and servicing agreement or
servicing agreement to service and administer the mortgage loans in the mortgage
pool for the benefit of the related securityholders, in accordance with
applicable law, the terms of the pooling and servicing agreement or servicing
agreement, the mortgage loans and any instrument of credit enhancement included
in the related trust fund, and, to the extent consistent with the foregoing, the
customs and standards of prudent institutional mortgage lenders servicing
comparable mortgage loans for their own account in the jurisdictions where the
related mortgaged properties are located. Subject to the foregoing, the master
servicer will have full power and authority to do any and all things in
connection with servicing and administration that it may deem necessary and
desirable.
As part of its servicing duties, the master servicer will be required
to make reasonable efforts to collect all payments called for under the terms
and provisions of the mortgage loans that it services. The master servicer will
be obligated to follow the same collection procedures as it would follow for
comparable mortgage loans held for its own account, so long as these procedures
are consistent with the servicing standard of and the terms of the related
pooling and servicing agreement or servicing agreement and the servicing
standard generally described in the preceding paragraph, and do not impair
recovery under any instrument of credit enhancement included in the related
trust fund. Consistent with the foregoing, the master servicer will be
permitted, in its discretion, to waive any prepayment premium, late payment
charge or other charge in connection with any mortgage loan.
Under a pooling and servicing agreement or a servicing agreement, a
master servicer will be granted discretion to extend relief to mortgagors whose
payments become delinquent. In the case of single family loans and Contracts, a
master servicer may, for example, grant a period of temporary indulgence to a
mortgagor or may enter into a liquidating plan providing for repayment of
delinquent amounts within a specified period from the date of execution of the
plan. However, the master servicer must first determine that any waiver or
extension will not impair the coverage of any related insurance policy or
materially adversely affect the security for the mortgage loan. In addition,
unless otherwise specified in the related prospectus supplement, if a material
default occurs or a payment default is reasonably foreseeable with respect to a
multifamily loan, commercial loan or mixed-use loan, the master servicer will be
permitted, subject to any specific limitations set forth in the related pooling
and servicing agreement or servicing agreement and described in the related
prospectus supplement, to modify, waive or amend any term of such mortgage loan,
including deferring payments, extending the stated maturity date or otherwise
adjusting the payment schedule, provided that the modification, waiver or
amendment (1) is reasonably likely to produce a greater recovery with respect to
that mortgage loan on a present value basis than would liquidation and (2) will
not adversely affect the coverage under any applicable instrument of credit
enhancement.
In the case of multifamily loans, commercial loans and mixed-use loans,
a mortgagor's failure to make required mortgage loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a mortgagor under a multifamily, commercial or mixed-use loan that is
unable to make mortgage loan payments may also be unable to make timely payment
of taxes and otherwise to maintain and insure the related mortgaged property.
Generally, the related master servicer will be required to monitor any
multifamily loan or commercial loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related mortgaged property, initiate
corrective action in cooperation with the mortgagor if cure is likely, inspect
the related mortgaged property and take any other actions as are consistent with
the servicing standard described above and in the pooling and servicing
agreement or servicing agreement. A significant period of time may elapse
17
before the master servicer is able to assess the success of any such corrective
action or the need for additional initiatives. The time within which the master
servicer can make the initial determination of appropriate action, evaluate the
success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose (or accept a deed to a mortgaged
property in lieu of foreclosure) on behalf of the securityholders of the related
series may vary considerably depending on the particular multifamily, commercial
or mixed-use loan, the mortgaged property, the mortgagor, the presence of an
acceptable party to assume that loan and the laws of the jurisdiction in which
the mortgaged property is located. If a mortgagor files a bankruptcy petition,
the master servicer may not be permitted to accelerate the maturity of the
related multifamily, commercial or mixed-use loan or to foreclose on the
mortgaged property for a considerable period of time. See "Legal Aspects of
Mortgage Loans."
Some or all of the mortgage loans in a mortgage pool may contain a
due-on-sale clause that entitles the lender to accelerate payment of the
mortgage loan upon any sale or other transfer of the related mortgaged property
made without the lender's consent. In any case in which a mortgaged property is
being conveyed by the mortgagor, the master servicer will in general be
obligated, to the extent it has knowledge of the conveyance, to exercise its
rights to accelerate the maturity of the related mortgage loan under any
due-on-sale clause applicable thereto, but only if the exercise of these rights
is permitted by applicable law and only to the extent it would not adversely
affect or jeopardize coverage under any Primary Insurance Policy or applicable
credit enhancement arrangements. If applicable law prevents the master servicer
from enforcing a due-on-sale or due-on-encumbrance clause or if the master
servicer determines that it is reasonably likely that the related mortgagor
would institute a legal action to avoid enforcement of a due-on-sale or
due-on-encumbrance clause, the master servicer may enter into an assumption and
modification agreement with the person to whom the property has been or is about
to be conveyed, pursuant to which this person becomes liable under the mortgage
loan subject to specified conditions. The original mortgagor may be released
from liability on a single family loan if the master servicer shall have
determined in good faith that the release will not adversely affect the
collectability of the mortgage loan. The master servicer will determine whether
to exercise any right the trustee may have under any due-on-sale or
due-on-encumbrance provision in a multifamily loan, commercial loan or mixed-use
loan in a manner consistent with the servicing standard. The master servicer
generally will be entitled to retain as additional servicing compensation any
fee collected in connection with the permitted transfer of a mortgaged property.
See "Legal Aspects of Mortgage Loans--Enforceability of Certain Provisions." FHA
loans do not contain due-on-sale or due-on-encumbrance clauses and may be
assumed by the purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The master servicer may approve a request if it has determined,
exercising its good faith business judgment in the same manner as it would if it
were the owner of the related mortgage loan, that approval will not adversely
affect the security for, or the timely and full collectability of, the related
mortgage loan. Any fee collected by the master servicer for processing these
requests will be retained by the master servicer as additional servicing
compensation.
In the case of mortgage loans secured by junior liens on the related
mortgaged properties, the master servicer will be required to file (or cause to
be filed) of record a request for notice of any action by a superior lienholder
under the senior lien for the protection of the related trustee's interest,
where permitted by local law and whenever applicable state law does not require
that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose the junior lienholder's equity of redemption.
The master servicer also will be required to notify any superior lienholder in
writing of the existence of the mortgage loan and request notification of any
action (as described below) to be taken against the mortgagor or the mortgaged
property by the superior lienholder. If the master servicer is notified that any
superior lienholder has accelerated or intends to accelerate the obligations
secured by the related senior lien, or has declared or
18
intends to declare a default under the mortgage or the promissory note secured
thereby, or has filed or intends to file an election to have the related
mortgaged property sold or foreclosed, then, the master servicer will be
required to take, on behalf of the related trust fund, whatever actions are
necessary to protect the interests of the related securityholders, and/or to
preserve the security of the related mortgage loan, subject to the REMIC
Provisions, if applicable. The master servicer will be required to advance the
necessary funds to cure the default or reinstate the superior lien, if the
advance is in the best interests of the related securityholders and the master
servicer determines the advances are recoverable out of payments on or proceeds
of the related mortgage loan.
The master servicer for any mortgage pool will also be required to
perform other customary functions of a servicer of comparable loans, including
maintaining escrow or impound accounts for payment of taxes, insurance premiums
and similar items, or otherwise monitoring the timely payment of those items;
adjusting mortgage rates on ARM Loans; maintaining Buydown Accounts; supervising
foreclosures and similar proceedings; managing REO properties; and maintaining
servicing records relating to the mortgage loans in the mortgage pool. The
master servicer will be responsible for filing and settling claims in respect of
particular mortgage loans under any applicable instrument of credit enhancement.
See "Description of Credit Enhancement."
SUBSERVICERS
A master servicer may delegate its servicing obligations in respect of
the mortgage loans serviced by it to one or more third-party subservicers, but
the master servicer will remain liable for its obligations under the related
pooling and servicing agreement or servicing agreement. The master servicer will
be solely liable for all fees owed by it to any subservicer, regardless of
whether the master servicer's compensation pursuant to the related pooling and
servicing agreement or servicing agreement is sufficient to pay the
subservicer's fees. Each subservicer will be entitled to reimbursement for some
of the expenditures which it makes, generally to the same extent as would the
master servicer for making the same expenditures. See "--Servicing and Other
Compensation and Payment of Expenses; Retained Interest" below and "Description
of the Securities--The Certificate Account."
SPECIAL SERVICERS
If and to the extent specified in the related prospectus supplement, a
special servicer may be a party to the related pooling and servicing agreement
or servicing agreement or may be appointed by the master servicer or another
specified party to perform specified duties in respect of servicing the related
mortgage loans that would otherwise be performed by the master 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 related
prospectus supplement, and the master servicer will be liable for the
performance of a special servicer only if, and to the extent, set forth in that
prospectus supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below, the master servicer will be required, in a
manner consistent with the servicing standard, to foreclose upon or otherwise
comparably convert the ownership of properties securing any mortgage loans in
the related mortgage pool that come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
Generally, the foreclosure process will commence no later than 90 days after
delinquency of the related mortgage loan. The master servicer will be authorized
to institute foreclosure proceedings, exercise any power of sale contained in
the related mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire
title to the related mortgaged
19
property, by operation of law or otherwise, if the action is consistent with the
servicing standard. The master servicer's actions in this regard must be
conducted, however, in a manner that will permit recovery under any instrument
of credit enhancement included in the related trust fund. In addition, the
master servicer will not be required to expend its own funds in connection with
any foreclosure or to restore any damaged property unless it shall determine
that (1) the foreclosure and/or restoration will increase the proceeds of
liquidation of the mortgage loan to the related securityholders after
reimbursement to itself for these expenses and (2) these expenses will be
recoverable to it from related Insurance Proceeds, Liquidation Proceeds or
amounts drawn out of any fund or under any instrument constituting credit
enhancement (respecting which it shall have priority for purposes of withdrawal
from the Certificate Account in accordance with the pooling and servicing
agreement or servicing agreement).
However, unless otherwise specified in the related prospectus
supplement, the master servicer may not acquire title to any multifamily
property or commercial property securing a mortgage loan or take any other
action that would cause the related trustee, for the benefit of securityholders
of the related series, or any other specified person to be considered to hold
title to, to be a "mortgagee-in-possession" of, or to be an "owner" or an
"operator" of such mortgaged property within the meaning of federal
environmental laws, unless the master servicer has previously determined, based
on a report prepared by a person who regularly conducts environmental audits
(which report will be an expense of the trust fund), that either:
(1) the mortgaged property is in compliance with applicable
environmental laws and regulations or, if not, that taking actions as
are necessary to bring the mortgaged property into compliance with
these laws is reasonably likely to produce a greater recovery on a
present value basis than not taking those actions; and
(2) there are no circumstances or conditions present at the
mortgaged property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if those circumstances or conditions are present
for which any such action could be required, taking those actions with
respect to the mortgaged property is reasonably likely to produce a
greater recovery on a present value basis than not taking those
actions. See "Legal Aspects of Mortgage Loans--Environmental
Legislation."
The master servicer will not be obligated to foreclose upon or
otherwise convert the ownership of any mortgaged property securing a single
family loan if it has received notice or has actual knowledge that the property
may be contaminated with or affected by hazardous wastes or hazardous
substances; however, environmental testing will not be required. The master
servicer will not be liable to the securityholders of the related series if,
based on its belief that no such contamination or effect exists, the master
servicer forecloses on a mortgaged property and takes title to the mortgaged
property, and thereafter the mortgaged property is determined to be so
contaminated or affected.
With respect to a mortgage loan in default, the master servicer may
pursue foreclosure (or similar remedies) concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the master servicer is
not required to continue to pursue both remedies if it determines that one
remedy is more likely than the other to result in a greater recovery. Upon the
first to occur of final liquidation (by foreclosure or otherwise) and are
purchase or substitution pursuant to a breach of a representation and warranty,
the mortgage loan will be removed from the related trust fund if it has not been
removed previously. The master servicer may elect to treat a defaulted mortgage
loan as having been finally liquidated if substantially all amounts expected to
be received in connection therewith have been received. Any additional
liquidation expenses relating to the mortgage loan thereafter incurred will be
reimbursable to the
20
master servicer (or any subservicer) from any amounts otherwise distributable to
holders of securities of the related series, or may be offset by any subsequent
recovery related to the mortgage loan. Alternatively, for purposes of
determining the amount of related Liquidation Proceeds to be distributed to
securityholders, the amount of any Realized Loss or the amount required to be
drawn under any applicable form of credit support, the master servicer may take
into account minimal amounts of additional receipts expected to be received, as
well as estimated additional liquidation expenses expected to be incurred in
connection with the defaulted mortgage loan.
With respect to a series of securities, if so provided in the related
prospectus supplement, the applicable form of credit enhancement may provide, to
the extent of coverage, that a defaulted mortgage loan will be removed from the
trust fund prior to the final liquidation thereof. In addition, a pooling and
servicing agreement or servicing agreement may grant to the master servicer, a
special servicer, a provider of credit enhancement and/or the holder or holders
of specified classes of securities of the related series a right of first
refusal to purchase from the trust fund, at a predetermined purchase price, any
mortgage loan as to which a specified number of scheduled payments are
delinquent. If the purchase price is insufficient to fully fund the entitlements
of securityholders to principal and interest, it will be specified in the
related prospectus supplement. Furthermore, a pooling and servicing agreement or
a servicing agreement may authorize the master servicer to sell any defaulted
mortgage loan if and when the master servicer determines, consistent with the
servicing standard, that the sale would produce a greater recovery to
securityholders on a present value basis than would liquidation of the related
mortgaged property.
In the event that title to any mortgaged property is acquired by
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the trustee or to its nominee on behalf of securityholders of
the related series. Notwithstanding any acquisition of title and cancellation of
the related mortgage loan, the REO Mortgage Loan will be considered for most
purposes to be an outstanding mortgage loan held in the trust fund until the
mortgaged property is sold and all recoverable Liquidation Proceeds and
Insurance Proceeds have been received with respect to the defaulted mortgage
loan. For purposes of calculations of amounts distributable to securityholders
in respect of an REO Mortgage Loan, the amortization schedule in effect at the
time of any acquisition of title (before any adjustment thereto by reason of any
bankruptcy or any similar proceeding or any moratorium or similar waiver or
grace period) will be deemed to have continued in effect (and, in the case of an
ARM Loan, the amortization schedule will be deemed to have adjusted in
accordance with any interest rate changes occurring on any adjustment date
therefor) so long as the REO Mortgage Loan is considered to remain in the trust
fund.
If title to any mortgaged property is acquired by a trust fund as to
which a REMIC election has been made, the master servicer, on behalf of the
trust fund, will be required to sell the mortgaged property within three years
of acquisition, unless (1) the IRS grants an extension of time to sell the
property or (2) the trustee receives an opinion of independent counsel to the
effect that the holding of the property by the trust fund for more 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 certificate is outstanding. Subject to the foregoing and
any other tax-related constraints, the master servicer generally will be
required to solicit bids for any mortgaged property so acquired in a manner as
will be reasonably likely to realize a fair price for the property. If title to
any mortgaged property is acquired by a trust fund as to which a REMIC election
has been made, the master servicer will also be required to ensure that the
mortgaged property is administered so that it constitutes "foreclosure
property"within the meaning of Section 860G(a)(8) of the Code at all times, that
the sale of the property does not result in the receipt by the trust fund of any
income from non-permitted assets as described in Section 860F(a)(2)(B) of the
Code, and that the trust fund does not derive any "net income from foreclosure
property" within the meaning of Section 860G(c)(2) of the Code with respect to
the property.
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If Liquidation Proceeds collected with respect to a defaulted mortgage
loan are less than the outstanding principal balance of the defaulted mortgage
loan plus accrued interest plus the aggregate amount of reimbursable expenses
incurred by the master servicer with respect to the mortgage loan, and the
shortfall is not covered under any applicable instrument or fund constituting
credit enhancement, the trust fund will realize a loss in the amount of the
difference. The master servicer will be entitled to reimburse itself from the
Liquidation Proceeds recovered on any defaulted mortgage loan, prior to the
distribution of Liquidation Proceeds to securityholders, amounts that represent
unpaid servicing compensation in respect of the mortgage loan, unreimbursed
servicing expenses incurred with respect to the mortgage loan and any
unreimbursed advances of delinquent payments made with respect to the mortgage
loan. If so provided in the related prospectus supplement, the applicable form
of credit enhancement may provide for reinstatement subject to specified
conditions in the event that, following the final liquidation of a mortgage loan
and a draw under the credit enhancement, subsequent recoveries are received. In
addition, if a gain results from the final liquidation of a defaulted mortgage
loan or an REO Mortgage Loan which is not required by law to be remitted to the
related mortgagor, the master servicer will be entitled to retain the gain as
additional servicing compensation unless the related prospectus supplement
provides otherwise. For a description of the master servicer's (or other
specified person's) obligations to maintain and make claims under applicable
forms of credit enhancement and insurance relating to the mortgage loans, see
"Description of Credit Enhancement" and "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; RETAINED INTEREST
The principal servicing compensation to be paid to the master servicer
in respect of its master servicing activities for a series of securities will be
equal to the percentage or range of percentages per annum described in the
related prospectus supplement of the outstanding principal balance of each
mortgage loan, and this compensation will be retained by it on a monthly or
other periodic basis from collections of interest on each mortgage loan in the
related trust fund at the time the collections are deposited into the applicable
Certificate Account. This portion of the servicing fee will be calculated with
respect to each mortgage loan by multiplying the fee by the principal balance of
the mortgage loan. In addition, the master servicer may retain all prepayment
premiums, assumption fees and late payment charges, to the extent collected from
mortgagors, and any benefit which may accrue as a result of the investment of
funds in the applicable Certificate Account. Any additional servicing
compensation will be described in the related prospectus supplement. Any
subservicer will receive a portion of the master servicer's compensation as its
subservicing compensation.
In addition to amounts payable to any subservicer, the master servicer
will pay or cause to be paid some of the ongoing expenses associated with each
trust fund and incurred by it in connection with its responsibilities under the
pooling and servicing agreement or servicing agreement, including, if so
specified in the related prospectus supplement, payment of any fee or other
amount payable in respect of any alternative credit enhancement arrangements,
payment of the fees and disbursements of the trustee, any custodian appointed by
the trustee and the security registrar, and payment of expenses incurred in
enforcing the obligations of subservicers and Sellers. The master servicer will
be entitled to reimbursement of expenses incurred in enforcing the obligations
of subservicers and Sellers under limited circumstances. In addition, the master
servicer will be entitled to reimbursements for some of its expenses incurred in
connection with liquidated mortgage loans and in connection with the restoration
of mortgaged properties, this right of reimbursement being prior to the rights
of securityholders to receive any related Liquidation Proceeds or Insurance
Proceeds. If and to the extent so provided in the related prospectus supplement,
the master servicer will be entitled to receive interest on amounts advanced to
cover reimbursable expenses for the period that the advances are outstanding at
the rate specified in the prospectus supplement, and the master servicer will be
entitled to payment of the interest periodically from general collections on the
mortgage loans in the
22
related trust fund prior to any payment to securityholders or as otherwise
provided in the related pooling and servicing agreement or servicing agreement
and described in the prospectus supplement.
The prospectus supplement for a series of securities will specify
whether there will be any interest in the mortgage loans retained by the
company. Any retained interest will be a specified portion of the interest
payable on each mortgage loan in a mortgage pool and will not be part of the
related trust fund. Any retained interest will be established on a loan-by-loan
basis and the amount thereof with respect to each mortgage loan in a mortgage
pool will be specified on an exhibit to the related pooling and servicing
agreement or servicing agreement. Any partial recovery of interest in respect of
a mortgage loan will be allocated between the owners of any retained interest
and the holders of classes of securities entitled to payments of interest as
provided in the related prospectus supplement and the applicable pooling and
servicing agreement or servicing agreement.
If and to the extent provided in the related prospectus supplement, the
master servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to any Prepayment Interest
Shortfalls resulting from mortgagor prepayments during that period. See "Yield
Considerations."
EVIDENCE AS TO COMPLIANCE
Each pooling and servicing agreement and servicing agreement will
provide that on or before a specified date in each year, beginning the first
such date that is at least a specified number of months after the cut-off date,
a firm of independent public accountants will furnish a statement to the company
and the trustee to the effect that, on the basis of an examination by the firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for mortgages serviced for
Freddie Mac, the servicing of mortgage loans under agreements (including the
related pooling and servicing agreement or servicing agreement) substantially
similar to each other was conducted in compliance with the agreements except for
significant exceptions or errors in records that, in the opinion of the firm,
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for mortgages serviced for Freddie Mac requires it to report. In rendering its
statement the firm may rely, as to the matters relating to the direct servicing
of mortgage loans by subservicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for mortgages serviced for
Freddie Mac (rendered within one year of the statement) of firms of independent
public accountants with respect to those subservicers which also have been the
subject of this type of examination.
Each pooling and servicing agreement and servicing agreement will also
provide for delivery to the trustee, on or before a specified date in each year,
of an annual statement signed by one or more officers of the master servicer to
the effect that, to the best knowledge of each officer, the master servicer has
fulfilled in all material respects its obligations under the pooling and
servicing agreement or servicing agreement throughout the preceding year or, if
there has been a material default in the fulfillment of any obligation, the
statement shall specify each known default and the nature and status thereof.
This statement may be provided as a single form making the required statements
as to more than one pooling and servicing agreement or servicing agreement.
Copies of the annual accountants' statement and the annual statement of
officers of a master servicer may be obtained by securityholders without charge
upon written request to the master servicer or trustee.
23
DESCRIPTION OF THE SECURITIES
GENERAL
The securities will be issued in series. Each series of certificates
(or, in some instances, two or more series of certificates) will be issued
pursuant to a pooling and servicing agreement, similar to one of the forms filed
as an exhibit to the registration statement of which this prospectus is a part.
Each pooling and servicing agreement will be filed with the Commission as an
exhibit to a Current Report on Form 8-K. Each series of notes (or, in some
instances, two or more series of notes) will be issued pursuant to an indenture
between the related Issuer and the trustee, similar to the form filed as an
exhibit to the registration statement of which this prospectus is a part. The
trust fund will be created pursuant to an owner trust agreement between the
company and the owner trustee. Each indenture, along with the related servicing
agreement and owner trust agreement, will be filed with the Commission as an
exhibit to a Current Report on Form 8-K. Qualified counsel will render an
opinion to the effect that the trust fund's assets will not be considered assets
of the Seller or the company in the event of the bankruptcy Seller or the
company. The following summaries (together with additional summaries under "The
Agreements" below) describe the material provisions relating to the securities
common to each Agreements.
Certificates of each series covered by a particular pooling and
servicing agreement will evidence specified beneficial ownership interests in a
separate trust fund created pursuant to the pooling and servicing agreement.
Each series of notes covered by a particular indenture will evidence
indebtedness of a separate trust fund created pursuant to the related owner
trust agreement. A trust fund will consist of, to the extent provided in the
pooling and servicing agreement or owner trust agreement:
o the mortgage loans (and the related mortgage documents) or
interests therein (including any mortgage securities)
underlying a particular series of securities as from time to
time are subject to the pooling and servicing agreement or
servicing agreement, exclusive of, if specified in the related
prospectus supplement, any interest retained by the company or
any of its affiliates with respect to each mortgage loan;
o all payments and collections in respect of the mortgage loans
or mortgage securities due after the related cut-off date, as
from time to time are identified as deposited in respect
thereof in the related Certificate Account as described below;
o any property acquired in respect of mortgage loans in the
trust fund, whether through foreclosure of a mortgage loan or
by deed in lieu of foreclosure;
o hazard insurance policies, Primary Insurance Policies and FHA
insurance policies, if any, maintained in respect of mortgage
loans in the trust fund and the proceeds of these policies;
o the rights of the company under any mortgage loan purchase
agreement, including in respect of any representations and
warranties therein; and
o any combination, as and to the extent specified in the related
prospectus supplement, of a financial guaranty insurance
policy, mortgage pool insurance policy, letter of credit,
special hazard insurance policy, or currency or interest rate
exchange agreements as described under "Description of Credit
Enhancement."
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If provided in the related prospectus supplement, the original
principal amount of a series of securities may exceed the principal balance of
the mortgage loans or mortgage securities initially being delivered to the
trustee. Cash in an amount equal to this difference will be deposited into a
pre-funding account maintained with the trustee. During the period set forth in
the related prospectus supplement, amounts on deposit in the pre-funding account
may be used to purchase additional mortgage loans or mortgage securities for the
related trust fund. Any amounts remaining in the pre-funding account at the end
of the period will be distributed as a principal prepayment to the holders of
the related series of securities at the time and in the manner set forth in the
related prospectus supplement.
Each series of securities may consist of any one or a combination of
the following:
o a single class of securities;
o two or more classes of securities, one or more classes of
which will be senior in right of payment to one or more of the
other classes, and as to which some classes of senior (or
subordinate) securities may be senior to other classes of
senior (or subordinate) securities, as described in the
respective prospectus supplement;
o two or more classes of securities, one or more classes of
which will be Strip Securities;
o two or more classes of securities which differ as to the
timing, sequential order, rate, pass-through rate or amount of
distributions of principal or interest or both, or as to which
distributions of principal or interest or both on a class may
be made upon the occurrence of specified events, in accordance
with a schedule or formula (including "planned amortization
classes" and "targeted amortization classes"), or on the basis
of collections from designated portions of the mortgage pool,
and which classes may include one or more classes of Accrual
Securities; or
o other types of classes of securities, as described in the
related prospectus supplement.
With respect to any series of notes, the related Equity Certificates, insofar as
they represent the beneficial ownership interest in the Issuer, will be
subordinate to the related notes. As to each series, the offered securities will
be rated in one of the four highest rating categories by one or more Rating
Agencies. Credit support for the offered securities of each series may be
provided by a financial guaranty insurance policy, mortgage pool insurance
policy, letter of credit, reserve fund, overcollateralization, and currency or
interest rate exchange agreements as described under "Description of Credit
Enhancement," by the subordination of one or more other classes of securities as
described under "Subordination" or by any combination of the foregoing.
If so specified in the prospectus supplement relating to a series of
certificates, one or more elections may be made to treat the related trust fund,
or a designated portion thereof, as a REMIC. If an election is made with respect
to a series of certificates, one of the classes of certificates in the series
will be designated as evidencing the sole class of "residual interests" in each
related REMIC, as defined in the Code; alternatively, a separate class of
ownership interests will evidence the residual interests. All other classes of
certificates in the series will constitute "regular interests" in the related
REMIC, as defined in the Code. As to each series of certificates as to which a
REMIC election is to be made, the master servicer, trustee or other specified
person will be obligated to take specified actions required in order to comply
with applicable laws and regulations.
25
FORM OF SECURITIES
Except as described below, the offered securities of each series will
be issued as physical certificates or notes in fully registered form only in the
denominations specified in the related prospectus supplement, and will be
transferrable and exchangeable at the corporate trust office of the registrar
named in the related prospectus supplement. No service charge will be made for
any registration of exchange or transfer of offered securities, but the trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge. A "securityholder" or "holder" is the entity whose name appears on the
records of the registrar (consisting of or including the security register) as
the registered holder of a security.
If so specified in the related prospectus supplement, specified classes
of a series of securities will be initially issued through the book-entry
facilities of the DTC. As to any class of DTC Registered Securities, the
recordholder of the securities will be DTC's nominee. DTC is a limited-purpose
trust company organized under the laws of the State of New York, which holds
securities for its participants and facilitates the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in the accounts of participants. Intermediaries have indirect access to
DTC's clearance system.
No Beneficial Owner will be entitled to receive a Security representing
its interest in registered, certificated form, unless either (1) DTC ceases to
act as depository in respect thereof and a successor depository is not obtained,
or (2) the company elects in its sole discretion to discontinue the registration
of the securities through DTC. Prior to one of these events, Beneficial Owners
will not be recognized by the trustee or the master servicer as holders of the
related securities for purposes of the related pooling and servicing agreement
or indenture, and Beneficial Owners will be able to exercise their rights as
owners of the securities only indirectly through DTC, participants and
Intermediaries. Any Beneficial Owner that desires to purchase, sell or otherwise
transfer any interest in DTC Registered Securities may do so only through DTC,
either directly if the Beneficial Owner is a participant or indirectly through
participants and, if applicable, Intermediaries. Pursuant to the procedures of
DTC, transfers of the beneficial ownership of any DTC Registered Securities will
be required to be made in minimum denominations specified in the related
prospectus supplement. The ability of a Beneficial Owner to pledge DTC
Registered Securities to persons or entities that are not participants in the
DTC system, or to otherwise act with respect to the securities, may be limited
because of the lack of physical certificates or notes evidencing the securities
and because DTC may act only on behalf of participants.
Distributions in respect of the DTC Registered Securities will be
forwarded by the trustee or other specified person to DTC, and DTC will be
responsible for forwarding the payments to participants, each of which will be
responsible for disbursing the payments to the Beneficial Owners it represents
or, if applicable, to Intermediaries. Accordingly, Beneficial Owners may
experience delays in the receipt of payments in respect of their securities.
Under DTC's procedures, DTC will take actions permitted to be taken by holders
of any class of DTC Registered Securities under the pooling and servicing
agreement or indenture only at the direction of one or more participants to
whose account the DTC Registered Securities are credited and whose aggregate
holdings represent no less than any minimum amount of Percentage Interests or
voting rights required therefor. DTC may take conflicting actions with respect
to any action of holders of securities of any class to the extent that
participants authorize these actions. None of the master servicer, the company,
the trustee or any of their respective affiliates will have any liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in the DTC Registered Securities, or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
26
GLOBAL SECURITIES
Some of the offered securities may be Global Securities. Except in some
limited circumstances, the Global Securities will be available only in
book-entry form. Investors in the Global Securities may hold those Global
Securities through any of DTC, Clearstream Banking, societe anonyme, formerly
known as Cedelbank SA, or Euroclear. The Global Securities will be traceable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Clearstream and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Clearstream and Euroclear and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Clearstream and Euroclear (in that
capacity) and as DTC participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless those holders meet various requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
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
Relevant Depositary which in turn will hold those positions in their accounts as
DTC participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through 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.
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.
Secondary market trading between DTC participants will be settled using
the procedures applicable to prior mortgage loan asset-backed notes issues in
same-day funds. Secondary market trading between Clearstream participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds. 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 Relevant Depositary,
27
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 that accrual period and a year assumed to consist
of 360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the Relevant Depositary to the DTC participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the 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 account 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 to 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 those overdraft charges, although the 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 crediting 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.
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 Clearstream or Euroclear will instruct the respective
depositary, as appropriate, to credit the Global Securities to the DTC
participant's account against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment to and
excluding the settlement date on the basis of the actual number of days in that
accrual period and a year assumed to consist to 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of 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
28
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 is taken. At least
three techniques should be readily available to eliminate this potential
problem:
o borrowing through Clearstream or Euroclear for one day (until
the purchase side of the trade is reflected in their
Clearstream or Euroclear accounts) in accordance with the
clearing system's customary procedures;
o 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
o 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.
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 (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between that
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) that 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 holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-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 that
change.
A Non-U.S. Person (as defined below), including a non-U.S. corporation
or bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form W-8ECI (Exemption
from Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Non-U.S. Persons residing in a country that has a tax treaty with the
United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form W-8BEN (Holdership, Exemption or Reduced Rate
Certificate). Form W-8BEN may be filed by Noteholders or their agent.
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).
The holder of a Global Security or, in the case of a Form W-8BEN or a
Form W-8ECI filer, his agent, files by submitting the appropriate form to the
person through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8BEN and
29
Form W-8ECI are effective for three calendar years. The term "U.S. Person" means
a citizen or resident of the United States, a corporation, partnership or other
entity created or organized in, or under the laws of, the United States or any
political subdivision thereof (except, in the case of a partnership, to the
extent provided in regulations), or an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States Persons have the
authority to control all substantial decisions of the trust. The term "Non-U.S.
Person" means any person who is not a U.S. Person. This summary does not deal
with all aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult their
own tax advisors for specific tax advice concerning their holding and disposing
of the Global Securities.
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of a series of securities, the company will
assign, or cause to be assigned, to the related trustee (or its nominee),without
recourse, the mortgage loans or mortgage securities being included in the
related trust fund, together with, all principal and interest received on or
with respect to the mortgage loans or mortgage securities after the cut-off
date, other than principal and interest due on or before the cut-off date. If
specified in the related prospectus supplement, the company or any of its
affiliates may retain an interest in the trust fund assets, if any, for itself
or transfer the same to others. The trustee will, concurrently with the
assignment, deliver the securities of the series to or at the direction of the
company in exchange for the mortgage loans and/or mortgage securities in the
related trust fund. Each mortgage loan will be identified in a schedule
appearing as an exhibit to the related pooling and servicing agreement or
servicing agreement. The schedule will include, among other things, information
as to the principal balance of each mortgage loan in the related trust fund as
of the cut-off date, as well as information respecting the mortgage rate, the
currently scheduled monthly payment of principal and interest, the maturity of
the mortgage note and the loan-to-value ratio at origination or modification
(without regard to any secondary financing).
In addition, the company will, as to each mortgage loan, other than
mortgage loans underlying any mortgage securities and other than Contracts,
deliver, or cause to be delivered, to the related trustee (or to the custodian
described below) the following documents:
o the mortgage note endorsed, without recourse, either in blank
or to the order of the trustee (or its nominee),
o the mortgage with evidence of recording indicated on the
mortgage (except for any mortgage not returned from the public
recording office) or, in the case of a cooperative mortgage
loan, on the related financing statement,
o an assignment of the mortgage in blank or to the trustee (or
its nominee) in recordable form (or, with respect to a
cooperative mortgage loan, an assignment of the respective
security agreements, any applicable UCC financing statements,
recognition agreements, relevant stock certificates, related
blank stock powers and the related proprietary leases or
occupancy agreements),
o any intervening assignments of the mortgage with evidence of
recording on the assignment (except for any assignment not
returned from the public recording office),
o if applicable, any riders or modifications to the mortgage
note and mortgage, and
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o any other documents set forth in the related pooling and
servicing agreement, mortgage loan purchase agreement or
servicing agreement.
The assignments may be blanket assignments covering mortgages on mortgaged
properties located in the same county, if permitted by law.
Notwithstanding the foregoing, a trust fund may include mortgage loans
where the original mortgage note is not delivered to the trustee if the company
delivers, or causes to be delivered, to the related 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. In addition, if
the company cannot deliver, with respect to any mortgage loan, the mortgage or
any intervening assignment with evidence of recording on the assignment
concurrently with the execution and delivery of the related pooling and
servicing agreement or servicing agreement because of a delay caused by the
public recording office, the company will deliver, or cause to be delivered, to
the related trustee (or the custodian) a true and correct photocopy of the
mortgage or assignment as submitted for recording within one year. The company
will deliver, or cause to be delivered, to the related trustee (or the
custodian) the mortgage or assignment with evidence of recording indicated on
the assignment after receipt thereof from the public recording office. If the
company cannot deliver, with respect to any mortgage loan, the mortgage or any
intervening assignment with evidence of recording on the mortgage or assignment
concurrently with the execution and delivery of the related pooling and
servicing agreement or servicing agreement because the mortgage or assignment
has been lost, the company will deliver, or cause to be delivered, to the
related trustee (or the custodian) a true and correct photocopy of the mortgage
or assignment with evidence of recording on the mortgage or assignment.
Assignments of the mortgage loans to the trustee (or its nominee) will be
recorded in the appropriate public recording office, except in states where, in
the opinion of counsel acceptable to the trustee, recording is not required to
protect the trustee's interests in the mortgage loan against the claim of any
subsequent transferee or any successor to or creditor of the company or the
originator of the mortgage loan.
As to each Contract, the company will deliver, or cause to be
delivered, to the related trustee (or the custodian) the following documents:
o the original Contract endorsed, without recourse, to the order
of the trustee,
o copies of documents and instruments related to the Contract
and the security interest in the Manufactured Home securing
the Contract, and
o a blanket assignment to the trustee of all Contracts in the
related trust fund and the related documents and instruments.
In order to give notice of the right, title and interest of the securityholders
to the Contracts, the company will cause to be executed and delivered to the
trustee a UCC-1 financing statement identifying the trustee as the secured party
and identifying all Contracts as collateral.
The company will, as to each mortgage security included in a mortgage
pool, deliver, or cause to be delivered, to the related trustee (or the
custodian), a physical certificate or note evidencing the mortgage security,
registered in the name of the related trustee (or its nominee), or endorsed in
blank or to the related trustee (or its nominee), or accompanied by transfer
documents sufficient to effect a transfer to the trustee (or its nominee).
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The trustee (or the custodian) will hold the documents in trust for the
benefit of the related securityholders, and generally will review the documents
within 120 days after receipt thereof in the case of documents delivered
concurrently with the execution and delivery of the related pooling and
servicing agreement or indenture, and within the time period specified in the
related pooling and servicing agreement or indenture in the case of all other
documents delivered. If any document is found to be missing or defective in any
material respect, the trustee (or the custodian) will be required to promptly so
notify the master servicer, the company, and the related Seller. If the related
Seller does not cure the omission or defect within a specified period after
notice is given thereto by the trustee, and the omission or defect materially
and adversely affects the interests of securityholders in the affected mortgage
loan or mortgage security, then, the related Seller will be obligated to
purchase the mortgage loan or mortgage security from the trustee at its purchase
price (or, if and to the extent it would otherwise be permitted to do so for a
breach of representation and warranty as described under "The Mortgage
Pools--Representations of Sellers," to substitute for the mortgage loan or
mortgage security). The trustee will be obligated to enforce this obligation of
the Seller to the extent described above under "The Mortgage
Pools--Representations by Sellers," but there can be no assurance that the
applicable Seller will fulfill its obligation to purchase (or substitute for)the
affected mortgage loan or mortgage security as described above. The company will
not be obligated to purchase or substitute for the mortgage loan or mortgage
security if the Seller defaults on its obligation to do so. This purchase or
substitution obligation constitutes the sole remedy available to the related
securityholders and the related trustee for omission of, or a material defect
in, a constituent document. Any affected mortgage loan or mortgage security not
so purchased or substituted for shall remain in the related trust fund.
The trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the mortgage loans
and/or mortgage securities in any mortgage pool, and to maintain possession of
and, if applicable, to review, the documents relating to the mortgage loans
and/or mortgage securities, in any case as the agent of the trustee. The
identity of any custodian to be appointed on the date of initial issuance of the
securities will be set forth in the related prospectus supplement. A custodian
may be an affiliate of the company or the master servicer.
Except in the case of a Designated Seller Transaction or as to mortgage
loans underlying any mortgage securities, the company will make representations
and warranties as to the types and geographical concentrations of the mortgage
loans and as to the accuracy of some of the information furnished to the related
trustee in respect of each mortgage loan (for example, the original
Loan-to-Value Ratio, the principal balance as of the cut-off date, the mortgage
rate and maturity). Upon a breach of any of these representations which
materially and adversely affects the interests of the securityholders in a
mortgage loan, the company will be obligated to cure the breach in all material
respects, to purchase the mortgage loan at its purchase price or, to substitute
for the mortgage loan a Qualified Substitute Mortgage Loan in accordance with
the provisions for substitution by Affiliated Sellers as described above under
"The Mortgage Pools--Representations by Sellers." However, the company will not
be required to repurchase or substitute for any mortgage loan in connection with
a breach of a representation and warranty if the substance of the breach also
constitutes fraud in the origination of the related mortgage loan. This purchase
or substitution obligation constitutes the sole remedy available to
securityholders or the trustee for a breach of a representation by the company.
Any mortgage loan not so purchased or substituted for shall remain in the
related trust fund.
Pursuant to the related pooling and servicing agreement or servicing
agreement, the master servicer for any mortgage pool, either directly or through
subservicers, will service and administer the mortgage loans included in the
mortgage pool and assigned to the related trustee as more fully set forth under
"Servicing of Mortgage Loans." The master servicer will make representations and
warranties regarding its authority to
32
enter into, and its ability to perform its obligations under, the pooling and
servicing agreement or servicing agreement.
CERTIFICATE ACCOUNT
GENERAL. The master servicer and/or the trustee will, as to each trust
fund, establish and maintain or cause to be established and maintained a
Certificate Account, which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
securities of the related series. A Certificate Account shall be maintained as
an Eligible Account, and the funds held therein may be held as cash or invested
in Permitted Investments. Any Permitted Investments shall not cause the company
to register under the Investment Company Act of 1940. Any interest or other
income earned on funds in the Certificate Account will be paid to the related
master servicer or trustee as additional compensation. If permitted by the
Rating Agency or Agencies and so specified in the related prospectus supplement,
a Certificate Account may contain funds relating to more than one series of
mortgage pass-through certificates and may contain other funds representing
payments on mortgage loans owned by the related master servicer or serviced by
it on behalf of others.
DEPOSITS. With respect to each series of securities, the related master
servicer, trustee or special servicer will be required to deposit or cause to be
deposited in the Certificate Account for the related trust fund within a period
following receipt (in the case of collections and payments), the following
payments and collections received, or advances made, by the master servicer, the
trustee or any special servicer subsequent to the cut-off date with respect to
the mortgage loans and/or mortgage securities in the trust fund (other than
payments due on or before the cut-off date):
o all payments on account of principal, including principal
prepayments, on the mortgage loans;
o all payments on account of interest on the mortgage loans,
including any default interest collected, in each case net of
any portion thereof retained by the master servicer, any
special servicer or subservicer as its servicing compensation
or as compensation to the trustee, and further net of any
retained interest of the company;
o all payments on the mortgage securities;
o all Insurance Proceeds and Liquidation Proceeds;
o any amounts paid under any instrument or drawn from any fund
that constitutes credit enhancement for the related series of
securities as described under "Description of Credit
Enhancement";
o any advances made as described under "--Advances" below;
o any Buydown Funds (and, if applicable, investment earnings on
the Buydown Funds) required to be paid to securityholders, as
described below;
o any amounts paid by the master servicer to cover Prepayment
Interest Shortfalls arising out of the prepayment of mortgage
loans as described under "Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of
Expenses; Retained Interest";
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o to the extent that any item does not constitute additional
servicing compensation to the master servicer or a special
servicer, any payments on account of modification or
assumption fees, late payment charges or prepayment premiums
on the mortgage loans;
o any amount required to be deposited by the master servicer or
the trustee in connection with losses realized on investments
for the benefit of the master servicer or the trustee, as the
case may be, of funds held in the Certificate Account; and
o any other amounts required to be deposited in the Certificate
Account as provided in the related pooling and servicing
agreement or the related servicing agreement and indenture and
described in this prospectus or in the related prospectus
supplement.
With respect to each buydown mortgage loan, the master servicer will be
required to deposit the related Buydown Funds provided to it in a Buydown
Account which will comply with the requirements set forth in this prospectus
with respect to the Certificate Account. The terms of all buydown mortgage loans
provide for the contribution of Buydown Funds in an amount equal to or exceeding
either (1) the total payments to be made from the funds pursuant to the related
buydown plan or (2) if the Buydown Funds are to be deposited on a discounted
basis, that amount of Buydown Funds which, together with investment earnings on
the Buydown Funds at a rate as will support the scheduled level of payments due
under the buydown mortgage loan. Neither the master servicer nor the company
will be obligated to add to any discounted Buydown Funds any of its own funds
should investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any insufficiency is not recoverable from the
mortgagor or, in an appropriate case, from the Seller, distributions to
securityholders may be affected. With respect to each buydown mortgage loan, the
master servicer will be required monthly to withdraw from the Buydown Account
and deposit in the Certificate Account as described above the amount, if any, of
the Buydown Funds (and, if applicable, investment earnings on the Buydown
Funds)for each buydown mortgage loan that, when added to the amount due from the
mortgagor on the buydown mortgage loan, equals the full monthly payment which
would be due on the buydown mortgage loan if it were not subject to the buydown
plan. The Buydown Funds will in no event be a part of the related trust fund.
If the mortgagor on a buydown mortgage loan prepays the mortgage loan
in its entirety during the Buydown Period, the master servicer will be required
to withdraw from the Buydown Account and remit to the mortgagor or the other
designated party in accordance with the related buydown plan any Buydown Funds
remaining in the Buydown Account. If a prepayment by a mortgagor during the
Buydown Period together with Buydown Funds will result in full prepayment of a
buydown mortgage loan, the master servicer generally will be required to
withdraw from the Buydown Account and deposit in the Certificate Account the
Buydown Funds and investment earnings on the Buydown Funds, if any, which
together with the prepayment will result in a prepayment in full; provided that
Buydown Funds may not be available to cover a prepayment under some mortgage
loan programs. Any Buydown Funds so remitted to the master servicer in
connection with a prepayment described in the preceding sentence will be deemed
to reduce the amount that would be required to be paid by the mortgagor to repay
fully the related mortgage loan if the mortgage loan were not subject to the
buydown plan. Any investment earnings remaining in the Buydown Account after
prepayment or after termination of the Buydown Period will be remitted to the
related mortgagor or the other designated party pursuant to the Buydown
Agreement relating to each buydown mortgage loan. If the mortgagor defaults
during the Buydown Period with respect to a buydown mortgage loan and the
property securing the buydown mortgage loan is sold in liquidation (either by
the master servicer, the primary insurer, any pool insurer or any other
insurer), the master servicer will be required to withdraw from the Buydown
Account the Buydown Funds and all investment earnings on the Buydown Funds, if
any, and either deposit the same in the Certificate Account or, alternatively,
pay the same to the primary insurer or the pool insurer,
34
as the case may be, if the mortgaged property is transferred to the insurer and
the insurer pays all of the loss incurred in respect of the default.
WITHDRAWALS. With respect to each series of securities, the master
servicer, trustee or special servicer may make withdrawals from the Certificate
Account for the related trust fund for any of the following purposes, unless
otherwise provided in the related agreement and described in the related
prospectus supplement:
(1) to make distributions to the related securityholders on each
distribution date;
(2) to reimburse the master servicer or any other specified person
for unreimbursed amounts advanced by it in respect of mortgage
loans in the trust fund as described under "--Advances" below,
these reimbursement to be made out of amounts received which
were identified and applied by the master servicer as late
collections of interest (net of related servicing fees) on and
principal of the particular mortgage loans with respect to
which the advances were made or out of amounts drawn under any
form of credit enhancement with respect to the mortgage loans;
(3) to reimburse the master servicer or a special servicer for
unpaid servicing fees earned by it and some unreimbursed
servicing expenses incurred by it with respect to mortgage
loans in the trust fund and properties acquired in respect
thereof, these reimbursement to be made out of amounts that
represent Liquidation Proceeds and Insurance Proceeds
collected on the particular mortgage loans and properties, and
net income collected on the particular properties, with
respect to which the fees were earned or the expenses were
incurred or out of amounts drawn under any form of credit
enhancement with respect to the mortgage loans and properties;
(4) to reimburse the master servicer or any other specified person
for any advances described in clause (2) above made by it and
any servicing expenses referred to in clause (3) above
incurred by it which, in the good faith judgment of the master
servicer or the other person, will not be recoverable from the
amounts described in clauses (2) and (3), respectively, the
reimbursement to be made from amounts collected on other
mortgage loans in the trust fund or, if and to the extent so
provided by the related pooling and servicing agreement or the
related servicing agreement and indenture and described in the
related prospectus supplement, only from that portion of
amounts collected on the other mortgage loans that is
otherwise distributable on one or more classes of subordinate
securities of the related series;
(5) if and to the extent described in the related prospectus
supplement, to pay the master servicer, a special servicer or
another specified entity (including a provider of credit
enhancement) interest accrued on the advances described in
clause (2) above made by it and the servicing expenses
described in clause (3) above incurred by it while these
remain outstanding and unreimbursed;
(6) to reimburse the master servicer, the company, or any of their
respective directors, officers, employees and agents, as the
case may be, for expenses, costs and liabilities incurred
thereby, as and to the extent described under "The
Agreements--Certain Matters Regarding the Master Servicer and
the Company";
35
(7) if and to the extent described in the related prospectus
supplement, to pay the fees of the trustee;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses, costs
and liabilities incurred thereby, as and to the extent
described under "The Agreements--Certain Matters Regarding the
Trustee";
(9) to pay the master servicer or the trustee, as additional
compensation, interest and investment income earned in respect
of amounts held in the Certificate Account;
(10) to pay (generally from related income) the master servicer or
a special servicer for costs incurred in connection with the
operation, management and maintenance of any mortgaged
property acquired by the trust fund by foreclosure or by deed
in lieu of foreclosure;
(11) 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
"Federal Income Tax Consequences--REMICS--Prohibited
Transactions and Other Possible REMIC Taxes";
(12) 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 the mortgage loan or property;
(13) to pay for the cost of various opinions of counsel obtained
pursuant to the related pooling and servicing agreement or the
related servicing agreement and indenture for the benefit of
the related securityholders;
(14) to pay to itself, the company, a Seller or any other
appropriate person all amounts received with respect to each
mortgage loan purchased, repurchased or removed from the trust
fund pursuant to the terms of the related pooling and
servicing agreement or the related servicing agreement and
indenture and not required to be distributed as of the date on
which the related purchase price is determined;
(15) to make any other withdrawals permitted by the related pooling
and servicing agreement or the related servicing agreement and
indenture and described in the related prospectus supplement;
(16) to pay for costs and expenses incurred by the trust fund for
environmental site assessments performed with respect to
multifamily or commercial properties that constitute security
for defaulted mortgage loans, and for any containment,
clean-up or remediation of hazardous wastes and materials
present on that mortgaged properties, as described under
"Servicing of Mortgage Loans--Realization Upon or Sale of
Defaulted Mortgage Loans"; and
(17) to clear and terminate the Certificate Account upon the
termination of the trust fund.
DISTRIBUTIONS
Distributions on the securities of each series will be made by or on
behalf of the related trustee or master servicer on each distribution date as
specified in the related prospectus supplement from the available
36
distribution amount for the series and the distribution date. The available
distribution amount for any series of securities and any distribution date will
generally refer to the total of all payments or other collections (or advances
in lieu thereof) on, under or in respect of the mortgage loans and/or mortgage
securities and any other assets included in the related trust fund that are
available for distribution to the securityholders of the series on that date.
The particular components of the available distribution amount for any series on
each distribution date will be more specifically described in the related
prospectus supplement.
Distributions on the securities of each series (other than the final
distribution in retirement of any certificate) will be made to the persons in
whose names the securities are registered on the Record Date, and the amount of
each distribution will be determined as of the Determination Date. All
distributions with respect to each class of securities on each distribution date
will be allocated in equal proportion among the outstanding securities in the
class. 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 the securityholder has provided the trustee
or other person required to make the payments with wiring instructions no later
than five business days prior to the related Record Date or other date specified
in the related prospectus supplement (and, if so provided in the related
prospectus supplement, the securityholder holds securities in the requisite
amount or denomination specified therein), or by check mailed to the address of
the securityholder as it appears on the security register; provided, however,
that the final distribution in retirement of any class of securities will be
made only upon presentation and surrender of the securities at the location
specified in the notice to securityholders of the final distribution. Payments
will be made to each certificateholder in accordance with the holder's
Percentage Interest in a particular class.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE SECURITIES
Each class of securities of each series, other than Strip Securities
and REMIC Residual Certificates that have no security interest rate, may have a
different per annum rate at which interest accrues on that class of securities,
which may be fixed, variable or adjustable, or any combination of rates. The
related prospectus supplement will specify the security interest rate or, in the
case of a variable or adjustable security interest rate, the method for
determining the security interest rate, for each class. The related prospectus
supplement will specify whether interest on the securities of the series will be
calculated on the basis of a 360-day year consisting of twelve 30-day months or
on a different method.
Distributions of interest in respect of the securities of any class,
other than any class of Accrual Securities, Strip Securities or REMIC Residual
Certificates that is not entitled to any distributions of interest, will be made
on each distribution date based on the accrued interest for the class and the
distribution date, subject to the sufficiency of the portion of the available
distribution amount allocable to the class on the distribution date. Prior to
the time interest is distributable on any class of Accrual Securities, the
amount of accrued interest otherwise distributable on the class will be added to
the principal balance thereof on each distribution date. With respect to each
class of interest-bearing securities, accrued interest for each distribution
date will be equal to interest at the applicable security interest rate accrued
for a specified period (generally one month) on the outstanding principal
balance thereof immediately prior to the distribution date. Accrued interest for
each distribution date on Strip Securities entitled to distributions of interest
will be similarly calculated except that it will accrue on a notional amount
that is based on either (1) based on the principal balances of some or all of
the mortgage loans and/or mortgage securities in the related trust fund or
(2)equal to the principal balances of one or more other classes of securities of
the same series. Reference to a notional amount with respect to a class of Strip
Securities is solely for convenience in making calculations of accrued interest
and does not represent the right to receive any distribution of principal. If so
specified in the related prospectus supplement, the amount of accrued interest
that is otherwise distributable on (or, in the case of Accrual Securities, that
may otherwise be added to the principal balance
37
of) one or more classes of the securities of a series will be reduced to the
extent that any Prepayment Interest Shortfalls, as described under "Yield
Considerations", exceed the amount of any sums (including, if and to the extent
specified in the related prospectus supplement, the master servicer's servicing
compensation) that are applied to offset the shortfalls. The particular manner
in which the shortfalls will be allocated among some or all of the classes of
securities of that series will be specified in the related prospectus
supplement. The related prospectus supplement will also describe the extent to
which the amount of accrued interest that is otherwise distributable on (or, in
the case of Accrual Securities, that may otherwise be added to the principal
balance of) a class of offered securities may be reduced as a result of any
other contingencies, including delinquencies, losses and Deferred Interest on or
in respect of the related mortgage loans or application of the Relief Act with
respect to the mortgage loans. Any reduction in the amount of accrued interest
otherwise distributable on a class of securities by reason of the allocation to
the class of a portion of any Deferred Interest on or in respect of the related
mortgage loans will result in a corresponding increase in the principal balance
of the class.
As and to the extent described in the related prospectus supplement,
distributions of principal with respect to a series of securities will be made
on each distribution date to the holders of the class or classes of securities
of the series entitled thereto until the principal balance(s) of the securities
have been reduced to zero. In the case of a series of securities which includes
two or more classes of securities, the timing, sequential order, priority of
payment or amount of distributions in respect of principal, and any schedule or
formula or other provisions applicable to the determination thereof (including
distributions among multiple classes of senior securities or subordinate
securities), shall be as set forth in the related prospectus supplement.
Distributions of principal with respect to one or more classes of securities may
be made at a rate that is faster (and, in some cases, substantially faster) than
the rate at which payments or other collections of principal are received on the
mortgage loans and/or mortgage securities in the related trust fund, may not
commence until the occurrence of events such as the retirement of one or more
other classes of securities of the same series, or maybe made at a rate that is
slower (and, in some cases, substantially slower) than the rate at which
payments or other collections of principal are received on the mortgage loans
and/or mortgage securities. In addition, distributions of principal with respect
to one or more classes of securities may be made, subject to available funds,
based on a specified principal payment schedule and, with respect to one or more
classes of securities, may be contingent on the specified principal payment
schedule for another class of the same series and the rate at which payments and
other collections of principal on the mortgage loans and/or mortgage securities
in the related trust fund are received.
PRE-FUNDING ACCOUNT
If so specified in the related prospectus supplement, the pooling and
servicing agreement or other agreement may provide for the transfer by the
Sellers of additional mortgage loans to the related trust after the Closing
Date. The additional mortgage loans will be required to conform to the
requirements set forth in the related Agreement or other agreement providing for
the transfer, and will be underwritten to the same standards as the mortgage
loans initially included in the trust fund as described in the prospectus
supplement. As specified in the related prospectus supplement, the transfer
maybe funded by the establishment of a pre-funding account with the trustee. If
a pre-funding account is established, all or a portion of the proceeds of the
sale of one or more classes of securities of the related series will be
deposited in the account to be released as additional mortgage loans are
transferred. A pre-funding account will be required to be maintained as an
Eligible Account, the amounts therein may be required to be invested in
Permitted Investments and the amount held therein shall at no time exceed 40% of
the aggregate outstanding principal balance of the related securities. The
related Agreement or other agreement providing for the transfer of additional
mortgage loans generally will provide that the transfers must be made within up
to three months (with respect to any series of certificates) or up to one year
(with respect to any series of notes) after the
38
Closing Date, and that amounts set aside to fund the transfers (whether in a
pre-funding account or otherwise) and not so applied within the required period
of time will be deemed to be principal prepayments and applied in the manner set
forth in the prospectus supplement. To the extent amounts in any pre-funding
account have not been used to purchase additional mortgage loans, holders of the
securities may receive an additional prepayment, which may affect their yield to
maturity. In addition, securityholders may not be able to reinvest amounts
received from any pre-funding account in comparable securities, or may only be
able to do so at a lower interest rate.
DISTRIBUTIONS ON THE SECURITIES IN RESPECT OF PREPAYMENT PREMIUMS
Prepayment premiums will generally be retained by the master servicer
or by the Seller as additional compensation. However, if so provided in the
related prospectus supplement, prepayment premiums received on or in connection
with the mortgage loans or mortgage securities in any trust fund will be
distributed on each distribution date to the holders of the class or classes of
securities of the related series entitled thereto in accordance with the
provisions described in the prospectus supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the mortgage
loans and/or mortgage securities in any trust fund (to the extent not covered or
offset by draws on any reserve fund or under any instrument of credit
enhancement) will be allocated among the respective classes of securities of the
related series in the priority and manner, and subject to the limitations,
specified in the related prospectus supplement. As described in the related
prospectus supplement, these allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more classes of
securities, or may be effected simply by a prioritization of payments among
classes of securities.
ADVANCES
If and to the extent provided in the related prospectus supplement, and
subject to any limitations specified therein, the related master servicer may be
obligated to advance, or have the option of advancing, on or before each
distribution date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the available distribution
amount for the related series of securities for the distribution date, an amount
up to the aggregate of any payments of interest (and, if specified in the
related prospectus supplement, principal) that were due on or in respect of the
mortgage loans during the related Due Period and were delinquent on the related
Determination Date. No notice will be given to the certificateholders of these
advances. Scheduled payments on the mortgage loans in any trust fund that became
due during a given Due Period will, to the extent received by the related
Determination Date or advanced by the related master servicer or other specified
person, be distributed on the distribution date next succeeding the
Determination Date. 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.
Accordingly, all advances made from the master servicer's own funds will be
reimbursable out of related recoveries on the mortgage loans (including amounts
received under any fund or instrument constituting credit enhancement)
respecting which advances were made and other specific sources as may be
identified in the related prospectus supplement, including amounts which would
otherwise be payable to the offered securities. No Nonrecoverable Advance will
be required to be made by the master servicer; and, if previously made by a
master servicer, a Nonrecoverable Advance will be reimbursable from any amounts
in the related Certificate Account prior to any distributions being made to the
related series of securityholders. If advances have been made from excess funds
in a Certificate Account, the master servicer that advanced the funds will be
required to replace the funds in the Certificate Account on any future
39
distribution date to the extent that funds then in the Certificate Account are
insufficient to permit full distributions to securityholders on that date. If so
specified in the related prospectus supplement, the obligation of a master
servicer to make advances maybe secured by a cash advance reserve fund or a
surety bond. If applicable, information regarding the characteristics of, and
the identity of any obligor on, a surety bond, will be set forth in the related
prospectus supplement. If any person other than the master servicer has any
obligation to make advances as described above, the related prospectus
supplement will identify the person. If and to the extent so provided in the
related prospectus supplement, any entity making advances will be entitled to
receive interest on the advances for the period that the advances are
outstanding at the rate specified in the prospectus supplement, and the entity
will be entitled to payment of the interest periodically from general
collections on the mortgage loans in the related trust fund prior to any payment
to securityholders or as otherwise provided in the related pooling and servicing
agreement or servicing agreement and described in the prospectus supplement. As
specified in the related prospectus supplement with respect to any series of
securities as to which the trust fund includes mortgage securities, the
advancing obligations with respect to the underlying mortgage loans will be
pursuant to the terms of the mortgage securities, as may be supplemented by the
terms of the applicable pooling and servicing agreement or servicing agreement,
and may differ from the provisions described above.
REPORTS TO SECURITYHOLDERS
With each distribution to securityholders of a particular class of
offered securities, the related master servicer or trustee will forward or cause
to be forwarded to each holder of record of the class of securities a statement
or statements with respect to the related trust fund setting forth the
information specifically described in the related pooling and servicing
agreement or the related servicing agreement or indenture, which generally will
include the following as applicable except as otherwise provided therein:
o the amount, if any, of the distribution allocable to
principal;
o the amount, if any, of the distribution allocable to interest;
o the amount, if any, of the distribution allocable to
prepayment premiums;
o with respect to a series consisting of two or more classes,
the outstanding principal balance or notional amount of each
class after giving effect to the distribution of principal on
the distribution date;
o the amount of servicing compensation received by the related
master servicer (and, if payable directly out of the related
trust fund, by any special servicer and any subservicer);
o the aggregate amount of advances included in the distributions
on the distribution date, and the aggregate amount of
unreimbursed advances at the close of business on the
distribution date;
o the aggregate principal balance of the mortgage loans in the
related mortgage pool on, or as of a specified date shortly
prior to, the distribution date;
o the number and aggregate principal balance of any mortgage
loans in the related mortgage pool 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 been
commenced;
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o the book value of any real estate acquired the trust fund by
foreclosure or by a deed in lieu of foreclosure;
o the balance of the reserve fund, if any, at the close of
business on the distribution date;
o the amount of coverage under any financial guaranty insurance
policy, mortgage pool insurance policy or letter of credit
covering default risk as of the close of business on the
applicable Determination Date and a description of any credit
enhancement substituted therefor;
o the Special Hazard Amount, Fraud Loss Amount and Bankruptcy
Amount as of the close of business on the applicable
distribution date and a description of any change in the
calculation of these amounts;
o with respect to any series of securities as to which the trust
fund includes mortgage securities, additional information as
required under the related pooling and servicing agreement and
specified in the related prospectus supplement; and
o any other material information as required under the related
pooling and servicing agreement.
In the case of information furnished pursuant to the first three items
above, the amounts will be expressed as a dollar amount per minimum denomination
of the relevant class of offered securities or per a specified portion of the
minimum denomination. In addition to the information described above, reports to
securityholders will contain other information as is set forth in the applicable
pooling and servicing agreement or the applicable servicing agreement or
indenture, which may include prepayments, reimbursements to subservicers and the
master servicer and losses borne by the related trust fund. In addition, within
a reasonable period of time after the end of each calendar year, the master
servicer or trustee will furnish a report to each holder of record of a class of
offered securities at any time during the calendar year which, for example, will
include information as to the aggregate of amounts reported pursuant to the
first three items above for the calendar year or, in the event the person was a
holder of record of a class of securities during a portion of the calendar year,
for the applicable portion of the year.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Credit support with respect to the offered securities of each series
may be comprised of one or more of the following components. Each component will
have limitations and will provide coverage with respect to Realized Losses on
the related mortgage loans. Credit support will cover Defaulted Mortgage Losses,
but coverage may be limited or unavailable with respect to Special Hazard
Losses, Fraud Losses, Bankruptcy Losses and Extraordinary Losses. To the extent
that the credit support for the offered securities of any series is exhausted,
the holders thereof will bear all further risk of loss.
As set forth below and in the applicable prospectus supplement,
coverage with respect to Realized Losses may be provided by one or more of a
financial guaranty insurance policy, a special hazard insurance policy, a
mortgage pool insurance policy or a letter of credit. In addition, if provided
in the applicable prospectus supplement, in lieu of or in addition to any or all
of the foregoing arrangements, credit
41
enhancement may be in the form of a reserve fund to cover the losses, in the
form of subordination of one or more classes of subordinate securities to
provide credit support to one or more classes of senior securities, in the form
of overcollateralization, or in the form of a combination of the foregoing. The
credit support may be provided by an assignment of the right to receive
specified cash amounts, a deposit of cash into a reserve fund or other pledged
assets, or by banks, insurance companies, guarantees or any combination thereof
identified in the applicable prospectus supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the offered securities of each
series will be set forth in the related prospectus supplement. To the extent
provided in the applicable prospectus supplement and the pooling and servicing
agreement or indenture, the credit enhancement arrangements may be periodically
modified, reduced and substituted for based on the aggregate outstanding
principal balance of the mortgage loans covered thereby. See "Description of
Credit Enhancement--Reduction or Substitution of Credit Enhancement." If
specified in the applicable prospectus supplement, credit support for the
offered securities of one series may cover the offered securities of one or more
other series.
In general, references to "mortgage loans" under this "Description of
Credit Enhancement" section are to mortgage loans in a trust fund. However, if
so provided in the prospectus supplement for a series of securities, any
mortgage securities included in the related trust fund and/or the related
underlying mortgage loans may be covered by one or more of the types of credit
support described in this prospectus. The related prospectus supplement will
specify, as to each form of credit support, the information indicated below with
respect thereto, to the extent the information is material and available.
SUBORDINATE SECURITIES
If so specified in the related prospectus supplement, one or more
classes of securities of a series may be subordinate securities. To the extent
specified in the related prospectus supplement, the rights of the holders of
subordinate securities to receive distributions from the Certificate Account on
any distribution date will be subordinated to the corresponding rights of the
holders of senior securities. If so provided in the related prospectus
supplement, the subordination of a class may apply only in the event of (or may
be limited to) some types of losses or shortfalls. The related prospectus
supplement will set forth information concerning the manner and amount of
subordination provided by a class or classes of subordinate securities in a
series and the circumstances under which the subordination will be available.
The offered securities of any series may include one or more classes of
subordinate securities.
CROSS-SUPPORT
If the mortgage loans and/or mortgage securities in any trust fund are
divided into separate groups, each supporting a separate class or classes of
securities of the related series, credit enhancement may be provided by
cross-support provisions requiring that distributions be made on senior
securities evidencing interests in one group of mortgage loans and/or mortgage
securities prior to distributions on subordinate securities evidencing interests
in a different group of mortgage loans and/or mortgage securities within the
trust fund. The prospectus supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying the provisions.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest
collections on the mortgage loans may exceed interest payments on the securities
for the related distribution date. The excess interest may be
42
deposited into a reserve fund or applied as a payment of principal on the
securities. To the extent excess interest is applied as principal payments on
the securities, the effect will be to reduce the principal balance of the
securities relative to the outstanding balance of the mortgage loans, thereby
creating overcollateralization and additional protection to the security
holders, as specified in the related prospectus supplement. If so provided in
the related prospectus supplement, overcollateralization may also be provided as
to any series of securities by the issuance of securities in an initial
aggregate principal amount which is less than the aggregate principal amount of
the related mortgage loans.
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related prospectus supplement, a financial
guaranty insurance policy may be obtained and maintained for a class or series
of securities. The insurer with respect to a financial guaranty insurance policy
will be described in the related prospectus supplement and a copy of the form of
financial guaranty insurance policy will be filed with the related Current
Report on Form 8-K.
A financial guaranty insurance policy will be unconditional and
irrevocable and will guarantee to holders of the applicable securities that an
amount equal to the full amount of payments due to the holders will be received
by the trustee or its agent on behalf of the holders for payment on each
distribution date. The specific terms of any financial guaranty insurance policy
will be set forth in the related prospectus supplement. A financial guaranty
insurance policy may have limitations and generally will not insure the
obligation of the Sellers or the master servicer to purchase or substitute for a
defective mortgage loan and will not guarantee any specific rate of principal
prepayments. The insurer will be subrogated to the rights of each holder to the
extent the insurer makes payments under the financial guaranty insurance policy.
MORTGAGE POOL INSURANCE POLICIES
Any mortgage pool insurance policy obtained by the company for each
trust fund will be issued by the pool insurer named in the applicable prospectus
supplement. Each mortgage pool insurance policy will, subject to the limitations
described below, cover Defaulted Mortgage Losses in an amount equal to a
percentage specified in the applicable prospectus supplement of the aggregate
principal balance of the mortgage loans on the cut-off date. As set forth under
"Maintenance of Credit Enhancement," the master servicer will use reasonable
efforts to maintain the mortgage pool insurance policy and to present claims
thereunder to the pool insurer on behalf of itself, the related trustee and the
related securityholders. The mortgage pool insurance policies, however, are not
blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted mortgage loans and only upon satisfaction of the
conditions precedent described below. Unless specified in the related prospectus
supplement, the mortgage pool insurance policies may not cover losses due to a
failure to pay or denial of a claim under a Primary Insurance Policy,
irrespective of the reason therefor. Each mortgage pool insurance policy will
generally provide that no claims may be validly presented thereunder unless,
among other things:
o any required Primary Insurance Policy is in effect for the
defaulted mortgage loan and a claim thereunder has been
submitted and settled,
o hazard insurance on the property securing the mortgage loan
has been kept in force and real estate taxes and other
protection and preservation expenses have been paid by the
master servicer,
o if there has been physical loss or damage to the mortgaged
property, it has been restored to its condition (reasonable
wear and tear excepted) at the cut-off date and
43
o the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens, except for
permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the option
either (1) to purchase the property securing the defaulted mortgage loan at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the applicable mortgage rate to the date of purchase and expenses incurred by
the master servicer, special servicer or subservicer on behalf of the related
trustee and securityholders, or (2) to pay the amount by which the sum of the
principal balance of the defaulted mortgage loan plus accrued and unpaid
interest at the mortgage rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the mortgaged property, in either case net of amounts paid or assumed to have
been paid under any related Primary Insurance Policy. Securityholders will
experience a shortfall in the amount of interest payable on the related
securities in connection with the payment of claims under a mortgage pool
insurance policy because the pool insurer is only required to remit unpaid
interest through the date a claim is paid rather than through the end of the
month in which the claim is paid. In addition, the securityholders will also
experience losses with respect to the related securities in connection with
payments made under a mortgage pool insurance policy to the extent that the
master servicer expends funds to cover unpaid real estate taxes or to repair the
related mortgaged property in order to make a claim under a mortgage pool
insurance policy, as those amounts will not be covered by payments under the
policy and will be reimbursable to the master servicer from funds otherwise
payable to the securityholders. If any mortgaged property securing a defaulted
mortgage loan is damaged and proceeds, if any (see "--Special Hazard Insurance
Policies" below for risks which are not covered by the policies), from the
related hazard insurance policy or applicable special hazard insurance policy
are insufficient to restore the damaged property to a condition sufficient to
permit recovery under the mortgage pool insurance policy, the master servicer is
not required to expend its own funds to restore the damaged property unless it
determines (x) that the restoration will increase the proceeds to one or more
classes of securityholders on liquidation of the mortgage loan after
reimbursement of the master servicer for its expenses and (y) that the expenses
will be recoverable by it through Liquidation Proceeds or Insurance Proceeds.
A mortgage pool insurance policy (and most Primary Insurance
Policies)will likely not insure against loss sustained by reason of a default
arising from, among other things, (1) fraud or negligence in the origination or
servicing of a mortgage loan, including misrepresentation by the mortgagor, the
Seller or other persons involved in the origination thereof, or (2) failure to
construct a mortgaged property in accordance with plans and specifications.
Depending upon the nature of the event, a breach of representation made by a
Seller may also have occurred. This breach, if it materially and adversely
affects the interests of securityholders and cannot be cured, would give rise to
a purchase obligation on the part of the Seller, as more fully described under
"The Mortgage Pools--Representations by Sellers." However, this event would not
give rise to a breach of a representation and warranty or a purchase obligation
on the part of the company or master servicer.
The original amount of coverage under each mortgage pool insurance
policy will be reduced over the life of the related series of securities by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the pool insurer upon disposition of all foreclosed properties. The
amount of claims paid includes expenses incurred by the master servicer, special
servicer or subservicer as well as accrued interest on delinquent mortgage loans
to the date of payment of the claim. Accordingly, if aggregate net claims paid
under any mortgage pool insurance policy reach the original policy limit,
coverage under that mortgage pool insurance policy will be exhausted and any
further losses will be borne by holders of the related series of securities. In
addition, unless the master servicer could determine that an advance in respect
of a delinquent mortgage loan would be recoverable to it from the proceeds of
the liquidation of the mortgage
44
loan or otherwise, the master servicer would not be obligated to make an advance
respecting the delinquency since the advance would not be ultimately recoverable
to it from either the mortgage pool insurance policy or from any other related
source. See "Description of the Securities--Advances."
Since each mortgage pool insurance policy will require that the
property subject to a defaulted mortgage loan be restored to its original
condition prior to claiming against the pool insurer, the policy will not
provide coverage against hazard losses. As set forth under "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder," the hazard policies covering
the mortgage loans typically exclude from coverage physical damage resulting
from a number of causes and, even when the damage is covered, may afford
recoveries which are significantly less than full replacement cost of the
losses. Further, no coverage in respect of Special Hazard Losses, Fraud Losses
or Bankruptcy Losses will cover all risks, and the amount of the coverage will
be limited. See "Special Hazard Insurance Policies" below. As a result, some
hazard risks will not be insured against and will therefore be borne by the
related securityholders.
LETTER OF CREDIT
If any component of credit enhancement as to the offered securities of
any series is to be provided by a letter of credit, a bank will deliver to the
related trustee an irrevocable letter of credit. The letter of credit may
provide direct coverage with respect to the mortgage loans. The bank that
delivered the letter of credit, as well as the amount available under the letter
of credit with respect to each component of credit enhancement, will be
specified in the applicable prospectus supplement. If so specified in the
related prospectus supplement, the letter of credit may permit draws only in the
event of some types of losses and shortfalls. The letter of credit may also
provide for the payment of advances which the master servicer would be obligated
to make with respect to delinquent monthly mortgage payments. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced as
described in the related prospectus supplement. The letter of credit will expire
on the expiration date set forth in the related prospectus supplement, unless
earlier terminated or extended in accordance with its terms.
SPECIAL HAZARD INSURANCE POLICIES
Any special hazard insurance policy covering Special Hazard Losses
obtained by the company for a trust fund will be issued by the insurer named in
the applicable prospectus supplement. Each special hazard insurance policy will,
subject to limitations described below, protect holders of the related series of
securities from Special Hazard Losses. See "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder." However, a special hazard insurance policy will
not cover losses occasioned by war, civil insurrection, some governmental
actions, errors in design, faulty workmanship or materials (except under some
circumstances), nuclear reaction, chemical contamination, waste by the mortgagor
and other risks. Aggregate claims under a special hazard insurance policy will
be limited to the amount set forth in the related prospectus supplement and will
be subject to reduction as described in the related prospectus supplement. A
special hazard insurance policy will provide that no claim may be paid unless
hazard and, if applicable, flood insurance on the property securing the mortgage
loan has been kept in force and other protection and preservation expenses have
been paid by the master servicer.
Subject to the foregoing limitations, a special hazard insurance policy
will provide that, where there has been damage to property securing a foreclosed
mortgage loan (title to which has been acquired by the insured) and to the
extent the damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the mortgagor or the master servicer,
special servicer or the subservicer, the insurer will pay the lesser of (1) the
cost of repair or replacement of the property or (2) upon transfer of the
property to
45
the insurer, the unpaid principal balance of the mortgage loan at the time of
acquisition of the property by foreclosure or deed in lieu of foreclosure, plus
accrued interest at the mortgage rate to the date of claim settlement and
expenses incurred by the master servicer, special servicer or subservicer with
respect to the property. If the property is transferred to a third party in a
sale approved by the issuer of the special hazard insurance policy, the amount
that the issuer will pay will be the amount under (ii) above reduced by the net
proceeds of the sale of the property. No claim may be validly presented under
the special hazard insurance policy unless hazard insurance on the property
securing a defaulted mortgage loan has been kept in force and other reimbursable
protection, preservation and foreclosure expenses have been paid (all of which
must be approved in advance by the issuer of the special hazard insurance
policy). If the unpaid principal balance plus accrued interest and expenses is
paid by the insurer, the amount of further coverage under the related special
hazard insurance policy will be reduced by that amount less any net proceeds
from the sale of the property. Any amount paid as the cost of repair of the
property will further reduce coverage by that amount. Restoration of the
property with the proceeds described under (1) above will satisfy the condition
under each mortgage pool insurance policy that the property be restored before a
claim under the mortgage pool insurance policy may be validly presented with
respect to the defaulted mortgage loan secured by the property. The payment
described under (2) above will render presentation of a claim in respect of the
mortgage loan under the related mortgage pool insurance policy unnecessary.
Therefore, so long as a mortgage pool insurance policy remains in effect, the
payment by the insurer under a special hazard insurance policy of the cost of
repair or of the unpaid principal balance of the related mortgage loan plus
accrued interest and expenses will not affect the total Insurance Proceeds paid
to securityholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy.
As and to the extent set forth in the applicable prospectus supplement,
coverage in respect of Special Hazard Losses for a series of securities may be
provided, in whole or in part, by a type of instrument other than a special
hazard insurance policy or by means of a special hazard representation of the
Seller or the company.
RESERVE FUNDS
If so provided in the related prospectus supplement, the company will
deposit or cause to be deposited in a reserve fund account any combination of
cash, one or more irrevocable letters of credit or one or more Permitted
Investments in specified amounts, or any other instrument satisfactory to the
relevant Rating Agency or Agencies, which will be applied and maintained in the
manner and under the conditions specified in the prospectus supplement. In the
alternative or in addition to the deposit, to the extent described in the
related prospectus supplement, a reserve fund may be funded through application
of all or a portion of amounts otherwise payable on any related subordinate
securities, from the retained interest of the company or otherwise. To the
extent that the funding of the reserve fund is dependent on amounts otherwise
payable on related subordinate securities, any retained interest of the company
or other cash flows attributable to the related mortgage loans or on
reinvestment income, the reserve fund may provide less coverage than initially
expected if the cash flows or reinvestment income on which the funding is
dependent are lower than anticipated. In addition, with respect to any series of
securities as to which credit enhancement includes a letter of credit, if so
specified in the related prospectus supplement, if specified conditions are met,
the remaining amount of the letter of credit may be drawn by the trustee and
deposited in a reserve fund. Amounts in a reserve fund may be distributed to
securityholders, or applied to reimburse the master servicer for outstanding
advances, or may be used for other purposes, in the manner and to the extent
specified in the related prospectus supplement. The related prospectus
supplement will disclose whether a reserve fund is part of the related trust
fund. If set forth in the related prospectus supplement, a reserve fund may
provide coverage to more than one series of securities.
46
In connection with the establishment of any reserve fund, the reserve
fund will be structured so that the trustee will have a perfected security
interest for the benefit of the securityholders in the assets in the reserve
fund. However, to the extent that the company, any affiliate thereof or any
other entity has an interest in any reserve fund, in the event of the
bankruptcy, receivership or insolvency of that entity, there could be delays in
withdrawals from the reserve fund and corresponding payments to the
securityholders which could adversely affect the yield to investors on the
related securities.
Amounts deposited in any reserve fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
master servicer or any other person named in the related prospectus supplement.
CASH FLOW AGREEMENTS
If so provided in the related 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 principal terms of a guaranteed investment contract or other
cash flow agreement, and the identity of the obligor, will be described in the
prospectus supplement for a series of notes.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable prospectus supplement does not
expressly provide for alternative credit enhancement arrangements in lieu of
some or all of the arrangements mentioned below, the following paragraphs shall
apply.
If a financial guaranty insurance policy has been obtained for a series
of securities, the master servicer will be obligated to exercise reasonable
efforts to keep the financial guaranty insurance policy in full force and effect
throughout the term of the applicable pooling and servicing agreement, unless
coverage thereunder has been exhausted through payment of claims or until the
financial guaranty insurance policy is replaced in accordance with the terms of
the applicable pooling and servicing agreement. The master servicer will agree
to pay the premiums for each financial guaranty insurance policy on a timely
basis. In the event the insurer ceases to be a qualified insurer as described in
the related prospectus supplement, or fails to make a required payment under the
related financial guaranty insurance policy, the master servicer will have no
obligation to replace the insurer. Any losses associated with any reduction or
withdrawal in rating by an applicable Rating Agency shall be borne by the
related securityholders.
If a mortgage pool insurance policy has been obtained for a series
obscurities, the master servicer will be obligated to exercise reasonable
efforts to keep the mortgage pool insurance policy (or an alternate form of
credit support) in full force and effect throughout the term of the applicable
pooling and servicing agreement or servicing agreement, unless coverage
thereunder has been exhausted through payment of claims or until the mortgage
pool insurance policy is replaced in accordance with the terms of the applicable
pooling and servicing agreement or servicing agreement. The master servicer will
agree today the premiums for each mortgage pool insurance policy on a timely
basis. In the event the pool insurer ceases to be a qualified insurer because it
ceases tone qualified by law to transact pool insurance business or coverage is
terminated for any reason other than exhaustion of the coverage, the master
servicer will use reasonable efforts to obtain from another qualified insurer
replacement insurance policy comparable to the mortgage pool insurance policy
with a total coverage equal to the then outstanding coverage of the mortgage
pool insurance policy, provided that, if the cost of the replacement policy is
greater than the cost of the mortgage pool insurance policy, the coverage of the
replacement policy will, unless otherwise agreed to by the company, be reduce to
a level such
47
that its premium rate does not exceed the premium rate on the mortgage pool
insurance policy. In the event that the pool insurer ceases to be a qualified
insurer because it ceases to be approved as an insurer by Freddie Mac, Fannie
Mae or any successor entity, the master servicer will be obligated to review,
not less often than monthly, the financial condition of the pool insurer with a
view toward determining whether recoveries under the mortgage pool insurance
policy are jeopardized for reasons related to the financial condition of the
pool insurer. If the master servicer determines that recoveries are so
jeopardized, it will be obligated to exercise its best reasonable efforts to
obtain from another qualified insurer a replacement insurance policy as
described above, subject to the same cost limit. Any losses associated with any
reduction or withdrawal in rating by an applicable Rating Agency shall be borne
by the related securityholders.
If a letter of credit or alternate form of credit enhancement has been
obtained for a series of securities, the master servicer will be obligated to
exercise reasonable efforts cause to be kept or to keep the letter of credit (or
an alternate form of credit support) in full force and effect throughout the
term of the applicable pooling and servicing agreement or indenture, unless
coverage thereunder has been exhausted through payment of claims or otherwise,
or substitution therefor is made as described below under "--Reduction or
Substitution of Credit Enhancement." Unless otherwise specified in the
applicable prospectus supplement, if a letter of credit obtained for a series of
securities is scheduled to expire prior to the date the final distribution on
the securities is made and coverage under the letter of credit has not been
exhausted and no substitution has occurred, the trustee will draw the amount
available under the letter of credit and maintain the amount in trust for the
securityholders.
In lieu of the master servicer's obligation to maintain a financial
guaranty insurance policy, mortgage pool insurance policy or letter of credit as
provided above, the master servicer may obtain a substitute financial guaranty
insurance policy, mortgage pool insurance policy or letter of credit. If the
master servicer obtains a substitute, it will maintain and keep the substitute
in full force and effect as provided in this prospectus. Prior to its obtaining
any substitute financial guaranty insurance policy, mortgage pool insurance
policy or letter of credit, the master servicer will obtain written confirmation
from the Rating Agency or Agencies that rated the related series of securities
that the substitution of the financial guaranty insurance policy, mortgage pool
insurance policy or letter of credit for the existing credit enhancement will
not adversely affect the then-current ratings assigned to the securities by the
Rating Agency or Agencies.
If a special hazard insurance policy has been obtained for a series
obscurities, the master servicer will also be obligated to exercise reasonable
efforts to maintain and keep the policy in full force and effect throughout the
term of the applicable pooling and servicing agreement or servicing agreement,
unless coverage thereunder has been exhausted through payment of claims or
otherwise or substitution therefor is made as described below under "--Reduction
or Substitution of Credit Enhancement." If coverage for Special Hazard Losses
takes the form of a special hazard insurance policy, the policy will provide
coverage against risks of the type described in this prospectus
under"Description of Credit Enhancement--Special Hazard Insurance Policies." The
master servicer may obtain a substitute policy for the existing special hazard
insurance policy if prior to the substitution the master servicer obtains
written confirmation from the Rating Agency or Agencies that rated the related
securities that the substitution shall not adversely affect the then-current
ratings assigned to the securities by the Rating Agency or Agencies.
The master servicer, on behalf of itself, the trustee and
securityholders, will provide the trustee information required for the trustee
to draw under the letter of credit and will present claims to each pool insurer,
to the issuer of each special hazard insurance policy, and, in respect of
defaulted mortgage loans for which there is no subservicer, to each primary
insurer and take any reasonable steps as are necessary to permit recovery under
the letter of credit, insurance policies or comparable coverage respecting
defaulted mortgage loans or mortgage loans which are the subject of a bankruptcy
proceeding. As set forth above, all
48
collections by the master servicer under any mortgage pool insurance policy or
any Primary Insurance Policy and, where the related property has not been
restoration special hazard insurance policy, are to be deposited in the related
certificate Account, subject to withdrawal as described above. All draws under
any letter of credit are also to be deposited in the related Certificate
account. In those cases in which a mortgage loan is serviced by a subservicer,
the subservicer, on behalf of itself, the trustee and the securityholders will
present claims to the primary insurer, and all paid claims shall initially be
deposited in a subservicing account that generally meets the requirements for
the Certificate Account prior to being delivered to the master servicer for
deposit in the related Certificate Account.
If any property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
special hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any financial guaranty
insurance policy, mortgage pool insurance policy, letter of credit or any
related Primary Insurance Policy, the master servicer is not required to expend
its own funds to restore the damaged property unless it determines (1) that the
restoration will increase the proceeds to one or more classes of securityholders
on liquidation of the mortgage loan after reimbursement of the master servicer
for its expenses and (2) that the expenses will be recoverable by it through
liquidation Proceeds or Insurance Proceeds. If recovery under any financial
guaranty insurance policy, mortgage pool insurance policy, letter of credit or
any related Primary Insurance Policy is not available because the master
servicer has been unable to make the above determinations, has made the
determinations incorrectly or recovery is not available for any other reason,
the master servicer is nevertheless obligated to follow the normal practices and
procedures (subject to the preceding sentence) as it deems necessary or
advisable to realize upon the defaulted mortgage loan and in the event the
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with the restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided pursuant to any form of credit
enhancement may be reduced. In most cases, the amount available pursuant to any
form of credit enhancement will be subject to periodic reduction in accordance
with a schedule or formula on a nondiscretionary basis pursuant to the terms of
the related pooling and servicing agreement or indenture. Additionally, in most
cases, the form of credit support (and any replacements therefor) may be
replaced, reduced or terminated, and the formula used in calculating the amount
of coverage with respect to Bankruptcy Losses, Special Hazard Losses or Fraud
losses may be changed, without the consent of the securityholders, upon the
written assurance from each applicable Rating Agency that the then-current
rating of the related series of securities will not be adversely affected.
Furthermore, in the event that the credit rating of any obligor under any
applicable credit enhancement is downgraded, the credit rating(s) of the related
series of securities may be downgraded to a corresponding level, and, the master
servicer will not be obligated to obtain replacement credit support in order to
restore the rating(s) of the related series of securities. The master servicer
will also be permitted to replace the credit support with other credit
enhancement instruments issued by obligors whose credit ratings are equivalent
to the downgraded level and in lower amounts which would satisfy the downgraded
level, provided that the then-current rating(s) of the related series
obscurities are maintained. Where the credit support is in the form of a reserve
fund, a permitted reduction in the amount of credit enhancement will result in a
release of all or a portion of the assets in the reserve fund to the company,
the master servicer or the other person that is entitled thereto. Any assets so
released will not be available for distributions in future periods.
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OTHER FINANCIAL OBLIGATIONS RELATED TO THE SECURITIES
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of a trust fund may enter into interest rate
swaps and related caps, floors and collars to minimize the risk of
securityholders from adverse changes in interest rates, which are collectively
referred to as swaps, and other yield supplement agreements or similar yield
maintenance arrangements that do not involve swap agreements or other notional
principal contracts, which are collectively referred to as yield supplement
agreements.
An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or "notional" principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In the typical swap, one party agrees to pay a fixed rate on
a notional principal amount, while the counterparty pays a floating rate based
on one or more reference interest rates including the London Interbank Offered
Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based upon one reference interest rate, such as LIBOR, for a floating
rate obligation based upon another referenced interest rate, such as U.S.
Treasury Bill rates.
Yield supplement agreements may be entered into to supplement the
interest rate or other rates on one or more classes of the securities of any
series. Additionally, agreements relating to other types of derivative products
that are designed to provide credit enhancement to the related series may be
entered into by a trustee and one or more counterparties. The terms of any
derivative product agreement and any counterparties will be described in the
accompanying prospectus supplement.
There can be no assurance that the trustee will be able to enter into
or offset swaps or enter into yield supplement agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the swaps and yield supplement
agreements may provide for termination under various circumstances, there can be
no assurance that the trustee will be able to terminate a swap or yield
supplement agreement when it would be economically advantageous to the trust
fund to do so.
PURCHASE OBLIGATIONS
Some types of trust assets and some classes of securities of any
series, as specified in the accompanying prospectus supplement, may be subject
to a purchase obligation that would become applicable on one or more specified
dates, or upon the occurrence of one or more specified events, or on demand made
by or on behalf of the applicable securityholders. A purchase obligation may be
in the form of a conditional or unconditional purchase commitment, liquidity
facility, remarketing agreement, maturity guaranty, put option or demand
feature. The terms and conditions of each purchase obligation, including the
purchase price, timing and payment procedure, will be described in the
accompanying prospectus supplement. A purchase obligation relating to trust
assets may apply to those trust assets or to the related securities. Each
purchase obligation may be a secured or unsecured obligation of the provider
thereof, which may include a bank or other financial institution or an insurance
company. Each purchase obligation will be evidenced by an instrument delivered
to the trustee for the benefit of the applicable securityholders of the related
series. As specified in the accompanying prospectus supplement, each purchase
obligation relating to trust assets will be payable solely to the trustee for
the benefit of the securityholders of the related series. Other purchase
obligations may be payable to the trustee or directly to the holders of the
securities to which that obligation relate.
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PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
GENERAL
The mortgaged property with respect to each mortgage loan will be
required to be covered by a hazard insurance policy and, if required as
described below, a Primary Insurance Policy. The following is only a brief
description of these insurance policies and does not purport to summarize or
describe all of the provisions of these policies. The insurance is subject to
underwriting and approval of individual mortgage loans by the respective
insurers.
PRIMARY MORTGAGE INSURANCE POLICIES
In a securitization of single family loans, single family loans
included in the related mortgage pool having a loan-to-value ratio at
origination of over 80% (or other percentage as described in the related
prospectus supplement) may be required by the company to be covered by a Primary
Insurance Policy. The Primary Insurance Policy will insure against default on a
mortgage loan as to at least the principal amount thereof exceeding 75% of the
Value of the related mortgaged property (or other percentage as described in the
related prospectus supplement) at origination of the mortgage loan, unless and
until the principal balance of the mortgage loan is reduced to a level that
would produce a loan-to-value ratio equal to or less than at least 80% (or other
percentage as described in the prospectus supplement). The company will
represent and warrant that, to the best of the company's knowledge, mortgage
loans of this type are so covered. This type of mortgage loan will not be
considered to be an exception to the foregoing standard if no Primary Insurance
Policy was obtained at origination but the mortgage loan has amortized to below
the above loan-to-value ratio percentage as of the applicable cut-off date.
Mortgage loans which are subject to negative amortization will only be covered
by a Primary Insurance Policy if the coverage was so required upon their
origination, notwithstanding that subsequent negative amortization may cause the
mortgage loan's loan-to-value ratio, based on the then-current balance, to
subsequently exceed the limits which would have required the coverage upon their
origination. Multifamily, commercial and mixed-use loans will not be covered by
a Primary Insurance Policy, regardless of the related loan-to-value ratio.
While the terms and conditions of the Primary Insurance Policies issued
by a primary insurer will differ from those in Primary Insurance Policies issued
by other primary insurers, each Primary Insurance Policy will in general cover
the Primary Insurance Covered Loss. The primary insurer generally will be
required to pay:
o the insured percentage of the Primary Insurance Covered Loss;
o the entire amount of the Primary Insurance Covered Loss, after
receipt by the primary insurer of good and merchantable title
to, and possession of, the mortgaged property; or
o at the option of the primary insurer, the sum of the
delinquent monthly payments plus any advances made by the
insured, both to the date of the claim payment and,
thereafter, monthly payments in the amount that would have
become due under the mortgage loan if it had not been
discharged plus any advances made by the insured until the
earlier of (1) the date the mortgage loan would have been
discharged in full if the default had not occurred or (2) an
approved sale.
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As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the mortgagor, the insured
will typically be required, among other things, to:
o advance or discharge (1) hazard insurance premiums and (2) as
necessary and approved in advance by the primary insurer, real
estate taxes, protection and preservation expenses and
foreclosure and related costs;
o in the event of any physical loss or damage to the mortgaged
property, have the mortgaged property restored to at least its
condition at the effective date of the Primary Insurance
Policy (ordinary wear and tear excepted); and
o tender to the primary insurer good and merchantable title to,
and possession of, the mortgaged property.
For any single family loan for which the coverage is required under the
standard described above, the master servicer will maintain or cause each
subservicer to maintain, as the case may be, in full force and effect and to the
extent coverage is available a Primary Insurance Policy with regard to each
single family loan, provided that the Primary Insurance Policy was in place as
of the cut-off date and the company had knowledge of the Primary Insurance
Policy. In the event the company gains knowledge that as of the Closing Date, a
mortgage loan which required a Primary Insurance Policy did not have one, then
the master servicer is required to use reasonable efforts to obtain and maintain
a Primary Insurance Policy to the extent that the policy is obtainable at a
reasonable price. The master servicer or the Seller will not cancel or refuse to
renew a Primary Insurance Policy in effect at the time of the initial issuance
of a series of securities that is required to be kept in force under the
applicable pooling and servicing agreement or indenture unless the replacement
Primary Insurance Policy for the canceled or non-renewed policy is maintained
with an insurer whose claims-paying ability is acceptable to the Rating Agency
or Agencies that rated the series of securities for mortgage pass-through
certificates having a rating equal to or better than the highest then-current
rating of any class of the series of securities. For further information
regarding the extent of coverage under any mortgage pool insurance policy or
primary Insurance Policy, see "Description of Credit Enhancement--Mortgage Pool
insurance Policies."
HAZARD INSURANCE POLICIES
The terms of the mortgage loans require each mortgagor to maintain a
hazard insurance policy for their mortgage loan. Additionally, the pooling and
servicing agreement or servicing agreement will require the master servicer to
cause to be maintained for each mortgage loan a hazard insurance policy
providing for no less than the coverage of the standard form of fire insurance
policy with extended coverage customary in the state in which the property is
located. The coverage generally will be in an amount equal to the lesser of the
principal balance owing on the mortgage loan or 100% of the insurable value of
the improvements securing the mortgage loan except that, if generally available,
the coverage must not be less than the minimum amount required under the terms
thereof to fully compensate for any damage or loss on a replacement cost basis.
The ability of the master servicer to ensure that hazard insurance proceeds are
appropriately applied may be dependent on its being named as an additional
insured under any hazard insurance policy and under any flood insurance policy
referred to below, or upon the extent to which information in this regard is
furnished to the master servicer by mortgagors or subservicers.
As set forth above, all amounts collected by the master servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the mortgaged property or released to the mortgagor in accordance with
teamster servicer's normal servicing procedures) will be deposited in the
related Certificate
52
Account. The pooling and servicing agreement or servicing agreement will provide
that the master servicer may satisfy its obligation to cause hazard policies to
be maintained by maintaining a blanket policy insuring against losses on the
mortgage loans. If the blanket policy contains a deductible clause, the master
servicer will deposit in the applicable certificate Account all sums which would
have been deposited therein but for the clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, 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
the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, depending on the case, vandalism. The foregoing
list is merely indicative of the kinds of uninsured risks and is not intended to
be all-inclusive. Where the improvements securing a mortgage loan are located in
a federally designated flood area at the time of origination of the mortgage
loan, the pooling and servicing agreement or servicing agreement requires the
master servicer to cause to be maintained for this mortgage loan, flood
insurance (to the extent available) in an amount equal in general to the lesser
of the amount required to compensate for any loss or damage on a replacement
cost basis or the maximum insurance available under the federal flood insurance
program.
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause which 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 in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, the clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(1) the replacement cost of the improvements damaged or destroyed less physical
depreciation or (2) the proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance that mortgagors are required to
maintain on the improvements securing the mortgage loans may decline as the
principal balances of the related mortgage loans decrease, and since residential
properties have historically appreciated in value over time, hazard insurance
proceeds could be insufficient to restore fully the damaged property in the
event of a partial loss. See "Description of Credit Enhancement--Special Hazard
Insurance Policies" for a description of the limited protection afforded by any
special hazard insurance policy against losses occasioned by hazards which are
otherwise uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
Under the terms of the mortgage loans, mortgagors are generally
required to present claims to insurers under hazard insurance policies
maintained on the mortgaged properties. The master servicer, on behalf of the
trustee and securityholders, is obligated to present claims under any special
hazard insurance policy and any blanket insurance policy insuring against hazard
losses on the mortgaged properties. However, the ability of the master servicer
to present the claims is dependent upon the extent to which information in this
regard is furnished to the master servicer or the subservicers by mortgagors.
53
FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under Sections
221 (d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a mortgage 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 mortgage loans
made for the purchase or refinancing of existing apartment projects which 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 or 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.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The master servicer will be obligated to purchase a
debenture issued in satisfaction of a defaulted FHA insured mortgage loan
serviced by it for an amount equal to the principal amount of any the debenture.
The master servicer will be required to take steps reasonably necessary
to keep FHA insurance in full force and effect.
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran or, in some instances, his or her spouse, to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one-to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment for the purchaser and permits the guaranty of mortgage
loans with terms, limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a dollar
limit established by the VA. The liability on the guaranty is reduced or
increased pro rata with any reduction or increase in amount of indebtedness, but
in no event will the amount payable on the guaranty exceed the amount of the
original guaranty. Notwithstanding the dollar and percentage limitations of the
guaranty, a mortgagee will ordinarily suffer a monetary loss only when the
difference between the unsatisfied indebtedness and the proceeds of a
foreclosure sale of mortgaged premises is greater than the original guaranty as
adjusted. The VA may, at its option, and without regard to the guaranty, make
full payment to a mortgagee of the unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
54
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Mortgage Insurance Policy may be
required by the company for VA loans in excess of amounts specified by the VA.
The amount of the additional coverage will beset forth in the related prospectus
supplement. Any VA guaranty relating to Contracts underlying a series of
certificates will be described in the related prospectus supplement.
THE COMPANY
The company is a wholly-owned subsidiary of Impac Funding Corporation.
The company was incorporated in the State of Delaware on May 6, 1996. The
company was organized for the purpose of serving as a private secondary mortgage
market conduit. The company does not have, nor is it expected in the future to
have, any significant assets. On January 29, 1998, the company changed its name
from ICIFC Secured Assets Corp. to Impac Secured Assets Corp.
The company maintains its principal office at 2037 Irvine Avenue, Suite
200, Santa Ana Heights, California 92707. Its telephone number is (714)
556-0122.
IMPAC FUNDING CORPORATION
Impac Funding Corporation, the Company's parent, will be a Seller and
may act as master servicer with respect to a mortgage pool. Impac Funding is a
mortgage banking conduit that acquires conventional one- to four-family
residential mortgage loans nationwide and has, from time to time, acquired
condominium conversion loans. Impac Funding is a non-consolidating subsidiary of
Impac Mortgage Holdings, Inc. Impac Funding primarily acquires mortgage loans
from approved correspondents.
Prior to November 1995, Impac Funding was a division of Imperial Credit
industries, Inc. In November 1995, Imperial Credit Industries, Inc. restructured
its operations pursuant to which Impac Funding became a separate corporation and
Imperial Credit Industries, Inc. contributed, among other things, all of the
outstanding nonvoting preferred stock of Impac Funding, which represents 99% of
the economic interest in Impac Funding, to Impac Mortgage Holdings, Inc., in
exchange for approximately 10% of the common stock of Impac Mortgage Holdings,
Inc. The common stock of Impac Funding was retained by Imperial Credit
industries, Inc. until March 1997 when it was distributed to certain officers
and/or directors of Impac Funding who are also officers and/or directors of
Impac Mortgage Holdings, Inc.
Impac Funding's executive offices are located at 1401 Dove Street,
Newport Beach, California 92660, and its telephone number is (949) 475-3700.
IMPAC MORTGAGE HOLDINGS, INC.
Impac Mortgage Holdings, Inc. is a publicly traded, recently formed
specialty finance company which operates three businesses: (1) long-term
investment operations, (2) conduit operations, and (3) warehouse lending
operations. The long-term investment operations is a recently-created business
that invests primarily in nonconforming residential mortgage loans and
securities backed by such loans. The conduit operations, conducted by Impac
Funding, primarily purchases and sells or securitizes non-conforming mortgage
loans, and the warehouse lending operations provides short-term lines of credit
to originators of mortgage loans. These two businesses include certain ongoing
operations contributed to Impac Mortgage Holdings by Imperial Credit Industries,
Inc., a leading specialty finance company, in November 1995. Impac
55
Mortgage Holdings is organized as a real estate investment trust for tax
purposes, which allows it generally to pass through earnings to stockholders
without federal income tax at the corporate level.
Impac Mortgage Holdings, Inc.'s executive offices are located at 20371
Irvine Avenue, Santa Ana Heights, California 92707, and its telephone number is
(714) 556-0122.
THE AGREEMENTS
GENERAL
Each series of certificates will be issued pursuant to a pooling and
servicing agreement or other agreement specified in the related prospectus
supplement. In general, the parties to a pooling and servicing agreement will
include the company, the trustee, the master servicer and, in some cases, a
special servicer. However, a pooling and servicing agreement that relates to a
trust fund that includes mortgage securities may include a party solely
responsible for the administration of the mortgage securities, and a pooling and
servicing agreement that relates to a trust fund that consists solely of
mortgage securities may not include a master servicer, special servicer or other
servicer as a party. All parties to each pooling and servicing agreement under
which securities of a series are issued will be identified in the related
prospectus supplement. Each series of notes will be issued pursuant to an
indenture. The parties to each indenture will be the related Issuer and the
trustee. The Issuer will be created pursuant to an owner trust agreement between
the company and the owner trustee.
Forms of the Agreements have been filed as exhibits to the registration
statement of which this prospectus is a part. However, the provisions of each
Agreement will vary depending upon the nature of the related securities and the
nature of the related trust fund. The following summaries describe provisions
that may appear in a pooling and servicing agreement with respect to a series of
certificates or in either the servicing agreement or indenture with respect to a
series of notes. The prospectus supplement for a series of securities will
describe any provision of the related Agreements that materially differs from
the description thereof set forth below. The company will provide a copy of the
Agreement (without exhibits) that relates to any series of securities without
charge upon written request of a holder of an offered security of the series
addressed to it at its principal executive offices specified in this prospectus
under "The Company".
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The pooling and servicing agreement or servicing agreement for each
series of securities will provide that the master servicer may not resign from
its obligations and duties except upon a determination that performance of the
duties is no longer permissible under applicable law or except (1) in connection
with a permitted transfer of servicing or (2) upon appointment of a successor
servicer reasonably acceptable to the trustee and upon receipt by the trustee of
letter from each Rating Agency generally to the effect that the resignation and
appointment will not, in and of itself, result in a downgrading of the
securities. No resignation will become effective until the trustee or a
successor servicer has assumed the master servicer's responsibilities, duties,
liabilities and obligations under the pooling and servicing agreement or
servicing agreement.
Each pooling and servicing agreement and servicing agreement will also
provide that the master servicer, the company and their directors, officers,
employees or agents will not be under any liability to the trust fund or the
securityholders for any action taken or for refraining from the taking of any
action in good faith, or for errors in judgment, unless the liability which
would otherwise be imposed was by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties or by reason of reckless
56
disregard of obligations and duties. Each pooling and servicing agreement and
servicing agreement will further provide that the master servicer, the company,
and any director, officer, employee or agent of the master servicer or the
company are entitled to indemnification by the trust fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the pooling and servicing agreement or servicing
agreement or the related series of securities, other than any loss, liability or
expense related to any specific mortgage loan or mortgage loans (except a loss,
liability or expense otherwise reimbursable pursuant to the pooling and
servicing agreement) and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of reckless disregard of obligations and duties. In
addition, each pooling and servicing agreement and servicing agreement will
provide that neither the master servicer nor the company will be under any
obligation to appear in, prosecute or defend any legal or administrative action
that is not incidental to its respective duties under the pooling and servicing
agreement or servicing agreement and which in its opinion may involve it in any
expense or liability. The master servicer or the company may, however, in its
discretion undertake any action which it may deem necessary or desirable with
respect to the pooling and servicing agreement or servicing agreement and the
rights and duties of the parties to that agreement and the interests of the
securityholders. The legal expenses and costs of the action and any resulting
liability will be expenses, costs and liabilities of the trust fund, and the
master servicer or the company, as the case may be, will be entitled
reimbursement from funds otherwise distributable to securityholders.
Any person into which the master servicer may be merged or
consolidated, any person resulting from any merger or consolidation to which the
master servicer is a party or any person succeeding to the business of the
master servicer will be the successor of the master servicer under the related
pooling and servicing agreement or servicing agreement, provided that (1) the
person is qualified to service mortgage loans on behalf of Fannie Mae or Freddie
Mac and(2) the merger, consolidation or succession does not adversely affect the
then-current ratings of the classes of securities of the related series that
have been rated. In addition, notwithstanding the prohibition on its
resignation, the master servicer may assign its rights under a pooling and
servicing agreement or servicing agreement to any person to whom the master
servicer is transferring a substantial portion of its mortgage servicing
portfolio, provided clauses (1) and (2) above are satisfied and the person is
reasonably satisfactory to the company and the trustee. In the case of an
assignment, the master servicer will be released from its obligations under the
pooling and servicing agreement or servicing agreement, exclusive of liabilities
and obligations incurred by it prior to the time of the assignment.
EVENTS OF DEFAULT AND RIGHTS UPON EVENT DEFAULT
POOLING AND SERVICING AGREEMENT
Events of default under the pooling and servicing agreement in respect
of a series of certificates, unless otherwise specified in the prospectus
supplement, will include:
o any failure by the master servicer to make a required deposit
to the Certificate Account or, if the master servicer is so
required, to distribute to the holders of any class of
certificates of the series any required payment which
continues unremedied for 5 days (or other time period
described in the related prospectus supplement) after the
giving of written notice of the failure to the master servicer
by the trustee or the company, or to the master servicer, the
company and the trustee by the holders of certificates
evidencing not less than 25% of the aggregate undivided
interests (or, if applicable, voting rights) in the related
trust fund;
57
o any failure by the master servicer duly to observe or perform
in any material respect any other of its covenants or
agreements in the pooling and servicing agreement with respect
to the series of certificates which continues unremedied for
30 days (15 days in the case of a failure to pay the premium
for any insurance policy which is required to be maintained
under the pooling and servicing agreement) after the giving of
written notice of the failure to the master servicer by the
trustee or the company, or to the master servicer, the company
and the trustee by the holders of certificates evidencing not
less than 25% of the aggregate undivided interests (or, if
applicable, voting rights) in the related trust fund;
o events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings regarding the
master servicer and some actions by the master servicer
indicating its insolvency or inability to pay its obligations,
as specified in the related pooling and servicing agreement;
and
o any failure of the master servicer to make advances as
described in this prospectus under "Description of the
Securities--Advances."
Additional events of default will be described in the related prospectus
supplement. A default pursuant to the terms of any mortgage securities included
in any trust fund will not constitute an event of default under the related
pooling and servicing agreement.
So long as an event of default remains unremedied, either the company
or the trustee may, and at the direction of the holders of certificates
evidencing not less than 51% of the aggregate undivided interests (or, if
applicable, voting rights) in the related trust fund the trustee shall, by
written notification to the master servicer and to the company or the trustee,
as applicable, terminate all of the rights and obligations of the master
servicer under the pooling and servicing agreement (other than any rights of the
master servicer as certificateholder) covering the trust fund and in and to the
mortgage loans and the proceeds thereof, whereupon the trustee or, upon notice
to the company and with the company's consent, its designee will succeed to all
responsibilities, duties and liabilities of the master servicer under the
pooling and servicing agreement (other than any obligation to purchase mortgage
loans) and will be entitled to similar compensation arrangements. In the event
that the trustee would be obligated to succeed the master servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of,
an established mortgage loan servicing institution with a net worth of at least
$15,000,000 to act as successor to the master servicer under the pooling and
servicing agreement (unless otherwise set forth in the pooling and servicing
agreement). Pending an appointment, the trustee is obligated to act as master
servicer. The trustee and the successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial master servicer under the pooling and servicing agreement.
No certificateholder will have any right under a pooling and servicing
agreement to institute any proceeding with respect to the pooling and servicing
agreement unless (1) that holder previously gave the trustee written notice of a
default that is continuing, (2) the holders of certificates evidencing not less
than 25% of the aggregate undivided interests (or, if applicable, voting
rights)in the related trust fund requested the trustee in writing to institute
the proceeding in its own name as trustee, (3) the trustee receives reasonable
security or indemnity against the costs, expenses and liabilities that may be
incurred in or because of the proceeding and (4) the trustee for a reasonable
time after receipt of the request and indemnity has neglected or refused to
institute any proceeding.
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The holders of certificates representing at least 66% of the aggregate
undivided interests (or, if applicable, voting rights) evidenced by those
certificates affected by a default or event of default may waive the default or
event of default (other than a failure by the master servicer to make an
advance); provided, however, that (1) a default or event of default under the
first or fourth items listed under "--Events of Default" above may be waived
only by all of the holders of certificates affected by the default or event of
default and (2) no waiver shall reduce in any manner the amount of, or delay the
timing of, payments received on mortgage loans which are required to be
distributed to, or otherwise materially adversely affect, any non-consenting
certificateholder.
SERVICING AGREEMENT
For a series of notes, a servicing default under the related servicing
agreement generally will include:
o any failure by the master servicer to make a required deposit
to the Certificate Account or, if the master servicer is so
required, to distribute to the holders of any class of notes
or Equity Certificates of the series any required payment
which continues unremedied for 5 business days (or other
period of time described in the related prospectus supplement)
after the giving of written notice of the failure to the
master servicer by the trustee or the Issuer;
o any failure by the master servicer duly to observe or perform
in any material respect any other of its covenants or
agreements in the servicing agreement with respect to the
series of securities which continues unremedied for 45 days
after the giving of written notice of the failure to the
master servicer by the trustee or the Issuer;
o events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings regarding the
master servicer and some actions by the master servicer
indicating its insolvency or inability to pay its obligations,
as specified in the related servicing agreement; and
o any other servicing default as set forth in the servicing
agreement.
So long as a servicing default remains unremedied, either the company
or the trustee may, by written notification to the master servicer and to the
Issuer or the trustee or trust fund, as applicable, terminate all of the rights
and obligations of the master servicer under the servicing agreement (other than
any right of the master servicer as noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the mortgage loans during any period prior to the date of
the termination), whereupon the trustee will succeed to all responsibilities,
duties and liabilities of the master servicer under the servicing agreement
(other than any obligation to purchase mortgage loans) and will be entitled to
similar compensation arrangements. In the event that the trustee would be
obligated to succeed the master servicer but is unwilling so to act, it may
appoint (or if it is unable so to act, it shall appoint) or petition a court of
competent jurisdiction for the appointment of an approved mortgage servicing
institution with a net worth of at least $15,000,000 to act as successor to the
master servicer under the servicing agreement (unless otherwise set forth in the
servicing agreement). Pending the appointment, the trustee is obligated to act
in the capacity. The trustee and the successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial master servicer under the servicing agreement.
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INDENTURE
For a series of notes, an event of default under the indenture
generally will include:
o a default for five days or more (or other period of time
described in the related prospectus supplement) in the payment
of any principal of or interest on any note of the series;
o failure to perform any other covenant of the company or the
trust fund in the indenture which continues for a period of
thirty days after notice thereof is given in accordance with
the procedures described in the related prospectus supplement;
o any representation or warranty made by the company 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 the series having been incorrect
in a material respect as of the time made, and the breach is
not cured within thirty days after notice thereof is given in
accordance with the procedures described in the related
prospectus supplement;
o events of bankruptcy, insolvency, receivership or liquidation
of the company or the trust fund, as specified in the
indenture; or
o any other event of default provided with respect to notes of
that series.
If an event of default with respect to the notes of any series at the
time outstanding occurs and is continuing, the trustee or the holders of a
majority of the then aggregate outstanding amount of the notes of the series may
declare the principal amount of all the notes of the series to be due and
payable immediately. The declaration may, in some circumstances, be rescinded
and annulled by the holders of a majority in aggregate outstanding amount of the
related notes.
If following an event of default with respect to any series of notes,
the notes of the series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue to
apply payments on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the notes of a
series following an event of default, unless (1) the holders of 100% of the then
aggregate outstanding amount of the notes of the series consent to the sale, (2)
the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding notes of
the series at the date of the sale or (3) the trustee determines that the
collateral would not be sufficient on an ongoing basis to make all payments on
the notes as the payments would have become due if the notes had not been
declared due and payable, and the trustee obtains the consent of the holders 66
of 2/3% of the then aggregate outstanding amount of the notes of the series.
In the event that the trustee liquidates the collateral in connection
with an event of default, the indenture provides that the trustee will have a
prior lien on the proceeds of the liquidation for unpaid fees and expenses. As a
result, upon the occurrence of the event of default, the amount available for
payments to the noteholders would be less than would otherwise be the case.
However, the trustee may not institute a proceeding for the enforcement of its
lien except in connection with a proceeding for the enforcement of the lien of
the indenture for the benefit of the noteholders after the occurrence of the
event of default.
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In the event the principal of the notes of a series is declared due and
payable, as described above, the holders of the notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of the discount that is unamortized.
No noteholder or holder of an Equity Certificate generally will have
any right under an owner trust agreement or indenture to institute any
proceeding with respect to the Agreement unless (1) that holder previously has
given to the trustee written notice of default and the continuance thereof, (2)
the holders of notes or Equity Certificates of any class evidencing not less
than 25% of the aggregate Percentage Interests constituting that class (a) have
made written request upon the trustee to institute the proceeding in its own
name as trustee and (b) have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred in or
because of the proceeding, (3) the trustee has neglected or refused to institute
the proceeding for 60 days after receipt of the request and indemnity and (4) no
direction inconsistent with the written request has been given to the trustee
during the 60 day period by the holders of a majority of the Note Balances of
that class.
AMENDMENT
Each pooling and servicing agreement may be amended by the parties
thereto, without the consent of any of the holders of certificates covered by
the pooling and servicing agreement,
o to cure any ambiguity,
o to correct, modify or supplement any provision therein which
may be inconsistent with any other provision therein or to
correct any error,
o to change the timing and/or nature of deposits in the
Certificate Account, provided that (1) the change would not
adversely affect in any material respect the interests of any
certificateholder, as evidenced by an opinion of counsel, and
(2) the change would not adversely affect the then-current
rating of any rated classes of certificates, as evidenced by a
letter from each applicable Rating Agency,
o if a REMIC election has been made with respect to the related
trust fund, to modify, eliminate or add to any of its
provisions (A) to the extent as shall be necessary to maintain
the qualification of the trust fund as a REMIC or to avoid or
minimize the risk of imposition of any tax on the related
trust fund, provided that the trustee has received an opinion
of counsel to the effect that (1) the action is necessary or
desirable to maintain the qualification or to avoid or
minimize the risk, and (2) the action will not adversely
affect in any material respect the interests of any holder of
certificates covered by the pooling and servicing agreement,
or (B) to restrict the transfer of the REMIC Residual
Certificates, provided that the company has determined that
the then-current ratings of the classes of the certificates
that have been rated will not be adversely affected, as
evidenced by a letter from each applicable Rating Agency, and
that the amendment will not give rise to any tax with respect
to the transfer of the REMIC Residual Certificates to a
non-permitted transferee,
o to make any other provisions with respect to matters or
questions arising under the pooling and servicing agreement
which are not materially inconsistent with the provisions
thereof, provided that the action will not adversely affect in
any material respect the interests of any certificateholder,
or
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o to amend specified provisions that are not material to holders
of any class of certificates offered under this prospectus.
The pooling and servicing agreement may also be amended by the parties
thereto with the consent of the holders of certificates of each class affected
thereby evidencing, in each case, at least 66% of the aggregate Percentage
Interests constituting the class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the pooling and
servicing agreement or of modifying in any manner the rights of the holders of
certificates covered by the pooling and servicing agreement, except that the
amendment may not (1) reduce in any manner the amount of, or delay the timing
of, payments received on mortgage loans which are required to be distributed on
a certificate of any class without the consent of the holder of the certificate
or (2) reduce the aforesaid percentage of certificates of any class the holders
of which are required to consent to the amendment without the consent of the
holders of all certificates of the class covered by the pooling and servicing
agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related trust fund, the trustee will not be entitled to consent
to any amendment to a pooling and servicing agreement without having first
received an opinion of counsel to the effect that the amendment or the exercise
of any power granted to the master servicer, the company, the trustee or any
other specified person in accordance with the amendment will not result in the
imposition of a tax on the related trust fund or cause the trust fund to fail to
qualify as a REMIC.
With respect to each series of notes, each related servicing agreement
or indenture may be amended by the parties thereto without the consent of any of
the holders of the notes covered by the Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that the action
will not adversely affect in any material respect the interests of any holder of
notes covered by the Agreement. Each Agreement may also be amended by the
parties thereto with the consent of the holders of notes evidencing not less
than 66% of the voting rights, for any purpose; provided, however, that the
amendment may not:
(1) reduce in any manner the amount of or delay the timing of,
payments received on trust fund assets which are required to
be distributed on any certificate without the consent of the
holder of the certificate,
(2) adversely affect in any material respect the interests of the
holders of any class of notes in a manner other than as
described in (1), without the consent of the holders of notes
of the class evidencing not less than 66% of the aggregate
voting rights of the class or
(3) reduce the aforesaid percentage of voting rights required for
the consent to the amendment without the consent of the
holders of all notes covered by the Agreement then
outstanding.
The voting rights evidenced by any security will be the portion of the voting
rights of all of the securities in the related series allocated in the manner
described in the related prospectus supplement.
TERMINATION; RETIREMENT OF SECURITIES
The obligations created by the related Agreements for each series of
securities (other than the limited payment and notice obligations of the trustee
and the company, respectively) will terminate upon the payment to
securityholders of that series of all amounts held in the Certificate Account or
by the master servicer and
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required to be paid to them pursuant to the Agreements following the earlier of
(1) the final payment or other liquidation or disposition (or any advance with
respect thereto) of the last mortgage loan, REO property and/or mortgage
security subject thereto and (2) the purchase by the master servicer or the
company or (a) if specified in the related prospectus supplement with respect to
each series of certificates, by the holder of the REMIC Residual Certificates
(see "Federal Income Tax Consequences" below) or (b)if specified in the
prospectus supplement with respect to each series of notes, by the holder of the
Equity Certificates, from the trust fund for the series of all remaining
mortgage loans, REO properties and/or mortgage securities. In addition to the
foregoing, the master servicer or the company will have the option to purchase,
in whole but not in part, the securities specified in the related prospectus
supplement in the manner set forth in the related prospectus supplement. With
respect to any series of certificates, the purchase shall not be made unless
either: (1) the aggregate principal balance of the certificates as of the date
is equal to or less than the percentage specified in the related prospectus
supplement (which shall not be greater than 10%) of the aggregate principal
balance of the certificates as of the Closing Date or (2) the aggregate
principal balance of the mortgage loans as of the date is equal to or less than
the percentage specified in the related prospectus supplement (which shall not
be greater than 10%) of the aggregate principal balance of the mortgage loans as
of the cut-off date. With respect to any series of notes, the purchase shall not
be made unless the aggregate principal balance of the notes as of the date is
equal to or less than the percentage specified in the related prospectus
supplement (which shall not be greater than 25%) of the aggregate principal
balance of the notes as of the Closing Date or a period specified in the related
prospectus supplement (which shall not be shorter than seven years)has elapsed
since the initial distribution date. Upon the purchase of the securities or at
any time thereafter, at the option of the master servicer or the company, the
assets of the trust fund may be sold, thereby effecting a retirement of the
securities and the termination of the trust fund, or the securities so purchased
may be held or resold by the master servicer or the company. In no event,
however, 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 persons
named in the pooling and servicing agreement. Written notice of termination of
the pooling and servicing agreement will be given to each securityholder, and
the final distribution will be made only upon surrender and cancellation of the
securities at an office or agency appointed by the trustee which will be
specified in the notice of termination. If the securityholders are permitted to
terminate the trust under the applicable pooling and servicing agreement, a
penalty may be imposed upon the securityholders based upon the fee that would be
foregone by the master servicer because of the termination.
The purchase of mortgage loans and property acquired in respect of
mortgage loans evidenced by a series of securities shall be made at the option
of the master servicer, the company or, if applicable, the holder of the REMIC
Residual Certificates or Equity Certificates at the price specified in the
related prospectus supplement. The exercise of the right will effect early
retirement of the securities of that series, but the right of the master
servicer, the company or, if applicable, the holder to so purchase is subject to
the aggregate principal balance of the mortgage loans and/or mortgage securities
in the trust fund for that series as of the distribution date on which the
purchase proceeds are to be distributed to securityholders being less than the
percentage specified in the related prospectus supplement of the aggregate
principal balance of the mortgage loans and/or mortgage securities at the
cut-off date for that series. The prospectus supplement for each series of
securities will set forth the amounts that the holders of the securities will be
entitled to receive upon the early retirement. The early termination may
adversely affect the yield to holders of the securities. With respect to any
series of certificates, an optional purchase of the mortgage loans in the
related trust fund may not result in the related certificates receiving an
amount equal to the principal balance thereof plus accrued and unpaid interest
and any undistributed shortfall on the related certificates. If a REMIC election
has been made, the termination of the related trust fund will be effected in a
manner consistent with applicable federal income tax regulations and its status
as a REMIC.
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Following any optional termination, there will be no continuing direct
or indirect liability of the trust fund or any securityholder as sellers of the
assets of the trust fund.
THE TRUSTEE
The trustee under each pooling and servicing agreement and indenture
will be named in the related prospectus supplement. The commercial bank,
national banking association, banking corporation or trust company that serves
as trustee may have typical banking relationships with the company and its
affiliates. The trustee shall at all times be a corporation or an association
organized and doing business under the laws of any state or the United States of
America, authorized under the laws to exercise corporate trust powers, having a
combined capital and surplus of at least $15,000,000 and subject to supervision
or examination by federal or state authority.
DUTIES OF THE TRUSTEE
The trustee for each series of securities will make no representation
as to the validity or sufficiency of the related Agreements, the securities or
any underlying mortgage loan, mortgage security or related document and will not
be accountable for the use or application by or on behalf of any master servicer
or special servicer of any funds paid to the master servicer or special servicer
in respect of the securities or the underlying mortgage loans or mortgage
securities, or any funds deposited into or withdrawn from the Certificate
Account for the series or any other account by or on behalf of the master
servicer or special servicer. If no event of default has occurred and is
continuing, the trustee for each series of securities will be required to
perform only those duties specifically required under the related pooling and
servicing agreement or indenture. However, upon receipt of any of the various
certificates, reports or other instruments required to be furnished to it
pursuant to the related Agreement, a trustee will be required to examine the
documents and to determine whether they conform to the requirements of the
agreement.
SOME MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related prospectus supplement,
the fees and normal disbursements of any trustee may be the expense of the
related master servicer or other specified person or may be required to be borne
by the related trust fund.
The trustee for each series of securities generally will be entitled to
indemnification, from amounts held in the Certificate Account for the series,
for any loss, liability or expense incurred by the trustee in connection with
the trustee's acceptance or administration of its trusts under the related
pooling and servicing agreement or indenture unless the loss, liability, cost or
expense was incurred by reason of willful misfeasance, bad faith or gross
negligence on the part of the trustee in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations or duties.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may resign at any time, in which event the company will be
obligated to appoint a successor trustee. The company may also remove the
trustee if the trustee ceases to be eligible to continue under the pooling and
servicing agreement or if the trustee becomes insolvent. Upon becoming aware of
the circumstances, the company will be obligated to appoint a successor trustee.
The trustee may also be removed at anytime by the holders of securities
evidencing not less than 51% of the aggregate undivided interests (or, if
applicable, voting rights) in the related trust fund. Any resignation or removal
of the trustee and
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appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee.
YIELD CONSIDERATIONS
The yield to maturity of an offered certificate will depend on the
price paid by the holder for the certificate, the security interest rate on a
certificate entitled to payments of interest (which security interest rate may
vary if so specified in the related prospectus supplement) and the rate and
timing of principal payments (including prepayments, defaults, liquidations and
repurchases) on the mortgage loans and the allocation thereof to reduce the
principal balance of the certificate (or notional amount thereof if
applicable)and other factors.
A class of securities may be entitled to payments of interest at a
fixed security interest rate, a variable security interest rate or adjustable
security interest rate, or any combination of the security interest rates, each
as specified in the related prospectus supplement. A variable security interest
rate may be calculated based on the weighted average of the Net Mortgage Rates
of the related mortgage loans for the month preceding the distribution date if
so specified in the related prospectus supplement. As will be described in the
related prospectus supplement, the aggregate payments of interest on a class of
securities, and their yield to maturity, will be affected by the rate of payment
of principal on the securities (or the rate of reduction in the notional balance
of securities entitled only to payments of interest) and, in the case of
securities evidencing interests in ARM Loans, by changes in the Net Mortgage
Rates on the ARM Loans. See "Maturity and Prepayment Considerations" below. The
yield on the securities will also be affected by liquidations of mortgage loans
following mortgagor defaults and by purchases of mortgage loans in the event of
breaches of representations made in respect of the mortgage loans by the
company, the master servicer and others, or conversions of ARM Loans to a fixed
interest rate. See "The Mortgage Pools--Representations by Sellers" and
"Descriptions of the Securities--Assignment of Trust Fund Assets" above. Holders
of Strip Securities or a class of securities having a security interest rate
that varies based on the weighted average mortgage rate of the underlying
mortgage loans may be affected by disproportionate prepayments and repurchases
of mortgage loans having higher Net Mortgage Rates or rates applicable to the
Strip Securities, as applicable.
With respect to any series of securities, a period of time will elapse
between the date upon which payments on the related mortgage loans are due and
the distribution date on which the payments are passed through to
securityholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on the mortgage loans were distributed to
securityholders on or near the date they were due.
In general, if a class of securities is purchased at initial issuance
at a premium and payments of principal on the related mortgage loans occur at a
rate faster than anticipated at the time of purchase, the purchaser's actual
yield to maturity will be lower than that assumed at the time of purchase.
Similarly, if a class of securities is purchased at initial issuance at a
discount and payments of principal on the related mortgage loans occur at a rate
slower than that assumed at the time of purchase, the purchaser's actual yield
to maturity will be lower than that originally anticipated. The effect of
principal prepayments, liquidations and purchases on yield will be particularly
significant in the case of a series of securities having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which the class is entitled. This
class will likely be sold at a substantial premium to its principal balance and
any faster than anticipated rate of prepayments will adversely affect the yield
to holders thereof. Extremely rapid prepayments may result in the failure of the
holders to recoup their original investment. In addition, the yield to maturity
on other types of classes of securities, including Accrual Securities and
securities with a security interest rate which fluctuates inversely with or at a
multiple of an
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index, may be relatively more sensitive to the rate of prepayment on the related
mortgage loans than other classes of securities.
The timing of changes in the rate of principal payments on or
repurchases of the mortgage loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying mortgage loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
When a principal prepayment in full is made on a mortgage loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date of the prepayment, instead of for
the full accrual period, that is, the period from the due date of the preceding
scheduled payment up to the due date for the next scheduled payment. In
addition, a partial principal prepayment may likewise be applied as of a date
prior to the next scheduled due date (and, accordingly, be accompanied by
accrued interest for less than the full accrual period). However, interest
accrued and distributable on any series of securities on any distribution date
will generally correspond to interest accrued on the principal balance of
mortgage loans for their respective full accrual periods. Consequently, if a
prepayment on any mortgage loan is distributable to securityholders on a
particular distribution date, but the prepayment is not accompanied by accrued
interest for the full accrual period, the interest charged to the borrower (net
of servicing and administrative fees and any retained interest of the company)
may be less than the corresponding amount of interest accrued and otherwise
payable on the related mortgage loan, and a Prepayment Interest Shortfall will
result. If and to the extent that the shortfall is allocated to a class of
offered securities, its yield will be adversely affected. The prospectus
supplement for a series of securities will describe the manner in which the
shortfalls will be allocated among the classes of the securities. If so
specified in the related prospectus supplement, the master servicer will be
required to apply some or all of its servicing compensation for the
corresponding period to offset the amount of the shortfalls. The related
prospectus supplement will also describe any other amounts available to off set
the shortfalls. See "Servicing of Mortgage Loans--Servicing and Other
Compensation and Payment of Expenses; Retained Interest".
The trust fund with respect to any series may include convertible ARM
Loans. As is the case with conventional, fixed-rate mortgage loans originated in
a high interest rate environment which may be subject to a greater rate of
principal prepayments when interest rates decrease, convertible ARM Loans may be
subject to a greater rate of principal prepayments (or purchases by the related
subservicer or the master servicer) due to their refinancing or conversion to
fixed interest rate loans in a low interest rate environment. For example, if
prevailing interest rates fall significantly, convertible ARM Loans could be
subject to higher prepayment and conversion rates than if prevailing interest
rates remain constant because the availability of fixed-rate or other
adjustable-rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their adjustable-rate mortgages to "lock in" a lower
fixed interest rate or to take advantage of the availability of other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in
arising interest rate environment as mortgagors attempt to limit their risk of
higher rates. A rising interest rate environment may also result in an increase
in the rate of defaults on the mortgage loans. If the related subservicer or the
master servicer purchases convertible ARM Loans, a mortgagor's exercise of the
conversion option will result in a distribution of the principal portion thereof
to the securityholders, as described in this prospectus. Alternatively, to the
extent subservicers or the master servicer fail to purchase converting ARM
Loans, the mortgage pool will include fixed-rate mortgage loans.
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The rate of defaults on the mortgage loans will also affect the rate
and timing of principal payments on the mortgage loans and thus the yield on the
securities. In general, defaults on single family loans are expected to occur
with greater frequency in their early years. The rate of default on single
family loans which are refinance or limited documentation mortgage loans, and on
mortgage loans, with high loan-to-value ratios, may be higher than for other
types of mortgage loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the mortgage loans will be affected by the general
economic condition of the region of the country in which the related mortgaged
properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values.
With respect to some mortgage loans in a mortgage pool, the mortgage
rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. Under the applicable
underwriting standards, the mortgagor under each mortgage loan generally will be
qualified, or the mortgage loan otherwise approved, on the basis of the mortgage
rate in effect at origination. The repayment of the mortgage loan may thus be
dependent on the ability of the mortgagor to make larger level monthly payments
following the adjustment of the mortgage rate. In addition, the periodic
increase in the amount paid by the mortgagor of a buydown mortgage loan during
or at the end of the applicable Buydown Period may create a greater financial
burden for the mortgagor, who might not have otherwise qualified for a mortgage
under applicable underwriting guidelines, and may accordingly increase the risk
of default with respect to the related mortgage loan.
The mortgage rates on 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
Indices applicable at origination and the related Note Margins), the amount of
interest accruing on the principal balance of the mortgage loans may exceed the
amount of their minimum scheduled monthly payment. As a result, a portion of the
accrued interest on negatively amortizing mortgage loans may become Deferred
Interest which will be added to the principal balance thereof and will bear
interest at the applicable mortgage rate. The addition of the 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 upon the price at which the securities were
purchased. In addition, with respect to ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on the mortgage loan would exceed
the amount of scheduled principal and accrued interest on the principal balance
thereof, and since the excess will be applied to reduce the principal balance of
the related class or classes of securities, the weighted average life of the
securities will be reduced and may adversely affect yield to holders thereof,
depending upon the price at which the securities were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the mortgage loans in a given mortgage pool will vary depending upon
the type of mortgage loans included in the mortgage pool. The prospectus
supplement for a series of securities will contain information with respect to
the types and maturities of the mortgage loans in the related mortgage pool. All
of the mortgage loans may be prepaid without penalty in full or in part at
anytime. The prepayment experience with respect to the mortgage loans in a
mortgage pool will affect the life and yield of the related series of
securities.
With respect to balloon loans, payment of the balloon payment (which,
based on the amortization schedule of the mortgage loans, is expected to be a
substantial amount) will generally depend on the
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mortgagor's ability to obtain refinancing of the mortgage loans or to sell the
mortgaged property prior to the maturity of the balloon loan. 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 mortgagor's
financial situation, prevailing mortgage loan interest rates, the mortgagor's
equity in the related mortgaged property, tax laws and prevailing general
economic conditions. None of the company, the master servicer, or any of their
affiliates will be obligated to refinance or repurchase any mortgage loan or to
sell the mortgaged property.
The extent of prepayments of principal of the mortgage loans may be
affected by a number of factors, including solicitations and the availability of
mortgage credit, the relative economic vitality of the area in which the
mortgaged properties are located and, in the case of multifamily, commercial and
mixed-use loans, the quality of management of the mortgage properties, the
servicing of the mortgage loans, possible changes in tax laws and other
opportunities for investment. In addition, the rate of principal payments on the
mortgage loans may be affected by the existence of lock-out periods and
requirements that principal prepayments be accompanied by prepayment premiums,
as well as due-on- sale and due-on-encumbrance provisions, and by the extent to
which the provisions may be practicably enforced. See "Servicing of Mortgage
Loans--Collection and Other Servicing Procedures" and "Legal Aspects of the
Mortgage Loans--Enforceability of Some Provisions" for a description of
provisions of the pooling and servicing agreement and legal aspects of mortgage
loans that may affect the prepayment experience on the mortgage loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (1) converting
to a fixed rate loan and thereby "locking in" the rate or (2) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the mortgage rates on ARM
Loans will be subject to periodic adjustments, the adjustments generally will
not increase or decrease the mortgage rates by more than a fixed percentage
amount on each adjustment date, will not increase the mortgage rates over a
fixed percentage amount during the life of any ARM Loan and will be based on an
index (which may not rise and fall consistently with mortgage interest
rates)plus the related Note Margin (which may be different from margins being
used at the time for newly originated adjustable rate mortgage loans). As a
result, the mortgage rates on the ARM Loans at any time may not equal the
prevailing rates for similar, newly originated adjustable rate mortgage loans.
In high interest rate environments, the prevailing rates on fixed-rate mortgage
loans may be sufficiently high in relation to the then-current mortgage rates on
newly originated ARM Loans that the rate of prepayment may increase as a result
of refinancings. There can be no assurance as to the rate of prepayments on the
mortgage loans during any period or over the life of any series of securities.
If the applicable pooling and servicing agreement for a series
obscurities provides for a pre-funding account or other means of funding the
transfer of additional mortgage loans to the related trust fund, as described
under "Description of the Securities--Pre-Funding Account" in this prospectus,
and the trust fund is unable to acquire the additional mortgage loans within any
applicable time limit, the amounts set aside for the purpose may be applied as
principal payments on one or more classes of securities of the series. See
"Yield Considerations."
There can be no assurance as to the rate of prepayment of the mortgage
loans. The company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios
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of mortgage loans such as the mortgage loans over an extended period of time.
All statistics known to the company that have been compiled with respect to
prepayment experience on mortgage loans indicate that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities. No representation is made
as to the particular factors that will affect the prepayment of the mortgage
loans or as to the relative importance of these factors.
As described in this prospectus and in the prospectus supplement,
teamster servicer, the company or a person specified in the related prospectus
supplement (other than holder of any class of offered certificates, other than
the REMIC Residual Certificates, if offered) may have the option to purchase the
assets in a trust fund and effect early retirement of the related series
obscurities. See "The Agreements--Termination; Retirement of Securities."
LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion summarizes legal aspects of mortgage loans
that is general in nature. The summaries do not purport to be complete. They do
not reflect the laws of any particular state nor the laws of all states in which
the mortgaged properties may be situated. This is because these legal aspects
are governed in part by the law of the state that applies to a particular
mortgaged property and the laws of the states may vary substantially. You should
refer to the applicable federal and state laws governing the mortgage loans.
MORTGAGES
Each single family, multifamily, commercial and mixed-use loan and, if
applicable, the Contracts (in each case other than cooperative mortgage
loans),will be evidenced by a note or bond and secured by an instrument granting
a security interest in real property, which may be a mortgage, deed of trust or
a deed to secure debt, depending upon the prevailing practice and law in the
state in which the related mortgaged property is located, and may have first,
second or third priority. Mortgages and deeds to secure debt are referred to
as"mortgages." Contracts evidence both the obligation of the obligor to repay
the loan evidenced thereby and grant a security interest in the related
Manufactured Homes to secure repayment of the loan. However, as Manufactured
Homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that Manufactured Homes may become subject to real estate title and
recording laws. See "--Contracts" below. In some states, a mortgage or deed of
trust creates alien upon the real property encumbered by the mortgage or deed of
trust. However, in other states, the mortgage or deed of trust conveys legal
title to the property respectively, to the mortgagee or to a trustee for the
benefit of the mortgagee subject to a condition subsequent (i.e., the payment of
the indebtedness secured thereby). The lien created by the mortgage or deed of
trust is not prior to the lien for real estate taxes and assessments and other
charges imposed under governmental police powers. Priority between mortgages
depends on their terms or on the terms of separate subordination or inter-credit
or agreements, the knowledge of the parties in some cases and generally on the
order of recordation of the mortgage in the appropriate recording office. There
are two parties to a mortgage, the mortgagor, who is the borrower and homeowner,
and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. In the case
of a land trust, there are three parties because title to the property is held
by a land trustee under a land trust agreement of which the borrower is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: the trustor who is the
borrower-homeowner; the beneficiary who is the lender; and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The
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trustee's authority under a deed of trust, the grantee's authority under a deed
to secure debt and the mortgagee's authority under a mortgage are governed by
the law of the state in which the real property is located, the express
provisions of the deed of trustor mortgage, and, in deed of trust transactions,
the directions of the beneficiary.
COOPERATIVE MORTGAGE LOANS
If specified in the prospectus supplement relating to a series of
certificates, the mortgage loans and Contracts may include cooperative mortgage
loans. Each mortgage note evidencing a cooperative mortgage loan will be secured
by a security interest in shares issued by the related Cooperative, and in the
related proprietary lease or occupancy agreement granting exclusive rights to
occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon the shares of the Cooperative, the priority of
which will depend on, among other things, the terms of the particular security
agreement as well as the order of recordation and/or filing of the agreement (or
financing statements related thereto) in the appropriate recording office.
All Cooperative buildings relating to the cooperative mortgage loans
are located primarily in the State of New York. Generally, each Cooperative owns
in fee or has a long-term 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 an underlying mortgage (or mortgages) on the
Cooperative's 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 mortgagor or lessor, as the case may be, is also responsible for fulfilling
the mortgage or rental obligations. An underlying mortgage loan is ordinarily
obtained by the Cooperative in connection with either the construction or
purchase of the Cooperative's building or the 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 is generally subordinate
to the interest of the holder of an underlying 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 an underlying mortgage, the mortgagee holding an
underlying 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. In
addition, an underlying 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 the
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 agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
mortgagee who financed the purchase by an individual tenant-stockholder of
shares of the Cooperative or, in the case of the mortgage loans, the collateral
securing the cooperative mortgage loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative pursuant to the
proprietary lease, which payment represents the tenant-stockholder's
proportional share of the Cooperative's payments for its underlying mortgage,
real property taxes, maintenance expenses and other capital or ordinary
expenses. An ownership interest in a
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Cooperative and accompanying occupancy rights may be financed through a
cooperative mortgage loan evidenced by a mortgage 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 shares of the related Cooperative.
The mortgagee 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 agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the mortgagee'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 mortgage 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 on Shares of Cooperatives"below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Code) of a corporation that qualifies as a "cooperative housing
corporation"within the meaning of Section 216(b)(1) of the Code is allowed a
deduction for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of interest expenses and real estate taxes
allowable asa deduction under Section 216(a) of the Code to the corporation
under Sections 163 and 164 of the Code. In order for a corporation to qualify
under Section216(b)(1) of the Code for its taxable year in which the items are
allowable as a deduction to the corporation, the section requires, among other
things, that at least 80% of the gross income of the corporation be derived from
its tenant-stockholders. By virtue of this requirement, the status of a
corporation for purposes of Section 216(b)(1) of the Code must be determined on
a year-to-year basis. Consequently, there can be no assurance that Cooperatives
relating to the cooperative mortgage loans will qualify under the section for
any particular year. In the event that the Cooperative fails to qualify for one
or more years, the value of the collateral securing any related cooperative
mortgage loans could be significantly impaired because no deduction would be
allowable to tenant- stockholders under Section 216(a) of the Code with respect
to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that a failure would be permitted to continue over a
period of years appears remote.
LEASES AND RENTS
Mortgages that encumber income-producing multifamily and commercial
properties often 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 (unless rents
are to be paid directly to the lender) 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.
CONTRACTS
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Financing statements are
effective for five years and must be renewed prior to the end of each five year
period. The certificate of title laws adopted by the majority of states provide
that ownership of motor vehicles
71
and manufactured housing shall be evidenced by a certificate of title issued by
the motor vehicles department (or a similar entity) of the state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of the
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to the office, depending on state law.
The master servicer will be required under the related pooling and
servicing agreement or servicing agreement to effect the notation or delivery of
the required documents and fees, and to obtain possession of the certificate of
title, as appropriate under the laws of the state in which any Manufactured Home
is registered. In the event the master servicer fails, due to clerical errors or
otherwise, to effect the 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 trustee 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 by the borrowers to move them, courts in many states have
held that manufactured homes 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. In order 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. Generally, Contracts will
contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor 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 Seller and transferred to the
company.
The company will assign or cause to be assigned a security interest in
the Manufactured Homes to the trustee, on behalf of the securityholders. Neither
the company, the master servicer nor the trustee will amend the certificates of
title to identify the trustee, on behalf of the securityholders, as the new
secured party and, accordingly, the company or the Seller will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, the assignment is an effective conveyance of
the security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the company's rights
as the secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, the assignment of the
security interest might not be held effective against creditors of the company
or Seller.
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 company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee 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 company
has failed to perfect or cause to be perfected the security interest assigned to
the trust fund, the 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, on
behalf of the securityholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the trustee
could be released.
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In the event that 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 the relocation and
thereafter until the owner re-registers the Manufactured Home in the state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in the state, and if the company did not take steps
tore-perfect its security interest in the 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 company 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 company would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the company 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.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it 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 each related pooling and servicing agreement or servicing agreement,
the master servicer will be obligated to take these steps, at the master
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 take priority even over a perfected security interest. The
company will obtain the representation of the related Seller that it has no
knowledge of any of these liens with respect to any Manufactured Home securing a
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 in the event
this type of lien arises.
FORECLOSURE ON MORTGAGES AND SOME CONTRACTS
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
which authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In addition to any notice
requirements contained in a deed of trust, in some states, the trustee must
record a notice of default and send a copy to the borrower trustor and to any
person who has recorded a request for a copy of notice of default and notice of
sale. In addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within a specified
period, a notice of sale must be posted in a public place and, in most states,
published for a specific period of time in one or more newspapers in a specified
manner prior to the date of trustee's sale. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the real property.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in these states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the
73
mortgagee's right to foreclose is contested, the legal proceedings necessary to
resolve the issue can be time-consuming.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the mortgagor's debt will be extinguished unless the
lender purchases the property for a lesser amount in order to preserve its right
against a borrower to seek a deficiency judgment and the remedy is available
under state law and the related loan documents. In the same states, there is a
statutory minimum purchase price which the lender may offer for the property and
generally, state law controls the amount of foreclosure costs and expenses,
including attorneys' fees, which may be recovered by a lender. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making the repairs at its
own expense as are necessary to render the property suitable for sale.
Generally, the lender will obtain the services of a real estate broker and pay
the broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property and, in some states, the
lender may be entitled to a deficiency judgment. Any loss may be reduced by the
receipt of any mortgage insurance proceeds or other forms of credit enhancement
for a series of certificates. See "Description of Credit Enhancement".
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages. The junior
mortgagee must either pay the entire amount due on the senior mortgages prior to
or at the time of the foreclosure sale or undertake to pay on any senior
mortgages that the mortgagor is currently in a state of default under. Under
either course of action, the junior mortgagee may add the amounts paid to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those single family loans which
are junior mortgage loans, if the lender purchases the property, the lender's
title will be subject to all senior liens and claims and 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 or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust 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 mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
lender to foreclose if the default under the mortgage instrument is not
74
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with
the rights of the tenant- stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The Cooperative may cancel the proprietary lease or occupancy
agreement, even while pledged, for failure by the tenant- stockholder to pay its
obligations or charges owed by the tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by the tenant-stockholder.
Generally, obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the Cooperative are made liens upon the
shares to which the proprietary lease or occupancy agreement relates. In
addition, the Cooperative may generally terminate a proprietary lease or
occupancy agreement in the event the borrower breaches its covenants in the
proprietary lease or occupancy agreement. Typically, the lender and the
Cooperative enter into a recognition agreement which, together with any lender
protection provisions contained in the proprietary lease or occupancy agreement,
establishes the rights and obligations of both parties in the event of a default
by the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. 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, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and 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 a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
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 amount realized upon a sale of
the collateral below the outstanding principal balance of the cooperative
mortgage loan and accrued and unpaid interest on the loan.
Recognition agreements also generally provide that in the event the
lender succeeds to the tenant- shareholder's shares and proprietary lease or
occupancy agreement as the result of realizing upon its collateral for a
cooperative mortgage loan, the lender must obtain the approval or consent of the
board of directors of the Cooperative as required by the proprietary lease
before transferring the Cooperative shares or assigning the proprietary lease.
The approval or consent is usually based on the prospective purchaser's income
and net worth, among other factors, and may significantly reduce the number of
potential purchasers, which could limit the ability of the lender to sell and
realize upon the value of the collateral. Generally, the lender is not limited
in any rights it may have to dispossess the tenant- stockholder.
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Because of the nature of cooperative mortgage loans, lenders do not
require the tenant-stockholder (i.e., the borrower) to obtain title insurance of
any type. Consequently, the existence of any prior liens or other imperfections
of title affecting the Cooperative's building or real estate also may adversely
affect the marketability of the shares allocated to the dwelling unit in the
event of foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York UCC
and the security agreement relating to those shares. Article 9 of the New York
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a 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 sale and the sale price. Generally, a sale conducted
according to the usual practice of banks selling similar collateral in the same
area 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 Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender 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. See "--Anti-Deficiency Legislation and
other Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO CONTRACTS
GENERAL. Repossession of manufactured housing is governed by state law.
A few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of the home in the
event of a default by the obligor generally will be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for there
possession of manufactured housing. While the UCC as adopted by the various
states may vary in small particulars, the general repossession procedure
established by the UCC is as follows:
o Except in those states where the debtor must receive notice of
the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession
may be effected either through self-help (peaceable retaking
without court order), voluntary
repossession or through judicial process (repossession
pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession
of the manufactured home. In cases in which the debtor objects
or raises a defense to repossession, a court order must be
obtained from the appropriate state court, and the
manufactured home must then be repossessed in accordance with
that order. Whether the method employed is self-help,
voluntary repossession or judicial repossession, the
repossession can be accomplished either by an actual physical
removal of the manufactured home to a secure location for
refurbishment and resale or by removing the occupants and
their belongings from the manufactured home and maintaining
possession of the manufactured home on the location where the
occupants were residing. Various factors may affect whether
the manufactured home is physically removed or left on
location, such as the nature and term of the lease of the site
on which it is located and the condition of the unit. In many
cases, leaving the
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manufactured home on location is preferable, in the event that
the home is already set up, because the expenses of retaking
and redelivery will be saved. However, in those cases where
the home is left on location, expenses for site rentals will
usually be incurred.
o Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence.
The disposition may be by public or private sale provided the
method, manner, time, place and terms of the sale are
commercially reasonable.
o Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to
satisfaction of the indebtedness. While some states impose
prohibitions or limitations on deficiency judgments if the net
proceeds from resale do not cover the full amount of the
indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgement in those states that do not
prohibit or limit the judgments. The deficiency judgment is a
personal judgment against the debtor for the shortfall.
Occasionally, after resale of a manufactured home and payment
of all expenses and indebtedness, there is a surplus of funds.
In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor.
Because the defaulting owner of a manufactured home generally
has very little capital or income available following
repossession, a deficiency judgment may not be sought in many
cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial
condition.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
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RIGHTS OF REDEMPTION
SINGLE FAMILY, MULTIFAMILY AND COMMERCIAL PROPERTIES. The purposes of a
foreclosure action in respect of a mortgaged property is to enable the lender to
realize upon its security and to bar the borrower, and all persons who have
interests in the property that are subordinate to that of the foreclosing
lender, from exercise of their "equity of redemption". The doctrine of equity of
redemption provides that, until the property encumbered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having interests that are subordinate to that of the foreclosing lender
have an equity of redemption and may redeem the property by paying the entire
debt with interest. 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 terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from 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. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchase through a foreclosure. 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.
MANUFACTURED HOMES. While state laws do not usually require notice to
be given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
SINGLE FAMILY, MULTIFAMILY AND COMMERCIAL LOANS. Some states have
imposed statutory prohibitions which limit the remedies of a beneficiary under a
deed of trust or a mortgagee under a mortgage. In some states (including
California), statutes limit the right of the beneficiary or mortgagee to obtain
a deficiency judgment against the borrower following non-judicial foreclosure by
power of sale. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender. In
the case of a mortgage loan secured by a property owned by a trust where the
mortgage note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust, even if
obtainable under applicable law, may be of little value to the mortgagee or
beneficiary if there are no trust assets against which the deficiency judgment
may be executed. Some state statutes require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action against
the borrower. In other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the security;
however in some of these states, the lender, following judgment on the personal
action, may be deemed to have elected a remedy and may be precluded from
exercising remedies with respect to the security. Consequently, the practical
effect of the election requirement, in those states permitting the election, is
that lenders will usually proceed against the security first rather than
bringing a personal action against the
78
borrower. Finally, in some states, statutory provisions limit any deficiency
judgment against the former borrower following a foreclosure to the excess of
the outstanding debt over the fair value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
Shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in some
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a cooperative mortgage loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments,
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 the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, under the federal Bankruptcy
Code, virtually all actions (including foreclosure actions and deficiency
judgment proceedings) to collect a debt are automatically stayed upon the filing
of the bankruptcy petition and, often, no interest or principal payments are
made during the course of the bankruptcy case. The delay and the consequences
thereof caused by the automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in a bankruptcy by or on behalf of a
junior lienor may stay the senior lender from taking action to foreclose out the
junior lien. Moreover, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearage 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 sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearage over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
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.
Tax liens arising under the Code may have 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
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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
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.
CONTRACTS. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under a contract or change the rate of interest and time of
repayment of the indebtedness.
ENVIRONMENTAL LEGISLATION
Under CERCLA, and under state law in some states, a secured party which
takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property may become liable for the
costs of cleaning up hazardous substances regardless of whether they have
contaminated the property. CERCLA imposes strict, as well as joint and several,
liability on several classes of potentially responsible parties, including
current owners and operators of the property who did not cause or contribute to
the contamination. Furthermore, liability under CERCLA is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Lenders may be held liable under CERCLA as owners or
operators unless they qualify for the secured creditor exemption to CERCLA. This
exemption exempts from the definition of owners and operators those who, without
participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility.
The Conservation Act amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws may impose liability on a secured party
which takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property on which contaminants other
than CERCLA hazardous substances are present, including petroleum, agricultural
chemicals, hazardous wastes, asbestos, radon, and lead-based paint. The cleanup
costs may be substantial. It is possible that the cleanup costs could become a
liability of a trust fund and reduce the amounts otherwise
80
distributable to the holders of the related series of certificates. Moreover,
federal statutes and states by statute may impose a lien for any cleanup costs
incurred by the state on the property that is the subject of the cleanup costs.
All subsequent liens on the property generally are subordinated to the lien and,
in some states, even prior recorded liens are subordinated to such lien. In the
latter states, the security interest of the trustee in a related parcel of real
property that is subject to the lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the company has not
made and will not make the evaluations prior to the origination of the Secured
Contracts. Neither the company nor any replacement Servicer will be required by
any Agreement to undertake these evaluations prior to foreclosure or accepting a
deed-in-lieu of foreclosure. The company does not make any representations or
warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from the
presence or effect of contaminants. However, the company will not be obligated
to foreclose on related real property or accept a deed-in-lieu of foreclosure if
it knows or reasonably believes that there are material contaminated conditions
on the property. A failure so to foreclose may reduce the amounts otherwise
available to certificateholders of the related series.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. Federal and state
law may specifically limit the amount of late charges that may be collected.
Under the related pooling and servicing agreement or servicing agreement, late
charges will be retained by the master servicer as additional servicing
compensation, and any inability to collect these amounts will not affect
payments to Securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The FTC Rule has the effect of subjecting a seller (and some related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due under the contract.
Most of the Contracts in a trust fund will be subject to the requirements of the
FTC Rule. Accordingly, the trust fund, as holder of the Contracts, will be
subject to any claims or defenses that the purchaser of the related manufactured
home may assert against the seller of the
81
manufactured home, subject to a maximum liability equal to the amounts paid by
the obligor on the Contract. If an obligor is successful in asserting the claim
or defense, and if the Seller had or should have had knowledge of the claim or
defense, the master servicer will have the right to require the Seller to
repurchase the Contract because of breach of its Seller's representation and
warranty that no claims or defenses exist that would affect the obligor's
obligation to make the required payments under the Contract. The Seller would
then have the right to require the originating dealer to repurchase the Contract
from it and might also have the right to recover from the dealer any losses
suffered by the Seller with respect to which the dealer would have been
primarily liable to the obligor.
ENFORCEABILITY OF SOME PROVISIONS
TRANSFER OF MORTGAGED PROPERTIES. Unless the related prospectus
supplement indicates otherwise, the mortgage loans generally contain due-on-sale
clauses. These clauses permit the lender to accelerate the maturity of the loan
if the borrower sells, transfers or conveys the property without the prior
consent of the lender. The enforceability of these 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, 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 limited exceptions. The Garn-St
Germain Act does "encourage" lenders to permit assumption of loans at the
original rate of interest or at some other rate less than the average of the
original rate and the market rate.
The Gain-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Gain-St Germain Act 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, some transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Gain-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
loan bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average life
of the mortgage loans and the number of mortgage loans which may be outstanding
until maturity.
TRANSFER OF MANUFACTURED HOMES. Generally, manufactured housing
contracts contain provisions prohibiting the sale or transfer of the related
manufactured homes without the consent of the obligee on the contract and
permitting the acceleration of the maturity of the contracts by the obligee on
the contract upon the sale or transfer that is not consented to. The master
servicer will, to the extent it has knowledge of the conveyance or proposed
conveyance, exercise or cause to be exercised its rights to accelerate the
maturity of the related Contracts through enforcement of due-on-sale clauses,
subject to applicable state law. In some cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the master
servicer desires to accelerate the maturity of the related Contract, the master
servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Gain-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases
teamster servicer may be prohibited from enforcing a due-on-sale clause in
respect of a Manufactured Home.
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LATE PAYMENT CHARGES AND PREPAYMENT RESTRICTIONS. Notes and mortgages,
as well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or condition
prepayments upon the borrower's payment of prepayment fees or yield maintenance
penalties. In some states, there are or may be specific limitations upon the
late charges which a lender may collect from a borrower for delinquent payments.
Some states also limit the amounts that a lender may collect from a borrower as
an additional charge if the loan is prepaid. In addition, the enforceability of
provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, 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
mortgagor 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 an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor 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.
INSTALLMENT CONTRACTS
The trust fund assets may also consist of installment sales contracts.
Under an installment contract the seller (referred to in this section as the
"lender") retains legal title to the property and enters into an agreement with
the purchaser (referred to in this section as the "borrower") for the payment of
the purchase price, plus interest, over the term of the contract. Only after
full performance by the borrower of the installment contract is the lender
obligated to convey title to the property to the purchaser. As with mortgage or
deed of trust financing, during the effective period of the installment
contract, the borrower is generally responsible for the 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 lender under an installment
contract varies on a state-by- state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in this
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the installment contract in local land records and an ejectment action
maybe necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under these statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract
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may be reinstated upon full payment of the defaulted amount and the borrower may
have a post-foreclosure statutory redemption right. In other states, courts in
equity may permit a borrower with significant investment in the property under
an installment contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse to
enforce the forfeiture clause. Nevertheless, the lender's procedures for
obtaining possession and clear title under an installment contract in a given
state are simpler and less time consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
APPLICABILITY OF USURY LAWS
Title V provides that state usury limitations shall not apply to some
types of residential first mortgage loans originated by some lenders after March
31,1980. A similar federal statute was in effect with respect to 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 which 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 or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
some kinds of manufactured housing. Contracts would be covered if they satisfy
conditions including, among other things, terms governing any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of or foreclosure with respect to
the related unit. Title V authorized any state to reimpose limitations on
interest rates and finance charges by adopting before April 1,1983 a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states adopted this type of law prior to the April 1,1983 deadline. In
addition, even where Title V was not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on loans
covered by Title V. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no Contract which imposes finance charges or provides for discount
points or charges in excess of permitted levels has been included in the trust
fund.
Usury limits apply to junior mortgage loans in many states. Any
applicable usury limits in effect at origination will be reflected in the
maximum mortgage rates for ARM Loans, as set forth in the related prospectus
supplement.
As indicated above under "The Mortgage Pools--Representations by
Sellers," each Seller of a mortgage loan will have represented that the mortgage
loan was originated in compliance with then applicable state laws, including
usury laws, in all material respects. However, the mortgage rates on the
mortgage loans will be subject to applicable usury laws as in effect from time
to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders historically have been subjected to a variety of restrictions. The
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. Title
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VIII provides that, notwithstanding any state law to the contrary, (1)
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,(2)
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 (3) 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 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, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of the provisions. Some states have taken
this action.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including components of manufactured housing such as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The company is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. In the event an obligor
is successful in asserting this claim, the related securityholders could suffer
a loss if (1) the related Seller fails or cannot be required to repurchase the
affected Contract for a breach of representation and warranty and (2) the master
servicer or the trustee were unsuccessful in asserting any claim of contribution
or subornation on behalf of the securityholders against the manufacturer or
other persons who were directly liable to the plaintiff for the damages. Typical
products liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from these
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Relief Act, a mortgagor who enters military
service after the origination of the mortgagor's mortgage loan (including a
mortgagor 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 mortgagor's
active duty status, unless a court orders otherwise upon application of the
lender. The Relief Act applies to mortgagors 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 mortgagors 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 master servicer
to collect full amounts of interest on the mortgage loans subject to the Relief
Act. Any shortfall in
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interest collections resulting from the application of the Relief Act or similar
legislation or regulations, which would not be recoverable from the related
mortgage loans, would result in a reduction of the amounts distributable to the
holders of the related securities, and would not be covered by advances by the
master servicer or other entity or by any form of credit enhancement provided in
connection with the related series of securities, unless described in the
prospectus supplement. In addition, the Relief Act imposes limitations that
would impair the ability of the master servicer to foreclose on an affected
single family loan or enforce rights under a Contract during the mortgagor's
period of active duty status, and, under some circumstances, during an
additional three month period thereafter. Thus, in the event that the Relief
Actor similar legislation or regulations applies to any mortgage loan which goes
into default, there may be delays in payment and losses on the related
securities in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the mortgage loans resulting from similar legislation
or regulations may result in delays in payments or losses to securityholders of
the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of RICO can be seized by the
government if the property was used in, or purchased with the proceeds of, these
crimes. Under procedures contained in 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.
JUNIOR MORTGAGES
Some of the mortgage loans may be secured by mortgages or deeds of
trust which are junior to senior mortgages or deeds of trust which are not part
of the trust fund. The rights of the securityholders, as mortgagee under a
junior mortgage, are subordinate to those of the mortgagee under the senior
mortgage, including the prior rights of the senior mortgagee to receive hazard
insurance and condemnation proceeds and to cause the property securing the
mortgage loan to be sold upon default of the mortgagor, which may extinguish the
junior mortgagee's lien unless the junior mortgagee asserts its subordinate
interest in the property in foreclosure litigation and, in some cases, either
reinitiates or satisfies the defaulted senior loan or loans. A junior mortgagee
may satisfy a defaulted senior loan in full or, in some states, may cure the
default and bring the senior loan current thereby reinstating the senior loan,
in either event usually adding the amounts expended to the balance due on the
junior loan. Inmost states, absent a provision in the mortgage or deed of trust,
no notice of default is required to be given to a junior mortgagee. Where
applicable law or the terms of the senior mortgage or deed of trust do not
require notice of default to the junior mortgagee, the lack of this notice may
prevent the junior mortgagee from exercising any right to reinstate the loan
which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply the proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the order the
mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event
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the property is taken by condemnation, the mortgagee or beneficiary under
underlying senior mortgages will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgages. Proceeds in excess of the amount of senior
mortgage indebtedness, inmost cases, may be applied to the indebtedness of
junior mortgages in the order of their priority.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under some mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the DIDMC and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982,which authorizes lender
to make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is the opinion of Thacher Proffitt & Wood,
counsel to the company, with respect to the anticipated material federal income
tax consequences of the purchase, ownership and disposition of offered
securities offered under this prospectus and the prospectus supplement insofar
as it relates to matters of law or legal conclusions with respect thereto. This
discussion is directed solely to securityholders that hold the securities as
capital assets within the meaning of Section 1221 of the Code and does not
purport to discuss all federal income tax consequences that may be applicable to
the individual circumstances of particular categories of investors, some of
which (such as banks, insurance companies and foreign investors) may be subject
special treatment under the Code. 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. Prospective
investors should note that no rulings have been or will be sought from the IRS
with respect to any of the federal income tax consequences discussed below, and
no assurance can be given the IRS will not take contrary positions. Taxpayers
and preparers of tax returns (including those filed by any REMIC or other
issuer) should be aware that under applicable Treasury regulations a provider of
advice on specific issues of law is not considered an income tax return preparer
unless the advice (1) is given with respect to events that have occurred at the
time the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (2) is directly relevant to the determination of an
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entry on a tax return. Accordingly, taxpayers should consult their own tax
advisors and tax return preparers regarding the preparation of any item on a tax
return, even where the anticipated tax treatment has been discussed in this
prospectus. In addition to the federal income tax consequences described in this
prospectus, 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 Consequences."
The following discussion addresses securities of three general types:
o REMIC Certificates representing interests in a trust fund, or
a portion thereof, that the REMIC Administrator will elect to
have treated as a REMIC under the REMIC Provisions of the
Code,
o notes representing indebtedness of a trust fund as to which no
REMIC election will be made, and
o Grantor Trust Certificates representing interests in a Grantor
Trust Fund as to which no REMIC election will be made.
The prospectus supplement for each series of certificates will indicate whether
a REMIC election (or elections) will be made for the related trust fund and, if
this election is to be made, will identify all "regular interests" and "residual
interests" in the REMIC. For purposes of this tax discussion, references to a
"securityholder," "certificateholder" or a "holder" are to the beneficial owner
of a security or certificate, as the case may be.
The following discussion is based in part upon the OID Regulations and
in part upon REMIC Regulations. The OID Regulations do not adequately address
issues relevant to securities such as the offered securities. In some instances,
the OID Regulations provide that they are not applicable to securities such as
the offered securities.
REMICS
CLASSIFICATION OF REMICS. On or prior to the date of the related
prospectus supplement with respect to the proposed issuance of each series of
REMIC Certificates, Thacher Proffitt & Wood, counsel to the company, will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related pooling and servicing agreement, for federal income
tax purposes,the related trust fund (or each applicable portion thereof) will
qualify as a REMIC and the REMIC Certificates offered with respect thereto will
be consideredto evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in that REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
ormore of the ongoing requirements of the Code for status as a REMIC 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, the entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates 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, no such
regulations have been issued. Any such relief, moreover, may be accompanied
bysanctions, such as the imposition of a corporate tax on all or a portion of
the REMIC's income for the period in which the requirements for status as a
REMICare not satisfied. The pooling and servicing agreement with respect to each
REMIC will include provisions designed to maintain the related trust fund's
status as a REMIC under the REMIC Provisions. It
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is not anticipated that the status of any trust fund as a REMIC will be
inadvertently terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. In general, the
REMIC Certificates will be "real estate assets" within the meaning of
Section856(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 underlying the
certificates would be so treated. Moreover, if 95% or more of the assets of the
REMIC qualify for any of the foregoing treatments at all times during a calendar
year, the REMIC Certificates will qualify for the corresponding status in their
entirety for that calendar year. Interest (including original issue discount) on
the REMIC Regular Certificates and income allocated to the class of REMIC
Residual Certificates will be interest described in Section 856(c)(3)(B) of the
Code to the extent that the certificates are treated as "real estate
assets"within the meaning of Section 856(c)(4)(A) of the Code. In addition, the
REMIC Regular Certificates will be "qualified mortgages" within the meaning of
Section860G(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's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC during the calendar quarter. The REMIC Administrator will report
those determinations to certificateholders in the manner and at the times
required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Certificates
and any 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 the 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 Code sections mentioned in the immediately preceding paragraph. In addition,
in some instances mortgage loans may not be treated entirely as assets described
in the foregoing sections of the Code. If so, the related prospectus supplement
will describe the mortgage loans that may not be so treated. The REMIC
Regulations do provide, however, that cash received from payments on mortgage
loans held pending distribution is considered part of the mortgage loans for
purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES. For some series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
trust fund as REMICs for federal income tax purposes. As to each such series of
REMIC Certificates, in the opinion of counsel to the company, assuming with all
provisions of the related pooling and servicing agreement, each of the REMICs in
that trust fund will qualify as a REMIC and the REMIC Certificates issued by
these REMICs will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates 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 the certificates is interest described in
Section 856(c)(3)(B) of the Code, all of the REMICs in that trust fund will be
treated as one REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in
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the REMIC or its assets.Moreover, holders of REMIC Regular Certificates that
otherwise report incomeunder a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
ORIGINAL ISSUE DISCOUNT. A REMIC Regular Certificate may be issued with
"original issue discount" within the meaning of Section 1273(a) of the Code. Any
holder of a REMIC Regular Certificate issued with original issue discount
generally will be required to include original issue discount in income as it
accrues, in accordance with the "constant yield" method described below, in
advance of the receipt of the cash attributable to that income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and some other debt instruments issued with original issue
discount. Regulations have not been issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to mortgage loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of that discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Committee Report indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must
bethe same as that used in pricing the initial offering of the REMIC Regular
Certificate. The Prepayment Assumption used in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
none of the company, the master servicer or the trustee will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of REMIC Regular Certificates will
be the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers and
underwriters). If less than a substantial amount of a particular class of REMIC
Regular Certificates is sold for cash on or prior to the Closing Date, the issue
price for that class will be the fair market value of that class on the Closing
Date. Under the OID Regulations, the stated redemption price of a REMIC Regular
Certificate is equal to the total of all payments to be made on the certificate
other than "qualified stated interest." "Qualified stated interest" is interest
that is unconditionally payable at least annually (during the entire term of the
instrument) at a single fixed rate, or at a "qualified floating rate,"
an"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that does not operate in a manner that
accelerates or defers interest payments on the REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
the REMIC Regular Certificates. If the original issue discount rules apply to
the certificates in a particular series, the related prospectus supplement will
describe the manner in which these rules will be applied with respect to the
certificates in that series that bear an adjustable interest rate in preparing
information returns to the certificateholders and the IRS.
The first interest payment on a REMIC Regular Certificate may be made
more than one month after the date of issuance, which is a period longer than
the subsequent monthly intervals between interest payments. Assuming the
"accrual period" (as defined below) for original issue discount is each monthly
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period that ends on the day prior to each distribution date, in some cases, as a
consequence of this "long first accrual period," some or all interest payments
may be required to be included in the stated redemption price of the REMIC
Regular Certificate and accounted for as original issue discount. Because
interest on REMIC Regular Certificates must in any event be accounted for under
an accrual method, applying this analysis would result in only a slight
difference in the timing of the inclusion in income of the yield on the REMIC
Regular Certificates.
In addition, if the accrued interest to be paid on the first
distribution date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect the accrued interest. In such cases, information
returns to the certificateholders and the IRS will be based on the position that
the portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of the
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next distribution date) and
that portion of the interest paid on the first distribution date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first distribution date should be included in the stated
redemption price of the REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of the accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first distribution date. It is unclear how an election to do so would be
made under the OIL Regulations and whether such an election could be made
unilaterally by a certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of a REMIC Regular Certificate is computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of the REMIC Regular Certificate, by multiplying (1) the number of
complete years (rounding down for partial years) from the issue date until that
payment is expected to be made (presumably taking into account the Prepayment
Assumption) by (2) a fraction, the numerator of which is the amount of the
payment, and the denominator of which is the stated redemption price at maturity
of the REMIC Regular Certificate. Under the OID Regulations, original issue
discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each paymentof stated principal
is made, based on the product of the total amount of de minimis original issue
discount attributable to that certificate and a fraction, the numerator of which
is the amount of the principal payment and the denominator of which is the
outstanding stated principal amount of the REMIC Regular Certificate. The OID
Regulations also would permit a certificateholder to elect to accrue de minimis
original issue discount into income currently based on a constant yield method.
See "Taxation of Owners of REMIC Regular Certificates--Market Discount" for a
description of this election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of the certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held the REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, each period that ends on a date
that corresponds to the day prior to each distribution date and begins on the
first day following the immediately preceding accrual period (or in the case of
the first such period, begins on the Closing Date), a calculation will be made
of the portion of the original issue discount that accrued during the accrual
period. The portion of original issue discount that
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accrues in any accrual period will equal the excess, if any, of (1) the sum of
(a) the present value, as of the end of the accrual period, of all of the
distributions remaining to be made on the REMIC Regular Certificate, if any, in
future periods and (b) the distributions made on the REMIC Regular Certificate
during the accrual period of amounts included in the stated redemption price,
over (2) the adjusted issue price of the REMIC Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (1)
assuming that distributions on the REMIC Regular Certificate will be received in
future periods based on the mortgage loans being prepaid at a rate equal to the
Prepayment Assumption, (2) using a discount rate equal to the original yield to
maturity of the certificate and (3) taking into account events (including actual
prepayments) that have occurred before the close of the accrual period. For
these purposes, the original yield to maturity of the certificate will be
calculated based on its issue price and assuming that distributions on the
certificate will be made in all accrual periods based on the mortgage loans
being prepaid at a rate equal to the Prepayment Assumption. The adjusted issue
price of a REMIC Regular Certificate at the beginning of any accrual period will
equal the issue price of the certificate, increased by the aggregate amount of
original issue discount that accrued with respect to the certificate in prior
accrual periods, and reduced by the amount of any distributions made on the
certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for that day.
A subsequent purchaser of a REMIC Regular Certificate that purchases a
certificate that is treated as having been issued with original issue discount
at a cost (excluding any portion of the cost attributable to accrued qualified
stated interest) less than its remaining stated redemption price will also be
required to include in gross income the daily portions of any original issue
discount with respect to the certificate. However, each such daily portion will
be reduced, if the cost of the certificate is in excess of its "adjusted issue
price," in proportion to the ratio the excess bears to the aggregate original
issue discount remaining to be accrued on the REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (1) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of the certificate at the beginning of the accrual
period which includes that day and (2) the daily portions of original issue
discount for all days during the accrual period prior to that day.
MARKET DISCOUNT. A certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a certificateholder generally will be required to allocate the portion
of each distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
Regulations permit a certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) in income as interest,
and to amortize premium, based on a constant yield method. If such an election
were made with respect to a REMIC Regular Certificate with market discount, the
certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that the certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a certificateholder that made this election for a certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premiumthat
the
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certificateholder owns or acquires. See "Taxation of Owners of REMIC Regular
Certificates--Premium" below. Each of these elections to accrueinterest,
discount and premium with respect to a certificate on a constant yield method or
as interest would be irrevocable, except with the approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate
willbe considered to be de minimis for purposes of Section 1276 of the Code if
the market discount is less than 0.25% of the remaining stated redemption price
of the REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity
ofobligations, and it is likely that the same rule will be applied with respect
to market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. This treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, the rules
described in the Committee Report apply. The Committee Report indicates that in
each accrual period market discount on REMIC Regular Certificates should accrue,
at thecertificateholder's option: (1) on the basis of a constant yield method,
(2) in the case of a REMIC Regular Certificate issued without original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the stated interest paid in the accrual period bears to the total
amount of stated interest remaining to be paid on the REMIC Regular Certificate
as of the beginning of the accrual period, or (3) in the case of a REMIC Regular
Certificate issued with original issue discount, in an amount that bears the
same ratio to the total remaining market discount as the original issue discount
accrued in the accrual period bears to the total original issue discount
remaining on the REMIC Regular Certificate at the beginning of the accrual
period. Moreover, the Prepayment Assumption used in calculating the accrual of
original issue discount is also used in calculating the accrual of market
discount. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect these regulations might have
on the tax treatment of a REMIC Regular Certificate purchased at a discount in
the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which the discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of the certificate 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.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions forthe
taxable year attributable to any indebtedness incurred or continued to purchase
or carry a REMIC Regular Certificate purchased with market discount. For these
purposes, the de minimis rule referred to above applies. Any such deferred
interest expense would not exceed the market discount that accrues during the
taxable year and is, in general, allowed as a deduction not later than the year
in which the market discount is includible in income. If a holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by the holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
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PREMIUM. A REMIC Regular Certificate purchased at a cost (excluding any
portion of the cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of a REMIC Regular Certificate may elect under Section
171of the Code to amortize the premium under the constant yield method over the
life of the certificate. If made, the election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether the certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
REALIZED LOSSES. Under Section 166 of the Code, both corporate holders
of the REMIC Regular Certificates and non-corporate holders of the REMIC Regular
Certificates that acquire the certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more realized losses on the mortgage loans.
However, it appears that a non-corporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until the holder's certificate
becomes wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to the certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the mortgage loans or the certificate underlying the REMIC
Certificates, as the case may be, until it can be established that the reduction
ultimately will not be recoverable. As a result, the amount of taxable income
reported in any period by the holder of a REMIC Regular Certificate could exceed
the amount of economic income actually realized by that holder in the period.
Although the holder of a REMIC Regular Certificate eventually will recognize a
loss or reduction in income attributable to previously accrued and included
income that as the result of a realized loss ultimately will not be realized,
the law is unclear with respect to the timing and character of this loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and some other transactions. See "--Prohibited
Transactions Tax and Other Taxes" below. Rather, the taxable income or net loss
of a REMIC is generally taken into account by the holder of the REMIC Residual
Certificates. Accordingly, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the mortgage loans or as debt instruments issued by the
REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the holder owned the REMIC Residual Certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using
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a "30 days per month/90 days per quarter/360 days per year" convention unless
otherwise disclosed in the related prospectus supplement. The daily amounts so
allocated will then be allocated among the REMIC Residual Certificateholders in
proportion to their respective ownership interests on that day. Any amount
included in the gross income or allowed as a loss of any REMIC Residual
Certificateholder by virtue of this paragraph will be treated as ordinary income
or loss. The taxable income of the REMIC will be determined under the rules
described below in "Taxable Income of the REMIC" and will be taxable to the
REMIC Residual Certificateholders without regard to the timing or amount of cash
distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to limitations under Section 469 of the Code on the
deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on
itsfederal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds the REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that some modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased the REMIC Residual Certificate from a prior
holder of the certificate at a price greater than (or less than) the adjusted
basis (as defined below) the REMIC Residual Certificate would have had in the
hands of an original holder of the certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of the REMIC Residual Certificate will be taken
into account in determining the income of the holder for federal income
taxpurposes. Although it appears likely that any of these payments would be
includible in income immediately upon its receipt, the IRS might assert that
these payments should be included in income over time according to an
amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of these payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the treatment
of these payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with the income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period.Consequently, REMIC Residual Certificateholders should have other sources
of funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions" and
"noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC Residual
Certificateholders may exceed the cash distributions received by the REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect the REMIC Residual Certificateholders' after-tax rate of
return. This disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC will equal
the income from the mortgage loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not
95
offered by the prospectus), amortization of any premium on the mortgage loans,
bad debt losses with respect to the mortgage loans and, except as described
below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). The aggregate basis will be allocated
among the mortgage loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any offered REMIC
Certificates will be determined in the manner described above under "--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount." The issue
price of a REMIC Certificate received in exchange for an interest in the
mortgage loans or other property will equal the fair market value of the
interests in the mortgage loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the REMIC
Administrator may be required to estimate the fair market value of the interests
in order to determine the basis of the REMIC in the mortgage loans and other
property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to mortgage loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include the market discount in income currently, as it accrues, on
a constant yield basis. See "--Taxation of Owners of REMIC Regular Certificates"
above, which describes a method for accruing discount income that is analogous
to that required to be used by a REMIC as to mortgage loans with market discount
that it holds.
A mortgage loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to the income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the mortgage
loans. Premium on any mortgage loan to which the election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any mortgage
loan originated on or before September 27, 1985. Instead, premium on such a
mortgage loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
the mortgage loan.
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered by
this prospectus) equal to the deductions that would be allowed if the REMIC
Regular Certificates (including any other class of REMIC Certificates
constituting "regular interests" in the REMIC not offered by this prospectus)
were indebtedness of the REMIC. Original issue discount will be considered to
accrue for this purpose as described above under "--Taxation of Owners of REMIC
Regular certificates--Original Issue Discount," except that the de minimis rule
and the adjustments for subsequent holders of REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered by this prospectus) described therein will
not apply.
If a class of REMIC Regular Certificates is issued with Issue Premium,
the net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of that class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be
96
amortized or repaid in that year. Although the matter is not entirely clear, it
is likely that Issue Premium would be amortized under a constant yield method in
a manner analogous to the method of accruing original issue discount described
above under "--Taxation of Owners of REMIC Regular certificates--Original Issue
Discount."
As a general rule, the taxable income of a REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will
betaken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows these deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, the excess will be the net loss for the REMIC for
that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis of a
REMIC Residual Certificate will be equal to the amount paid for the REMIC
Residual Certificate, increased by amounts included in the income of the REMIC
Residual Certificateholder and decreased (but not below zero) by distributions
made, and by net losses allocated, to the REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent the net loss exceeds the
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of the calendar quarter (determined without regard
to the netloss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject tothe same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to
whichREMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds the adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. Holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that the distributions will be
treated as nontaxable returns of capital. Their bases in the REMIC Residual
Certificates will initially equal the amount paid for the REMIC Residual
Certificates and will be increased by their allocable shares of taxable income
of the REMIC. However, these bases increases may not occur until the end of the
calendar quarter, or perhaps the end of the calendar year, with respect to which
the REMIC taxable income is allocated to the REMIC Residual Certificateholders.
To the extent the REMIC Residual Certificateholders' initial bases are less than
the distributions to the REMIC Residual Certificateholders, and increases in
initial bases either occur after the distributions or (together with their
initial bases) are less than the amount of the distributions, gain will be
recognized to the REMIC Residual Certificateholders on these distributions and
will be treated as gain from the sale of their REMIC Residual Certificates.
97
The effect of these rules is that a REMIC Residual Certificateholder
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of the REMIC Residual Certificate to the REMIC Residual
Certificateholder and the adjusted basis the REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a REMIC
Residual Certificate will be subject to federal income tax in all events. In
general, the"excess inclusions" with respect to a REMIC Residual Certificate for
any calendar quarter will be the excess, if any, of (1) the daily portions of
REMIC taxable income allocable to the REMIC Residual Certificate over (2) the
sum of the "daily accruals" (as defined below) for each day during the quarter
that the REMIC Residual Certificate was held by the REMIC Residual
Certificateholder. The daily accruals of a REMIC Residual Certificateholder will
be determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120% of the "long-term
Federal rate" in effect on the Closing Date. For this purpose, the adjusted
issue price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Certificate,
increased by the sum of the daily accruals for all prior quarters and decreased
(but not below zero) by any distributions made with respect to the REMIC
RESIDUAL Certificate before the beginning of that quarter. The issue price of a
REMIC Residual Certificate is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the REMIC
Residual Certificates were sold. The "long-term Federal rate" is an average of
current yields on Treasury securities with a remaining term of greater than nine
years, computed and published monthly by the IRS. Although it has not done so,
the Treasury has authority to issue regulations that would treat the entire
amount of income accruing on a REMIC Residual Certificate as an excess inclusion
if the REMIC Residual Certificates are considered to have "significant value."
For REMIC Residual Certificateholders, an excess inclusion (1) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (2) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (3) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
investors in REMIC Certificates," below.
Furthermore, for purposes of the alternative minimum tax, excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and alternative minimum taxable income may not be less
than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's income tax to
an amount lower than the tentative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
RESIDUAL Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of the trust in proportion to the dividends received by the shareholders from
the trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by the
shareholder. Treasury
98
regulations yet to be issued could apply a similar rule to regulated investment
companies, common trust funds and cooperatives; the REMIC Regulations currently
do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the "non-economic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is non-economic unless, based on the Prepayment Assumption and on
any required orpermitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
non-economic residual interests will be subject to restrictions under the terms
of the related pooling and servicing agreement that are intended to reduce the
possibility of any such transfer being disregarded. These restrictions will
require each party to a transfer to provide an affidavit that no purpose of the
transfer is to impede the assessment or collection of tax, including
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine the transferee's historic payment of its debts and ability to continue
to pay its debts as they come due in the future. The IRS has issued proposed
changes to REMIC Regulations that would add to the conditions necessary to
assure that a transfer of a non-economic 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 REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of the REMIC Residual
Certificate 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.
The related prospectus supplement will disclose whether offered REMIC
RESIDUAL Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
RESIDUAL Certificate will not be considered "non-economic" will be based upon
assumptions, and the company will make no representation that a REMIC Residual
Certificate will not be considered "non-economic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
RESIDUAL Certificates" below for additional restrictions applicable to transfers
of REMIC Residual Certificates to foreign persons.
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MARK-TO-MARKET RULES. In general, all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment, must be marked to market in accordance with the applicable
Code provision and the related regulations. However, the IRS has issued
regulations which provide that for purposes of this mark-to-market requirement,
a REMIC RESIDUAL Certificate acquired after January 4, 1995 is not treated as a
security and thus may not be marked to market. Prospective purchasers of a REMIC
Residual Certificate should consult their tax advisors regarding the possible
application of the mark-to-market requirement to REMIC Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of these fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Except as stated in the
related prospectus supplement, these fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, (1) an amount equal to the
individual's, estate's or trust's share of the fees and expenses will be added
to the gross income of the holder and (2) the individual's, estate's or trust's
share of the fees and expenses will be treated as a miscellaneous itemized
deduction allowable subject to the limitation of Section 67 of the Code, which
permits these deductions only to the extent they exceed in the aggregate two
percent of taxpayer's adjusted gross income. In addition, Section 68 of the Code
provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (1) 3% of the excess of the individual's adjusted gross
income over that amount or (2) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by REMIC Certificateholders that are subject to the
limitations of either Section67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for the holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of the fees and other deductions will be
included in the holder's gross income. Accordingly, these REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Prospective investors should consult with their tax advisors prior to
making an investment in the certificates.
SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold, the
selling Certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
Certificate. The adjusted basis of a REMIC Regular Certificate generally will
equal the cost of the REMIC Regular Certificate to the certificateholder,
increased by income reported by the certificateholder with respect to the REMIC
Regular Certificate (including original issue discount and market discount
income) and reduced (but not below zero) by distributions on the REMIC Regular
Certificate received by the certificateholder and by any amortized premium. The
adjusted basis of a REMIC Residual Certificate will be determined as described
under "--Taxation of Owners of REMIC Residual Certificates--Basis Rules, Net
Losses and Distributions." Except as provided in the following four paragraphs,
any such gain or loss will be capital gain or loss, provided the REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code.
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Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent the gain does
not exceed the excess, if any, of (1) the amount that would have been includible
in the seller's income with respect to the REMIC Regular Certificate assuming
that income had accrued thereon at a rate equal to 110% of the "applicable
Federal rate" (generally, a rate based on an average of current yields on
Treasury securities having a maturity comparable to that of the certificate
based on the application of the Prepayment Assumption to the certificate, which
rate is computed and published monthly by the IRS), determined as of the date of
purchase of the REMIC Regular Certificate, over (2) the amount of ordinary
income actually includible in the seller's income prior to the sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased the REMIC Regular Certificate at a market discount will be taxable
as ordinary income in an amount not exceeding the portion of the discount that
accrued during the period the REMIC Certificate was held by the holder, reduced
by any market discount included in income under the rules described above under
"--Taxation of Owners of REMIC Regular Certificates--Market Discount"
and"--Premium."
REMIC Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a REMIC Certificate by a bank or thrift institution to which this
section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's
netinvestment in the transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed
andpublished monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires the REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of the sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to the REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. In the event a
REMIC engages in a prohibited transaction, the Code imposes a 100% tax on the
income derived by the REMIC from the prohibited transaction. In general, subject
to specified exceptions, a prohibited transaction means the disposition of a
mortgage loan, the receipt of income from a source other than a mortgage loan
orother permitted investments, the receipt of compensation for services, or gain
from the disposition of an asset purchased with the payments on the mortgage
loans for temporary investment pending distribution on the
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REMIC Certificates. It is not anticipated that any REMIC will engage in any
prohibited transactions in which it would recognize a material amount of net
income.
In addition, a contribution to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition on the REMIC of
a tax equal to 100% of the value of the contributed property. Each pooling and
servicing agreement will include provisions designed to prevent the acceptance
of any contributions that would be subject to this tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
It is not anticipated that any REMIC will recognize "net income from foreclosure
property" subject to federal income tax.
To the extent permitted by then applicable laws, any tax resulting from
a prohibited transaction, tax resulting from a contribution made after the
Closing Date, tax on "net income from foreclosure property" or state or local
income or franchise tax that may be imposed on the REMIC will be borne by the
related master servicer or trustee in either case out of its own funds, provided
that the master servicer or the trustee, as the case may be, has sufficient
assets to do so, and provided further that the tax arises out of a breach of the
master servicer's or the trustee's obligations, as the case may be, under the
related pooling and servicing agreement and in respect of compliance with
applicable laws and regulations. Any such tax not borne by the master servicer
or the trustee will be charged against the related trust fund resulting in a
reduction in amounts payable to holders of the related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
CERTAIN ORGANIZATIONS. If a REMIC Residual Certificate is transferred to a
"disqualified organization" (as defined below), a tax would be imposed in an
amount (determined under the REMIC Regulations) equal to the product of (1) the
present value (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, which rate is
computed and published monthly by the IRS) of the total anticipated excess
inclusions with respect to the REMIC Residual Certificate for periods after the
transfer and (2) the highest marginal federal income tax rate applicable to
corporations.The anticipated excess inclusions must be determined as of the date
that the REMIC Residual Certificate is transferred and must be based on events
that have occurred up to the time of the transfer, the Prepayment Assumption and
any required or permitted clean up calls or required liquidation provided for in
the REMIC's organizational documents. Such a tax generally would be imposed on
the transferor of the REMIC Residual Certificate, except that where the transfer
is through an agent for a disqualified organization, the tax would instead be
imposed on the agent. However, a transferor of a REMIC Residual Certificate
would in no event be liable for the tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit 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. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that (1) residual interests in the entity are not held by disqualified
organizations and (2) information necessary for the application of the tax
described herein will be made available. Restrictions on the transfer of REMIC
Residual Certificates and other provisions that are intended to meet this
requirement will be included in the pooling and servicing agreement, and will be
discussed more fully in any prospectus supplement relating to the offering ofany
REMIC Residual Certificate.
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In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in the entity,
then a tax will be imposed on the entity equal to the product of (1) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by the disqualified organization and
(2) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in the pass-through entity furnishes to the
pass-through entity (1) the holder's social security number and a statement
under penalties of perjury that the social security number is that of the
recordholder or (2) a statement under penalties of perjury that the record
holder is not a disqualified organization. For taxable years beginning after
December 31,1997, notwithstanding the preceding two sentences, in the case of a
REMIC Residual Certificate held by an "electing large partnership," all
interests in the partnership shall be treated as held by disqualified
organizations (without regard to whether the record holders of the partnership
furnish statements described in the preceding sentence) and the amount that is
subject to tax under the second preceding sentence is excluded from the gross
income of the partnership allocated to the partners (in lieu of allocating to
the partners a deduction for the tax paid by the partnership).
For these purposes, a "disqualified organization" means:
o the United States, any State or political subdivision thereof,
any foreign government, any international organization, or any
agency or instrumentality of the foregoing (but would not
include instrumentalities described in Section 168(h)(2)(D) of
the Code or Freddie Mac),
o any organization (other than a cooperative described in
Section 521 of the Code) that is exempt from federal income
tax, unless it is subject to the tax imposed by Section 511 of
the Code, or
o any organization described in Section 1381(a)(2)(C) of the
Code.
For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to the interest, be treated as a pass-through entity.
TERMINATION. A REMIC will terminate immediately after the distribution
date following receipt by the REMIC of the final payment in respect of the
mortgage loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual Certificate, if the last
distribution on the REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in the certificate, the REMIC Residual
Certificateholder should (but may not) be treated as realizing a loss equal to
the amount of the difference, and the loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as
partners.The REMIC Administrator (or other party described in the related
prospectus supplement) will file REMIC federal income tax returns on behalf of
the related REMIC, and under the terms of the related Agreement, will either (1)
be irrevocably appointed by the holders of the largest percentage interest in
the related REMIC Residual Certificates as their agent to perform all of the
duties of the "tax matters
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person" with respect to the REMIC in all respects or (2) will be designated as
and will act as the "tax matters person" with respect tothe related REMIC in all
respects and will hold at least a nominal amount of REMIC Residual Certificates.
The REMIC Administrator, as the tax matters person or as agent for the
tax matters person, subject to notice requirements and various restrictions and
limitations, generally will have the authority to act on behalf of the REMIC and
the REMIC Residual Certificateholders in connection with the administrative and
judicial review of items of income, deduction, gain or loss of the REMIC, as
well as the REMIC's classification. REMIC Residual Certificateholders generally
will be required to report these REMIC items consistently with their treatmenton
the REMIC's tax return and may in some circumstances be bound by a settlement
agreement between the REMIC Administrator, as either tax matters person or as
agent for the tax matters person, and the IRS concerning any such REMIC item.
Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from such an audit,
could result in an audit of a REMIC Residual Certificateholder's return. Any
person that holds a REMIC Residual Certificate as a nominee for another person
may be required to furnish the REMIC, in a manner to be provided in Treasury
regulations, with the name and address of the person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and some other non-individuals will be
provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face the amount of original issue
discount and the issue date, and requiring the information to be reported to the
IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular
Certificateat the beginning of each accrual period. In addition, the reports
will include information required by regulations with respect to computing the
accrual of any market discount. Because exact computation of the accrual of
market discount on a constant yield method would require information relating to
the holder's purchase price that the REMIC may not have, Treasury regulations
only require that information pertaining to the appropriate proportionate method
of accruing market discount be provided. See "--Taxation of Owners of REMIC
Regular certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules
will be borne by the REMIC Administrator or other party designated in the
related prospectus supplement.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of
interestand principal, as well as payments of proceeds from the sale of
REMICCertificates, may be subject to the "backup withholding tax" under Section
3406of the Code at a rate of 31% if recipients of the payments fail to furnish
tothe payor certain information, including their taxpayer identification
numbers,or otherwise fail to establish an exemption from the backup withholding
tax. Anyamounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against the recipient's federal income tax. Furthermore,
penalties may
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be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular
Certificateholder that is not a United States Person and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate will
not be subject to United States federal income or withholding tax in respect of
a distribution on a REMIC Regular Certificate, provided that the holder complies
to the extent necessarywith identification requirements, including delivery of a
statement, signed by the certificateholder under penalties of perjury,
certifying that the certificateholder is not a United States person and
providing the name and address of the certificateholder. This statement is
generally made on IRS FormW-8BEN and must be updated whenever required
information has changed or within 3 calendar years after the statement is first
delivered. It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates. If the holder does not
qualify for exemption, distributions ofinterest, including distributions in
respect of accrued original issue discount, to the holder may be subject to a
tax rate of 30%, subject to reduction under any applicable tax treaty.
Special rules apply to partnerships, estates and trusts, and in certain
circumstances certifications as to foreign status and other matters may be
required to be provided by partners and beneficiaries thereof.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on the
United States shareholder's allocable portion of the interest income received by
the controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non- resident alien individual and would not be
subject to United States estate taxes. However, certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
Except as stated in the related prospectus supplement, transfers of
REMICResidual Certificates to investors that are not United States persons will
be prohibited under the related pooling and servicing agreement.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new final regulations which revise
procedures for complying with, or obtaining exemptions under, the
withholding,backup withholding and information reporting rules described above.
Prospective investors are urged to consult their tax advisors regarding the
procedures for obtaining an exemption from withholding under the new
regulations.
NOTES
On or prior to the date of the related prospectus supplement with
respect to the proposed issuance of each series of notes, Thacher Proffitt &
Wood, counsel to the company, will deliver its opinion to the effect that,
assuming compliance with all provisions of the indenture, owner trust agreement
and other related documents, for federal income tax purposes (1) the notes will
be treated as indebtedness and (2) the Issuer, as created pursuant to the terms
and conditions of the owner trust agreement, will not be characterized as an
association (or publicly traded partnership) taxable as a corporation or as a
taxable mortgage pool. For
105
purposes of this tax discussion, references to a "noteholder" or a "holder" are
to the beneficial owner of a note.
STATUS AS REAL PROPERTY LOANS
(1) Notes held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (2) notes held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code section 856(c)(4)(A) and interest on notes will not be considered "interest
on obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (1)
income reportable on the notes 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 REMIC Regular
Certificate as ordinary income is inapplicable to the notes. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates" and "--Sales of
REMIC Certificates."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS. On or prior to the date of the
related prospectus supplement with respect to the proposed issuance of each
series of Grantor Trust Certificates, Thacher Proffitt & Wood, counsel to the
company, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related pooling and servicing agreement,
the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of Chapter 1 of the Code and not as a
partnership or an association taxable as a corporation.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES.
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
prospectus supplement, counsel to the company will deliver an opinion that, in
general, Grantor Trust Fractional Interest Certificates will represent interests
in (1) "loans . . . secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; (2) "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code; and (3) "real estate assets" within the meaning
of Section 856(c)(4)(A) of the Code. In addition, counsel to the company will
deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of mortgage
loans that are "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code, and the interest on
which is "interest on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(B) of the Code, it is unclear whether the
Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized. However, the policies underlying these sections (namely, to
encourage or require investments in mortgage loans by thrift
106
institutions and real estate investment trusts) may suggest that this
characterization is appropriate. Counsel to the company will not deliver any
opinion on these questions. Prospective purchasers to which the characterization
of an investment in Grantor Trust Strip Certificates is material should consult
their tax advisors regarding whether the Grantor Trust Strip Certificates, and
the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or Certificate of beneficial ownership therein) which . .
.[are] principally secured by an interest in real property" within the meaning
of Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the mortgage loans (including amounts used to
pay reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the mortgage loans. Under Section 67 of the Code, an
individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through some pass-through entities will be allowed a
deduction for the reasonable servicing fees and expenses only to the extent that
the aggregate of the holder's miscellaneous itemized deductions exceeds two
percent of the holder's adjusted gross income. In addition, Section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (1) 3% of the excess of the individual's adjusted gross
income over the amount or (2) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
reportable by holders of Grantor Trust Fractional Interest Certificates who are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Further, certificateholders (other than corporations) subject to
the alternative minimum tax may not deduct miscellaneous itemized deductions in
determining the holder's alternative minimum taxable income. Although it is not
entirely clear, it appears that in transactions in which multiple classes of
Grantor Trust Certificates (including Grantor Trust Strip Certificates) are
issued, the fees and expenses should be allocated among the classes of Grantor
Trust Certificates using a method that recognizes that each such class benefits
from the related services. In the absence of statutory or administrative
clarification as to the method to be used, it currently is intended to base
information returns or reports to the IRS and certificateholders on a method
that allocates the expenses among classes of Grantor Trust Certificates with
respect to each period based on the distributions made to each such class during
that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates
or(2) the company or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the mortgage loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established "safe harbors." The servicing fees
paid with respect to the mortgage loans for a series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related prospectus supplement
will include information regarding servicing fees paid to the master servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
107
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
some stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--Market Discount" below. Under the stripped bond rules,
the holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on the certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of the certificate's stated redemption price over
its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by the purchaser
for the Grantor Trust Fractional Interest Certificate. The stated redemption
price of a Grantor Trust Fractional Interest Certificate will be the sum of all
payments to be made on the certificate, other than "qualified stated interest,"
if any, as well as the certificate's share of reasonable servicing fees and
other expenses. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of the income that accrues
in any month would equal the product of the holder's adjusted basis in the
Grantor Trust Fractional Interest Certificate at the beginning of the month (see
"Sales of Grantor Trust Certificates") and the yield of the Grantor Trust
Fractional Interest Certificate to the holder. This yield would be computed at
the rate (compounded based on the regular interval between distribution dates)
that, if used to discount the holder's share of future payments on the mortgage
loans,would cause the present value of those future payments to equal the price
at which the holder purchased the certificate. In computing yield under the
stripped bond rules, a certificateholder's share of future payments on the
mortgage loans will not include any payments made in respect of any ownership
interest in the mortgage loans retained by the company, the master servicer, any
subservicer or their respective affiliates, but will include the
certificateholder's share of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, for taxable years beginning after August 5,
1997, Section 1272(a)(6) of the Code requires (1) the use of a reasonable
prepayment assumption in accruing original issue discount and (2) adjustments in
the accrual of original issue discount when prepayments do not conform to the
prepayment assumption. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997 or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the mortgage loans allocable to the
certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
the principal amount, respectively), the use of a reasonable prepayment
108
assumption would increase or decrease the yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a mortgage loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a discount or a premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the mortgage loan that is allocable to the certificate and the portion of the
adjusted basis of the certificate that is allocable to the certificateholder's
interest in the mortgage loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount." It is unclear
whether any other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
It is currently intended to base information reports or returns to the
IRS and certificateholders in transactions subject to the stripped bond rules on
a Prepayment Assumption that will be disclosed in the related prospectus
supplement and on a constant yield computed using a representative initial
offering price for each class of certificates. However, none of the company, the
master servicer or the trustee will make any representation that the mortgage
loans will in fact prepay at a rate conforming to the Prepayment Assumption or
any other rate and certificateholders should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price.
Under Treasury regulation Section 1.1286-1, some stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (1) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (2) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest
Certificateis more than one percentage point lower than the gross interest rate
payable on the mortgage loans, the related prospectus supplement will disclose
that fact. If the original issue discount or market discount on a Grantor Trust
Fractional Interest Certificate determined under the stripped bond rules is less
than 0.25% of the stated redemption price multiplied by the weighted average
maturity of the mortgage loans, then that original issue discount or market
discount will be considered to be de minimis. Original issue discount or market
discount of only a de minimis amount will be included in income in the same
manner as de minimis original issue and market discount described in
"Characteristics of Investments in Grantor Trust Certificates--If Stripped Bond
Rules Do Not Apply" and"--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the certificateholder will be required to
report its share of the interest income on the mortgage loans in accordance with
the certificateholder's normal method of accounting. The original issue discount
rules will apply to a Grantor Trust Fractional Interest Certificate to theextent
it evidences an interest in mortgage loans issued with original issue discount.
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The original issue discount, if any, on the mortgage loans will equal
thedifference between the stated redemption price of the mortgage loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal tothe total of all payments to be made on the mortgage loan other than
"qualified stated interest." "Qualified stated interest" is interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single
fixedrate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on the mortgage
loan. In general, the issue price of a mortgage loan will be the amount
receivedby the borrower from the lender under the terms of the mortgage loan,
less any "points" paid by the borrower, and the stated redemption price of a
mortgage loan will equal its principal amount, unless the mortgage loan provides
for aninitial below-market rate of interest or the acceleration or the deferral
of interest payments. The determination as to whether original issue discount
willbe considered to be de minimis will be calculated using the same test
described in the REMIC discussion. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
In the case of mortgage loans bearing adjustable or variable
interestrates, the related prospectus supplement will describe the manner in
which the rules will be applied with respect to those mortgage loans by the
master servicer or the trustee in preparing information returns to the
certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield.
Section1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by these pools, it is intended to base information reports and returns to the
IRS and certificateholders for taxable years beginning after August 5, 1997, on
the use of a prepayment assumption. However, in the case of certificates not
backed by these pools or with respect to taxable years beginning prior to August
5, 1997, it currently is not intended to base the reports and returns on the use
of a prepayment assumption. Certificateholders are advised to consult their own
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related prospectus
supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to mortgage loans in the series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases the Grantor Trust Fractional Interest Certificate at a cost less than
the certificate's allocable portion of the aggregate remaining stated redemption
price of the mortgage loans held in the related trust fund will also be required
to include in gross income the certificate's daily portions of any original
issue discount with respect to the mortgage loans. However, each such daily
portion will be reduced, if the cost of the Grantor Trust Fractional Interest
Certificate to the purchaser is in excess of the certificate's allocable portion
of the aggregate "adjusted issue prices" of the mortgage loans held in the
related trust fund, approximately in proportion to the ratio the excess bears to
the certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on the mortgage loans. The adjusted issue price of a
mortgage loan on any given day equals the sum of (1) the adjusted issue price
(or, in the case of the first accrual period, the issue price) of the mortgage
loan at the beginning of the accrual period that includes the day and (2) the
daily portions of original issue discount for all days during the accrual period
prior to the day. The adjusted issue price of a mortgage loan at the beginning
of any accrual period will equal the issue price of the mortgage loan, increased
by the aggregate amount of original issue discount with respect to the mortgage
loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on the mortgage loan in prior accrual periods of amounts included
in its stated redemption price.
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In addition to its regular reports, the master servicer or the trustee,
except as provided in the related prospectus supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
the holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a mortgage loan is considered to have been purchased at a "market
discount," that is, in the case of a mortgage loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a mortgage loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of the discount that has accrued (under the rules described in the
next paragraph) through the month that has not previously been included in
income, but limited, in the case of the portion of the discount that is
allocable to any mortgage loan, to the payment of stated redemption price on the
mortgage loan that is received by (or, in the case of accrual basis
certificateholders, due to) the trust fund in that month. A certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the certificate to the holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, some rules
described in the Committee Report will apply. Under those rules, in each accrual
period market discount on the mortgage loans should accrue, at the
certificateholder's option: (1) on the basis of a constant yield method, (2) in
the case of a mortgage loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the mortgage loan as of the beginning of the accrual period, or(3)
in the case of a mortgage loan issued with original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining at the beginning of the accrual period. The prepayment
assumption, if any, used in calculating the accrual of original issue discount
is to be used in calculating the accrual of market discount. The effect of using
a prepayment assumption could be to accelerate the reporting of the discount
income. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect the regulations might have on
the tax treatment of a mortgage loan purchased at a discount in the secondary
market.
Because the mortgage loans will provide for periodic payments of stated
redemption price, the market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which the discount
would be included in income if it were original issue discount.
Market discount with respect to mortgage loans may be considered to be
de minimis and, if so, will be includible in income under de minimis rules
similar to those described above in "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" with the exception that it is
less likely that a prepayment assumption will be used for purposes of these
rules with respect to the mortgage loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a de
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minimis amount may require the deferral of interest expense deductions
attributable to accrued market discount not yet includible in income, unless an
election has been made to report market discount currently as it accrues. This
rule applies without regard to the origination dates of the mortgage loans.
PREMIUM. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, that is, at a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of the premium
allocable to mortgage loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to mortgage loans originated before September 28, 1985 or to mortgage
loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the mortgage loan and be allowed as a
deduction as these payments are made (or, for a certificateholder using the
accrual method of accounting, when the payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and a
mortgage loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the mortgage
loan that is allocable to the certificate and the portion of the adjusted basis
of the certificate that is allocable to the mortgage loan. If a prepayment
assumption is used to amortize premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply," no regulations or
published rulings under Section 1286 of the Code have been issued and some
uncertainty exists as to how it will be applied to securities such as the
Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their own tax advisors concerning the method to be
used in reporting income or loss with respect to the certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "--Possible Application of Contingent Payment Rules" and
assumes that the holder of a Grantor Trust Strip Certificate will not own any
Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of the holder's adjusted basis in the Grantor Trust
Strip Certificate at the beginning of that month and the yield of the Grantor
Trust Strip Certificate to the holder. The yield would be calculated based on
the price paid for that Grantor Trust Strip Certificate by its holder and the
payments remaining to be made thereon at the time of the purchase, plus an
allocable portion of the servicing fees and expenses to be paid
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with respect to the mortgage loans. See "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to some categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of the discount when
prepayments do not conform to the prepayment assumption. To the extent the
Grantor Trust Strip Certificates represent an interest in any pool of debt
instruments the yield on which may be affected by reason of prepayments, those
provisions will apply to the Grantor Trust Strip Certificates for taxable years
beginning after August 5, 1997. It is unclear whether those provisions would be
applicable to the Grantor Trust Strip Certificates that do not represent an
interest in any such pool or for taxable years beginning prior to August 5,
1997, or whether use of a prepayment assumption may be required or permitted in
the absence of these provisions. It is also uncertain, if a prepayment
assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust Strip
Certificate or, with respect to any subsequent holder, at the time of purchase
of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and certificateholders on the
prepayment Assumption disclosed in the related prospectus supplement and on a
constant yield computed using a representative initial offering price for each
class of certificates. However, none of the company, the master servicer or the
trustee will make any representation that the mortgage loans will in fact prepay
at a rate conforming to the Prepayment Assumption or at any other rate and
certificateholders should bear in mind that the use of a representative initial
offering price will mean that the information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
mortgage loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to the
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete mortgage loans, or if the Prepayment
Assumption is not used, then when a mortgage loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to the mortgage loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the mortgage loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments (the
"Contingent Payment Regulations"), but it appears that Grantor Trust Strip
Certificates, to the extent subject to Section 1272(a)(6) of the Code, as
described above, or due to their similarity to other mortgage-backed
securities(such as REMIC regular interests and debt instruments subject to
Section 1272(a)(6) of the Code) that are expressly excepted from the application
of the Contingent Payment Regulations, are or may be excepted from these
113
regulations. Like the OID Regulations, the Contingent Payment Regulations do not
specifically address securities, such as the Grantor Trust Strip Certificates,
that are subject to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the Contingent Payment
Regulations were to apply, the holder of a Grantor Trust Strip Certificate would
be required to apply the "noncontingent bond method." Under the "noncontingent
bond method," the issuer of a Grantor Trust Strip Certificate determines a
projected payment schedule on which interest will accrue. Holders of Grantor
Trust Strip Certificates are bound by the issuer's projected payment schedule.
The projected payment schedule consists of all noncontingent payments and a
projected amount for each contingent payment based on the projected yield (as
described below) of the Grantor Trust Strip Certificate. The projected amount of
each payment is determined so that the projected payment schedule reflects the
projected yield. The projected amount of each payment must reasonably reflect
the relative expected values of the payments to be received by the holder of a
Grantor Trust Strip Certificate. The projected yield referred to above is a
reasonable rate, not less than the "applicable Federal rate" that, as of the
issue date, reflects general market conditions, the credit quality of the
issuer, and the terms and conditions of the mortgage loans. The holder of a
Grantor Trust Strip Certificate would be required to include as interest income
in each month the adjusted issue price of the Grantor Trust Strip Certificate at
the beginning of the period multiplied by the projected yield, and would add to,
or subtract from, the income any variation between the payment actually received
in that month and the payment originally projected to be made in that month.
Assuming that a prepayment assumption were used, if the Contingent
Payment Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on the sale or exchange of
a Grantor Trust Certificate by an investor who holds the Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial
institutions)except as provided under Section 582(c) of the Code. The adjusted
basis of a Grantor Trust Certificate generally will equal its cost, increased by
any income reported by the seller (including original issue discount and market
discount income) and reduced (but not below zero) by any previously reported
losses, any amortized premium and by any distributions with respect to the
Grantor Trust Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in some circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject Section 582(c) of the Code. Furthermore, a portion of any
gain that might otherwise be capital gain may be treated as ordinary income to
the extent that the Grantor Trust Certificate is held as part of a "conversion
transaction" within the meaning of Section 1258 of the Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in the same or similar property that reduce or eliminate market risk,
if substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in the transaction. The amount of gain realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate "applicable Federal rate" (which rate
is computed and published monthly by the IRS) at the time the taxpayer enters
into the conversion transaction, subject to
114
appropriate reduction for prior inclusion of interest and other ordinary income
items from the transaction. Finally, a taxpayer may elect to have net capital
gain taxed at ordinary income rates rather than capital gains rates in order to
include the net capital gain in total net investment income for that taxable
year, for purposes of the rule that limits the deduction of interest on
indebtedness incurred to purchase or carry property held for investment to a
taxpayer's net investment income.
GRANTOR TRUST REPORTING. The master servicer or the trustee will
furnish to each holder of a Grantor Trust Fractional Interest Certificate with
each distribution a statement setting forth the amount of the distribution
allocable to principal on the underlying mortgage loans and to interest thereon
at the related pass-through rate. In addition, the master servicer or the
trustee will furnish, within a reasonable time after the end of each calendar
year, to each holder of a Grantor Trust Certificate who was a holder at any time
during that year, information regarding the amount of servicing compensation
received by the master servicer and subservicer (if any) and any other customary
factual information as the master servicer or the trustee deems necessary or
desirable to enable holders of Grantor Trust Certificates to prepare their tax
returns and will furnish comparable information to the IRS as and when required
by law to do so. Because the rules for accruing discount and amortizing premium
with respect to the Grantor Trust Certificates are uncertain in various
respects, there is no assurance the IRS will agree with the trust fund's
information reports of these items of income and expense. Moreover, these
information reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial certificateholders that bought
their certificates at the representative initial offering price used in
preparing the reports.
Except as disclosed in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the master servicer or the trustee.
BACKUP WITHHOLDING. In general, the rules described in
"--REMICS--Backup Withholding with Respect to REMIC Certificates" will also
apply to Grantor Trust Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC
Regular certificates in "REMICS--Foreign Investors in REMIC Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, except as disclosed in the related prospectus supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in the
discussion, only to the extent the related mortgage loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a certificateholder's trade or business in the United States, the Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of anon-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
securities offered under this prospectus and the prospectus supplement. 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 with respect to the various state and other tax
consequences of investments in the securities offered under this prospectus and
the prospectus supplement.
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ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose fiduciary and prohibited
transaction restrictions on ERISA Plans and on various other retirement plans
and arrangements, including bank collective investment funds and insurance
company general and separate accounts in which ERISA Plans are invested. Section
4975 of the Code imposes essentially the same prohibited transaction
restrictions on Tax Favored Plans. ERISA and the Code prohibit a broad range of
transactions involving assets of Plans and Parties in Interest, unless a
statutory or administrative exemption is available with respect to any such
transaction.
Some employee benefit plans, including governmental plans (as defined
in Section 3(32) of ERISA), 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 the ERISA requirements. Accordingly, assets of these plans may be
invested in the securities without regard to the ERISA considerations described
below, subject to the provisions of other applicable federal, state and local
law. Any such plan which 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 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. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to Plan Assets for a fee is a fiduciary
of the investing Plan. If the mortgage loans and other assets included in the
trust fund were to constitute Plan Assets, then any party exercising management
or discretionary control with respect to those Plan Assets may be deemed to be a
Plan "fiduciary," and thus subject to the fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Code with respect to any investing Plan. In addition, the acquisition or holding
of securities by or on behalf of a Plan or with Plan Assets, as well as the
operation of the trust fund, may constitute or involve a prohibited transaction
under ERISA and the Code unless a statutory or administrative exemption is
available. Further, ERISA and the Code prohibit a broad range of transactions
involving Plan Assets and persons, called Parties in Interest unless a statutory
or administrative exemption is available. Some Parties in Interest that
participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed under Section 502(i) of ERISA or Section 4975 of the Code,
unless a statutory or administrative exemption is available with respect to any
transaction of this sort.
Some transactions involving the trust fund might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Plan that purchases the securities, if the mortgage loans and other assets
included in a trust fund are deemed to be assets of the Plan. The DOL has
promulgated the DOL Regulations concerning whether or not a Plan's assets, or
"Plan Assets" would be deemed to include an interest in the underlying assets of
an entity, including a trust fund, for purposes of applying the general
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code. Under the DOL Regulations, generally, when a
Plan acquires an "equity interest" in another entity (such as the trust fund),
the underlying assets of that entity may be considered to be Plan Assets unless
an exception applies. Exceptions contained in the DOL Regulations provide that a
Plan's assets will not include an undivided interest in each asset of an entity
in which the Plan makes an equity investment if: (1) the entity is an operating
company; (2) the equity investment made by the Plan is either a
"publicly-offered security" that is "widely held," both as defined in the DOL
Regulations, or a security issued by an investment company registered under the
Investment Company Act of 1940, as amended; or (3) Benefit Plan Investors do not
own 25% or more in value of any class of equity securities issued by the entity.
In addition, the DOL Regulations
116
provide that the term "equity interest" means any interest in an entity other
than an instrument which is treated as indebtedness under applicable local law
and which has no "substantial equity features." Under the DOL Regulations, Plan
Assets will be deemed to include an interest in the instrument evidencing the
equity interest of a Plan (such as a certificate or a note with "substantial
equity features"), and, because of the factual nature of some of the rules set
forth in the DOL Regulations, Plan Assets may be deemed to include an interest
in the underlying assets of the entity in which a Plan acquires an interest
(such as the trust fund). Without regard to whether the notes are characterized
as equity interests, the purchase, sale and holding of notes by or on behalf of
a Plan could be considered to give rise to a prohibited transaction if the
Issuer, the trustee or any of their respective affiliates is or becomes a Party
in Interest with respect to the Plan. Neither Plans nor persons investing Plan
Assets should acquire or hold securities in reliance upon the availability of
any exception under the DOL Regulations.
The DOL has issued Exemptions to some underwriters, which generally
exempts from the application of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on those prohibited transactions
pursuant to Section 4975(a) and (b) of the Code, some transactions, among
others, relating to the servicing and operation of mortgage pools and the
initial purchase, holding and subsequent resale of mortgage pass-through
certificates or other "securities" underwritten by an Underwriter, as defined
below, provided that the conditions set forth in the Exemption are satisfied.
For purposes of this section "ERISA Considerations", the term "Underwriter"
shall include (1) the underwriter, (2) any person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with the underwriter and (3) any member of the underwriting syndicate or
selling group of which a person described in (1) or (2) is a manager or
co-manager with respect to a class of securities.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of securities by a Plan or
with Plan Assets 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. Second,
the Exemption only applies to securities evidencing rights and interests that
are not subordinated to the rights and interests evidenced by other securities
of the same trust, 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%. Third, the securities at the time of acquisition by a Plan or with
Plan Assets must be rated in one of the four highest generic rating categories
by an Exemption Rating Agency. However, the securities must be rated in one of
the two highest generic categories by an Exemption Rating Agency if the
loan-to-value ratio or combined loan-to-value ratio of any one- to four-family
residential mortgage loan or home equity loan held in the trust exceeds 100% but
does not exceed 125% at the date of issuance of the securities, and in that case
the Exemption will not apply: (1) to any of the securities if any mortgage loan
or other asset held in the trust (other than a one- to four-family residential
mortgage loan or home equity loan) has a loan-to-value ratio or combined
loan-to-value ratio that exceeds 100% at the Closing Date or (2) to any
subordinate securities. Fourth, the trustee cannot be an affiliate of any member
of the "Restricted Group" which consists of any Underwriter, the company, the
master servicer, the special servicer, any subservicer and any obligor with
respect to assets included in the trust fund constituting more than 5% of the
aggregate unamortized principal balance of the assets in the trust fund as of
the date of initial issuance of the securities. Fifth, 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 company pursuant to the assignment of the assets to
the related trust fund must represent not more than the fair market value of the
obligations; and the sum of all payments made to and retained by the master
servicer, the special servicer and any subservicer must represent not more than
reasonable compensation for the person's services under the related Agreement
and reimbursement of the person's reasonable expenses in connection therewith.
Sixth, the investing Plan or Plan Asset investor must be an accredited investor
as defined in Rule 501(a)(1) of Regulation D of the Commission under the
securities Act. In addition, except as otherwise specified in
117
the accompanying prospectus supplement, the exemptive relief afforded by the
Exemption may not apply to any securities where the related trust contains a
swap, a yield maintenance agreement or a pre-funding arrangement.
The Exemption also requires that the trust fund meet the following
requirements: (1) the trust fund must consist solely of assets of the type that
have been included in other investment pools; (2) securities evidencing
interests in the other investment pools must have been rated in one of the four
highest generic categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of securities by or on behalf of a Plan or
with Plan Assets; and (3) securities evidencing interests in the other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any acquisition obscurities by or on behalf of a Plan or
with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
security must make its own determination that the conditions set forth above
will be satisfied with respect to the security.
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(a)of ERISA, and 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 or transfer of securities in the
initial issuance of the securities or the direct or indirect acquisition or
disposition in the secondary market of securities by a Plan or with Plan Assets
or the continued holding of securities acquired by a Plan or with Plan Assets
pursuant to either of the foregoing. However, no exemption is provided from the
restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for 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 an Excluded Plan. For purposes of the securities, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If the specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise 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
obscurities in the initial issuance of securities between the company 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) a mortgagor with respect to 5% or less of the fair market
value of the trust fund assets or (b) an affiliate of such a person, (2) the
direct or indirect acquisition or disposition in the secondary market
obscurities by a Plan or with Plan Assets and (3) the continued holding
obscurities acquired by a Plan or with Plan Assets pursuant to either of the
foregoing.
Further, if the 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 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
trust fund. The company expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to 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 trust fund, provided that the general conditions of the Exemption are
satisfied.
118
The Exemption also may provide an exemption from the application of the
prohibited transaction provisions of Sections 406(a) and 407(a) of ERISA, and
the excise 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 the restrictions are deemed to
otherwise apply merely because a person is deemed to be a Party in Interest with
respect to an investing Plan by virtue of providing services to the Plan (or by
virtue of having a specified relationship to such a person) solely as a result
of the Plan's ownership of securities.
The Exemptions extend exemptive relief to mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing securities. With respect to the securities, the amendment will generally
allow mortgage loans supporting payments to securityholders, and having a value
equal to no more than 25% of the total principal amount of the securities being
offered by a trust fund, to be transferred to the trust fund within the
Pre-Funding Period instead of requiring that all the mortgage loans be either
identified or transferred on or before the Closing Date. In general, the relief
applies to the purchase, sale and holding of securities which otherwise qualify
for the Exemption, provided that the following general conditions are met:
o the ratio of the amount allocated to the pre-funding account
to the total principal amount of the securities being offered
must be less than or equal to 25%;
o all additional mortgage loans transferred to the related trust
fund after the Closing Date must meet the same terms and
conditions for eligibility as the original mortgage loans used
to create the trust fund, which terms and conditions have been
approved by one of the Exemption Rating Agencies;
o the transfer of the additional mortgage loans to the trust
fund during the Pre-Funding Period must not result in the
securities to be covered by the Exemptions receiving a lower
credit rating from an Exemption 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;
o solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for the mortgage loans
included in the related trust fund on the Closing Date and all
additional mortgage loans transferred to the related trust
fund after the Closing Date at the end of the Pre-Funding
Period must not be more than 100 basis points lower than the
rate for the mortgage loans which were transferred to the
trust fund on the Closing Date;
o either:
(1) the characteristics of the additional
mortgage loans transferred to the related trust fund
after the Closing Date must be monitored by an
insurer or other credit support provider which is
independent of the company; or
(2) an independent accountant retained by
the company must provide the company with a letter
(with copies provided to the Exemption Rating Agency
rating the securities, the Underwriter and the
trustee) stating whether or not the characteristics
of the additional mortgage loans transferred to the
related trust fund after the Closing Date conform to
the characteristics described in the prospectus or
prospectus supplement and/or agreement. In preparing
the letter, the independent accountant must use the
same type of procedures as were applicable to the
mortgage loans which were transferred to the trust
fund as of the Closing Date;
119
o the Pre-Funding Period must end no later than three months or
90 days after the Closing Date or earlier in some
circumstances if the pre-funding accounts falls below the
minimum level specified in the Agreement or an event of
default occurs;
o amounts transferred to any pre-funding accounts and/or
capitalized interest account used in connection with the
pre-funding may be invested only in investments which are
permitted by the Exemption Rating Agencies rating the
securities and must:
(1) be direct obligations of, or obligations
fully guaranteed as to timely payment of principal
and interest by, the United States or any agency or
instrumentality thereof (provided that the
obligations are backed by the full faith and credit
of the United States); or
(2) have been rated (or the obligor has been
rated) in one of the three highest generic rating
categories by one of the Exemption Rating Agencies
("ERISA Permitted Investments");
o the prospectus or prospectus supplement must describe the
duration of the Pre-Funding Period;
o the trustee (or any agent with which the trustee contracts to
provide trust services) must be a substantial financial
institution or trust company experienced in trust activities
and familiar with its duties, responsibilities and liabilities
with ERISA. The trustee, as legal owner of the trust fund,
must enforce all the rights created in favor of
securityholders of the trust fund, including employee benefit
plans subject to ERISA.
In addition to the Exemption, a Plan fiduciary or other Plan Asset
investor should consider any available class exemptions granted by the DOL,
which may provide relief from some of the prohibited transaction provisions of
ERISA and the related excise tax provisions of the Code, including PTCE 83-1,
regarding transactions involving mortgage pool investment trusts; PTCE 84-14,
regarding transactions effected by a "qualified professional asset manager";
PTCE 90-1, regarding transactions by insurance company pooled separate accounts;
PTCE 91-38, regarding investments by bank collective investment funds; PTCE
95-60, regarding transactions by insurance company general accounts; and PTCE
96-23, regarding transactions effected by an "in-house asset manager."
Insurance companies contemplating the investment of general account
assets in the securities should consult with their legal advisors with respect
to the applicability of Section 401(c) of ERISA. The DOL issued final
regulations under Section 401(c) which were published in the Federal Register on
January 5, 2000, but these final regulations are generally not applicable until
July 5, 2001.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY
FEATURES"OR NON-EXEMPT CERTIFICATES
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain securities, such as notes with "substantial equity
features,"subordinate securities in trusts containing mortgage loans with
loan-to- value ratios in excess of 100%, REMIC Residual Certificates, any
securities which are not rated in one of the four highest generic rating
categories by the Exemption Rating Agencies transfers of any the securities to a
Plan, to a trustee or other person acting on behalf of any Plan, or to any other
person investing Plan Assets to effect the
120
acquisition will not be registered by the trustee unless the transferee provides
the company, the trustee and the master servicer with an opinion of counsel
satisfactory to the company, the trustee (or Indenture Trustee in the case of
transfer of notes) and the master servicer, which opinion will not be at the
expense of the company, the trustee (or the Indenture Trustee in the case of the
transfer of notes) or the master servicer, that the purchase of the securities
by or on behalf of the Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the company, the trustee (or the
indenture trustee in the case of the transfer of notes) or the master servicer
to any obligation in addition to those undertaken in the related Agreement.
In lieu of an opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of securities by or
on behalf of a Plan is permissible under applicable law, will not constitute or
result in any non-exempt prohibited transaction under ERISA or Section 4975 of
the Code and will not subject the company, the trustee or the master servicer to
any obligation in addition to those undertaken in the Agreement and the
following statements are correct: (1) the transferee is an insurance company,
(2) the source of funds used to purchase the securities is an "insurance company
general account" (as that term is defined in PTCE 95-60), (3)the conditions set
forth in Sections I and III of PTCE 95-60 have been satisfied and (4) there is
no Plan with respect to which the amount of the general account's reserves and
liabilities for contracts held by or on behalf of the Plan and all other Plans
maintained by the same employer (or any "affiliate" thereof, as defined in PTCE
95-60) or by the same employee organization exceed 10% of the total of all
reserves and liabilities of the general account (as determined under PTCE 95-60)
as of the date of the acquisition of the securities.
An opinion of counsel or certification will not be required with
respect to the purchase of securities registered with the DTC. Any purchaser of
a DTC registered Security will be deemed to have represented by the purchase
that either (a) the purchaser is not a Plan and is not purchasing the securities
on behalf of, or with Plan Assets of, any Plan or (b) the purchase of any such
Security by or on behalf of, or with Plan Assets of, any Plan is permissible
under applicable law, will not result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Code and will not subject the company, the
trustee or the master servicer to any obligation in addition to those undertaken
in the related Agreement.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code nonetheless will be subject to federal income taxation to the
extent that its income is "unrelated business taxable income" within the meaning
of Section 512 of the Code. All "excess inclusion" of a REMIC allocated to a
REMIC Residual Certificate and held by such an investor will be considered
"unrelated business taxable income" and thus will be subject to federal income
tax. See "Federal Income Tax Consequences--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions."
CONSULTATION WITH COUNSEL
There can be no assurance that the Exemptions or any other DOL
exemption will apply with respect to any particular Plan that acquires the
securities or, even if all the conditions specified therein were satisfied, that
any such exemption would apply to transactions involving the trust fund.
Prospective Plan investors should consult with their legal counsel concerning
the impact of ERISA and the Code and the potential consequences to their
specific circumstances prior to making an investment in the securities. Neither
the company, the trustees, the master servicer nor any of their respective
affiliates will make any representation to the effect that the securities
satisfy all legal requirements with respect to the investment therein by Plans
121
generally or any particular Plan or to the effect that the securities are an
appropriate investment for Plans generally or any particular Plan.
BEFORE PURCHASING AN OFFERED SECURITY, A FIDUCIARY OF A PLAN OR OTHER
PLAN ASSET INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL
CONDITIONS SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION
401(C) OF ERISA WOULD BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE
PURCHASED UNDER THE EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR
PURPOSES OF THE EXEMPTION. IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE
AVAILABILITY OF THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS
EXEMPTIONS OR SECTION 410(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS
GENERAL FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE
SECURITIES ON BEHALF OF A PLAN.
LEGAL INVESTMENT MATTERS
Each class of certificates offered by this prospectus and by the
related prospectus supplement will be rated at the date of issuance in one of
the four highest rating categories by at least one Rating Agency. If so
specified in the related prospectus supplement, each such class that is rated in
one of the two highest rating categories by at least one Rating Agency will
constitute "mortgage related securities" for purposes of SMMEA, and, as such,
will be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, life insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any State 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 the entities. Under SMMEA, if a State enacted legislation on or
prior to October 3, 1991 specifically limiting the legal investment authority of
any such entities with respect to "mortgage related securities," such securities
will constitute legal investments for entities subject to the legislation only
to the extent provided therein. Some States have enacted legislation which
overrides the preemption provisions of SMMEA. SMMEA provides, however, that in
no event will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in "mortgage related
securities," or require the sale or other disposition of the securities, so long
as the contractual commitment was made or the securities acquired prior to the
enactment of the legislation.
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
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in the
securities, and national banks may purchase the securities for their own account
without regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement applicable to all depository institutions, setting
forth guidelines for and significant restrictions on investments in "high-risk
mortgage securities." The policy statement has been adopted by the Federal
Reserve Board, the Office of the Comptroller of the Currency, the FDIC and the
OTS with an effective date of February 10, 1992. The policy statement generally
indicates that a mortgage derivative product will be deemed to be high risk if
it exhibits greater price volatility than a standard fixed rate thirty-year
mortgage security. According to the policy statement, prior to purchase, a
depository institution will be required to determine whether a mortgage
derivative product that it is considering acquiring is high-risk, and if so that
the proposed acquisition would reduce the institution's overall interest rate
risk. Reliance on analysis and documentation
122
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance as
to which classes of offered securities will be treated as high-risk under the
policy statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of the securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having specified characteristics, which may include some classes of offered
securities. In addition, the National Credit Union Administration has issued
regulations governing federal credit union investments which prohibit investment
in specified types of securities, which may include some classes of offered
securities. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
Any class of securities that is not rated in one of the two highest
rating categories by at least one Rating Agency, and any other class of
securities specified in the related prospectus supplement, will not constitute
"mortgage related securities" for purposes of SMMEA. Prospective investors in
these classes of securities, in particular, should consider the matters
discussed in the following paragraph.
There may be other restrictions on the ability of investors either to
purchase some classes of offered securities or to purchase any class of offered
securities representing more than a specified percentage of the investors'
assets. The company will make no representations as to the proper
characterization of any class of offered securities for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of certificates.
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
thereof constitute legal investments or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to the investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
certificates will be applied by the company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the mortgage loans
and/or mortgage securities in the respective mortgage pools and to pay other
expenses. The company expects that it will make additional sales of securities
similar to the offered securities from time to time, but the timing and amount
of any such additional offerings will be dependent upon a number of factors,
including the volume of mortgage loans purchased by the company, prevailing
interest rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The certificates offered by this prospectus and by the related
prospectus supplements will be offered in series through one or more of the
methods described below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the company from the sale.
123
The company intends that offered securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the offered
securities of a particular series may be made through a combination of two or
more of these methods. The methods are as follows:
o By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
o By placements by the company with institutional investors
through dealers; and
o By direct placements by the company with institutional
investors.
If underwriters are used in a sale of any offered securities (other
than in connection with an underwriting on a best efforts basis), the
certificates will be acquired by the underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. The
underwriters may be broker-dealers affiliated with the company whose identities
and relationships to the company will be as set forth in the related prospectus
supplement. The managing underwriter or underwriters with respect to the offer
and sale of the offered securities of a particular series will be set forth on
the cover of the prospectus supplement relating to the series and the members of
the underwriting syndicate, if any, will be named in the prospectus supplement.
In connection with the sale of the offered securities, underwriters may
receive compensation from the company or from purchasers of the certificates in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the offered securities may be deemed to be
underwriters in connection with the certificates, and any discounts or
commissions received by them from the company and any profit on the resale of
offered securities by them may be deemed to be underwriting discounts and
commissions under the Securities Act.
It is anticipated that the underwriting agreement pertaining to the
sale of offered securities of any series will provide that the obligations of
the underwriters will be subject to conditions precedent, that the underwriters
will be obligated to purchase all such certificates if any are purchased (other
than in connection with an underwriting on a best efforts basis) and that, in
limited circumstances, the company will indemnify the several underwriters and
the underwriters will indemnify the company against specified civil liabilities,
including liabilities under the Securities Act or will contribute to payments
required to be made in respect thereof.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between the company and
purchasers of offered securities of the series.
The company anticipates that the certificates offered by this
prospectus and the prospectus supplement will be sold primarily to institutional
investors or sophisticated non-institutional investors. Purchasers of offered
securities, including dealers, may, depending on the facts and circumstances of
the purchases, be deemed to be "underwriters" within the meaning of the
Securities Act in connection with reoffers and sales by them of the
certificates. Holders of offered securities should consult with their legal
advisors in this regard prior to any such reoffer or sale.
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LEGAL MATTERS
Legal matters, including federal income tax matters, in connection with
the securities of each series will be passed upon for the company by Thacher
Proffitt & Wood, New York, New York. With respect to each series of securities,
a copy of this opinion will be filed with the Commission on Form 8-K within 15
days after the Closing Date.
FINANCIAL INFORMATION
With respect to each series of certificates, a new trust fund will be
formed, and no trust fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related series of
certificates. Accordingly, no financial statements with respect to any trust
fund related to a series of certificates will be included in this prospectus or
in the related prospectus supplement.
With respect to each series of notes, where the issuer is a statutory
business trust or a limited liability company, financial statements will be
filed as required by the Exchange Act. Each such issuer will suspend filing the
reports if and when the reports are no longer required under the Exchange Act.
RATING
It is a condition to the issuance of any class of offered securities
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
address the likelihood of receipt by the holders thereof of all collections on
the underlying mortgage assets to which the holders are entitled. These ratings
address the structural, legal and issuer-related aspects associated with the
certificates and notes, the nature of the underlying mortgage assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and mortgage-backed notes do not represent any assessment of the
likelihood of principal prepayments by borrowers or of the degree by which the
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 securities 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.
AVAILABLE INFORMATION
The company is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports and other information
with the Commission. Reports and other information filed by the company 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 its Regional
Offices located as follows: Chicago Regional Office, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of the material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system
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at the Commission's Website (http://www.sec.gov). The company does not intend to
send any financial reports to securityholders.
This prospectus does not contain all of the information set forth in
the registration statement (of which this prospectus forms a part) and exhibits
thereto which the company has filed with the Commission under the Securities Act
and to which reference is hereby made.
REPORTS TO SECURITYHOLDERS
The master servicer or another designated person will be required to
provide periodic unaudited reports concerning each trust fund to all registered
holders of offered securities of the related series with respect to each trust
fund as are required under the Exchange Act and the Commission's related rules
and regulations. See "Description of the Securities--Reports to
Securityholders."
INCORPORATION OF INFORMATION BY REFERENCE
There are incorporated in this prospectus and in the related prospectus
supplement by reference all documents and reports filed or caused to be filed by
the company with respect to a trust fund pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act, prior to the termination of the offering of the
offered securities of the related series. The company will provide or cause to
be provided without charge to each person to whom this prospectus is delivered
in connection with the offering of one or more classes of offered securities,
upon written or oral request of the person, a copy of any or all the reports
incorporated in this prospectus by reference, in each case to the extent the
reports relate to one or more of such classes of the offered securities, other
than the exhibits to the documents, unless the exhibits are specifically
incorporated by reference in the documents. Requests should be directed in
writing to Impac Secured Assets Corp., 20371 Irvine Avenue, Santa Ana Heights,
California 92707, or by telephone at (714) 556-0122. The company has determined
that its financial statements will not be material to the offering of any
offered securities.
126
GLOSSARY
ACCRUAL SECURITY -- A security with respect to which some or all of its
accrued interest will not be distributed but rather will be added to the
principal balance thereof on each distribution date for the period described in
the related prospectus supplement.
AFFILIATED SELLER -- Impac Funding Corporation, the parent of the
company, and their respective affiliates.
AGREEMENT -- An owner trust agreement, servicing agreement, indenture
or pooling and servicing agreement.
ARM LOAN -- A mortgage loan with an adjustable interest rate.
BANKRUPTCY CODE -- Title 11 of the United States Code, as amended from
time to time.
BANKRUPTCY LOSS -- A Realized Loss attributable to certain actions
which may be taken by a bankruptcy court in connection with a mortgage loan,
including a reduction by a bankruptcy court of the principal balance of or the
mortgage rate on a mortgage loan or an extension of its maturity.
BENEFICIAL OWNER -- A person acquiring an interest in any DTC
Registered Security.
BENEFIT PLAN INVESTORS -- Plans, as well as any "employee benefit plan"
(as defined in Section 3(3) or ERISA) which is not subject to Title I of ERISA,
such as governmental plans (as defined in Section 3(32) of ERISA) and church
plans(as defined in Section 3(33) of ERISA) which have not made an election
under Section 410(d) of the Code, and any entity whose underlying assets include
Plan Assets by reason of a Plan's investment in the entity.
BUYDOWN ACCOUNT -- With respect to a buydown mortgage loan, the
custodial account where the Buydown Funds are placed.
BUYDOWN FUNDS -- With respect a buydown mortgage loan, the amount
contributed by the seller of the mortgaged property or another source and placed
in the Buydown Account.
BUYDOWN PERIOD -- The period during which funds on a buydown mortgage
loan are made up for from the Buydown Account.
CERCLA -- The federal Comprehensive Environmental Response,
Compensation and Liability Act, as amended.
CERTIFICATE ACCOUNT -- One or more separate accounts for the collection
of payments on the related mortgage loans and/or mortgage securities
constituting the related trust fund.
CLOSING DATE -- With respect to any series of securities, the date on
which the securities are issued.
CODE-- The Internal Revenue Code of 1986.
COMMISSION-- The Securities and Exchange Commission.
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COMMITTEE REPORT -- The Conference Committee Report accompanying the
Tax Reform Act of 1986.
CONSERVATION ACT -- The Asset Conservation, Lender Liability and
Deposit Insurance Act of 1996.
CONTRACT -- Manufactured housing conditional sales contracts and
installment loan agreements each secured by a Manufactured Home.
CONTRIBUTIONS TAX -- With respect to specific contributions to a REMIC
made after the Closing Date, a tax on the REMIC equal to 100% of the value of
the contributed property.
COOPERATIVE -- With respect to a cooperative mortgage loan, the
corporation that owns the related apartment building.
CRIME CONTROL ACT-- The Comprehensive Crime Control Act of 1984.
DEFAULTED MORTGAGE LOSS -- A Realized Loss other than a Special Hazard
Loss, Extraordinary Loss or other losses resulting from damage to a mortgaged
property, Bankruptcy Loss or Fraud Loss.
DEFERRED INTEREST -- If an adjustment to the mortgage rate on a
mortgage loan has caused the amount of accrued interest on the mortgage loan in
any month to exceed the scheduled monthly payment on the mortgage loan, the
resulting amount of interest that has accrued but is not then payable;
DELETED MORTGAGE LOAN -- A mortgage loan which has been removed from
the related trust fund.
DESIGNATED SELLER TRANSACTION -- A series of securities where the
related mortgage loans are provided either directly or indirectly to the company
by one or more Sellers identified in the related prospectus supplement.
DETERMINATION DATE -- The close of business on the date on which the
amount of each distribution to securityholders will be determined, which shall
be stated in each prospectus supplement.
DIDMC -- The Depository Institutions Deregulation and Monetary Control
Act of 1980.
DOL-- The U.S. Department of Labor.
DOL REGULATIONS -- Regulations by the DOL promulgated at 29
C.F.R.ss.2510.3-101.
DTC REGISTERED SECURITY -- Any security initially issued through the
book-entry facilities of the DTC.
DUE PERIOD -- The period between distribution dates.
ELIGIBLE ACCOUNT -- An account maintained with a federal or state
chartered depository institution (i) the short-term obligations of which are
rated by each of the Rating Agencies in its highest rating at the time of any
deposit therein, or (ii) insured by the FDIC (to the limits established by the
FDIC), the uninsured deposits in which account are otherwise secured such that,
as evidenced by an opinion of counsel (obtained by and at the expense of the
person requesting that the account be held pursuant to this clause (ii))
delivered to the trustee prior to the establishment of the account, the security
holders will have a claim with respect
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to the funds in the account and a perfected first priority security interest
against any collateral (which shall be limited to Permitted Instruments)
securing the funds that is superior to claims of any other depositors or general
creditors of the depository institution with which the account is maintained or
(iii) a trust account or accounts maintained with a federal or state chartered
depository institution or trust company with trust powers acting in its
fiduciary capacity or (iv) an account or accounts of a depository institution
acceptable to the Rating Agencies (as evidenced in writing by the Rating
Agencies that use of any such account as the Certificate Account will not have
an adverse effect on the then-current ratings assigned to the classes of the
securities then rated by the Rating Agencies). Eligible Accounts may or may not
bear interest.
EQUITY CERTIFICATES -- With respect to any series of notes, the
certificate or certificates representing a beneficial ownership interest in the
related issuer.
ERISA -- The Employee Retirement Income Security Act of 1974, as
amended.
ERISA PLANS -- Employee pension and welfare benefit plans subject to
ERISA.
EXEMPTION-- An individual prohibited transactions exemption issued by
the DOL to an underwriter, as amended by PTE 97-34, 62 Fed. Reg. 39021 (July
21,1997), and PTE 2000-58, 65 Fed. Reg. 67765 (November 13, 2000).
EXEMPTION RATING AGENCY-- Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., or Fitch, Inc.
EXCHANGE ACT-- The Securities Exchange Act of 1934, as amended.
EXTRAORDINARY LOSS -- Any Realized Loss occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
FRAUD LOSS -- A Realized Loss incurred on a defaulted mortgage loan as
to which there was fraud in the origination of the mortgage loan.
FTC RULE -- The so-called "Holder-in-Due-Course" Rule of the Federal
Trade Commission.
GAIN-ST GERMAIN ACT -- The Gain-St Germain Depository Institutions Act
of 1982.
GLOBAL SECURITIES -- The globally offered securities of the classes
specified in the related prospectus supplement.
GRANTOR TRUST CERTIFICATE -- A certificate representing an interest in
a Grantor Trust Fund.
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATE -- A Grantor Trust
Certificate representing an undivided equitable ownership interest in the
principal of the mortgage loans constituting the related Grantor Trust Fund,
together with interest on the Grantor Trust Certificates at a pass-through rate.
GRANTOR TRUST STRIP CERTIFICATE -- A certificate representing ownership
of all or a portion of the difference between interest paid on the mortgage
loans constituting the related Grantor Trust Fund (net of normal administration
fees and any retained interest of the company) and interest paid to the holders
of Grantor Trust Fractional Interest Certificates issued with respect to the
Grantor Trust Fund. A Grantor Trust
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Strip Certificate may also evidence a nominal ownership interest in the
principal of the mortgage loans constituting the related Grantor Trust Fund.
GRANTOR TRUST FUND -- A trust fund as to which no REMIC election will
be made and which qualifies as a "grantor trust" within the meaning of Subpart
E, part I of subchapter J of the Code.
HIGH LTV LOANS -- Mortgage loans with loan-to-value ratios in excess of
80%and as high as 150% and which are not be insured by a Primary Insurance
Policy.
HOUSING ACT-- The National Housing Act of 1934, as amended.
INDEX -- With respect to an ARM Loan, the related index, which will be
specified in the related prospectus supplement and may include one of the
following indexes: (1) the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of either six months or one year, (2) the weekly
auction average investment yield of U.S. Treasury bills of six months, (3) the
daily Bank Prime Loan rate made available by the Federal Reserve Board, (4) the
cost of funds of member institutions for the Federal Home Loan Bank of San
Francisco, (5) the interbank offered rates for U.S. dollar deposits in the
London market, each calculated as of a date prior to each scheduled interest
rate adjustment date which will be specified in the related prospectus
supplement or (6) any other index described in the related prospectus
supplement.
INSURANCE PROCEEDS -- Proceeds received under any hazard, title,
primary mortgage, FHA or other insurance policy that provides coverage with
respect to a particular mortgaged property or the related mortgage loan (other
than proceeds applied to the restoration of the property or released to the
related borrower in accordance with the customary servicing practices of the
master servicer (or, if applicable, a special servicer) and/or the terms and
conditions of the related mortgage.
INTERMEDIARY -- An institution that is not a participant in the DTC but
clears through or maintains a custodial relationship with a participant.
IRS-- The Internal Revenue Service.
ISSUE PREMIUM -- The excess of the issue price of a REMIC Regular
Certificate over its stated redemption price.
ISSUER -- With respect to a series of notes, the Delaware business
trust or other trust, created pursuant to the owner trust agreement, that issues
the notes.
LIQUIDATION PROCEEDS -- (1) All amounts, other than Insurance Proceeds
received and retained in connection with the liquidation of defaulted mortgage
loans or property acquired in respect thereof, by foreclosure or otherwise,
together with the net operating income (less reasonable reserves for future
expenses) derived from the operation of any mortgaged properties acquired by the
trust fund through foreclosure or otherwise and (2) all proceeds of any mortgage
loan or mortgage security purchased (or, in the case of a substitution, amounts
representing a principal adjustment) by the master servicer, the company, a
Seller or any other person pursuant to the terms of the related pooling and
servicing agreement or servicing agreement as described under "The Mortgage
Pools--Representations by Sellers," "Servicing of Mortgage Loans--Realization
Upon and Sale of Defaulted Mortgage Loans," "--Assignment of Trust Fund
Assets"above and "The Agreements--Termination."
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MANUFACTURED HOME -- Manufactured homes within the meaning of 42 United
States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air conditioning, and electrical systems
contained therein; except that the term shall include any structure which meets
all the requirements of this paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under this chapter."
NET MORTGAGE RATE -- With respect to a mortgage loan, the mortgage rate
net of the per annum rate or rates applicable to the calculation of servicing
and administrative fees and any retained interest of the company.
NONRECOVERABLE ADVANCE -- An advance which, in the good faith judgment
of the master servicer, will not be recoverable from recoveries on the related
mortgage loan or another specifically identified source.
NOTE MARGIN -- With respect to an ARM Loan, the fixed percentage set
forth in the related mortgage note, which when added to the related Index,
provides the mortgage rate for the ARM Loan.
OID REGULATIONS -- The rules governing original issue discount that are
set forth in Sections 1271-1273 and 1275 of the Code and in the related Treasury
regulations.
OTS-- The Office of Thrift Supervision.
PARTIES IN INTEREST -- With respect to a Plan, persons who have
specified relationships to the Plans, either "Parties in Interest" within the
meaning of ERISA or "Disqualified Persons" within the meaning of the Code.
PERCENTAGE INTEREST -- With respect to a security of a particular
class, the percentage obtained by dividing the initial principal balance or
notional amount of the security by the aggregate initial amount or notional
balance of all the securities of the class.
PERMITTED INVESTMENTS -- United States government securities and other
investment grade obligations specified in the related pooling and servicing
agreement or the related servicing agreement and indenture.
PLAN ASSETS -- "Plan assets" of a Plan, within the meaning of the DOL
Regulations.
PLANS-- ERISA Plans and Tax Favored Plans.
PREPAYMENT ASSUMPTION -- With respect to a REMIC Regular Certificate or
a Grantor Trust Certificate, the prepayment assumption used in pricing the
initial offering of that security.
PREPAYMENT INTEREST SHORTFALL -- With respect to any mortgage loan with
a prepayment in part or in full the excess, if any, of interest accrued and
otherwise payable on the related mortgage loan over the interest charged to the
borrower (net of servicing and administrative fees and any retained interest of
the company).
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PRIMARY INSURANCE COVERED LOSS -- With respect to a mortgage loan
covered by a Primary Insurance Policy, the amount of the related loss covered
pursuant to the terms of the Primary Insurance Policy, which will generally
consist of the unpaid principal amount of the mortgage loan and accrued and
unpaid interest on the mortgage loan and reimbursement of specific expenses,
less (1) rents or other payments collected or received by the insured (other
than the proceeds of hazard insurance) that are derived from the related
mortgaged property, (2) hazard insurance proceeds in excess of the amount
required to restore the related mortgaged property and which have not been
applied to the payment of the mortgage loan, (3) amounts expended but not
approved by the primary insurer, (4) claim payments previously made on the
mortgage loan and (5) unpaid premiums and other specific amounts.
PRIMARY INSURANCE POLICY -- A primary mortgage guaranty insurance
policy.
PRIMARY INSURER-- An issuer of a Primary Insurance Policy.
PTCE-- Prohibited Transaction Class Exemption.
QUALIFIED SUBSTITUTE MORTGAGE LOAN -- A mortgage loan substituted for a
Deleted Mortgage Loan, meeting the requirements described under "The Mortgage
Pools-- Representations by Sellers" in this prospectus.
RATING AGENCY -- A "nationally recognized statistical rating
organization" within the meaning of Section 3(a)(41) of the Exchange Act.
REALIZED LOSS -- Any loss on a mortgage loan attributable to the
mortgagor's failure to make any payment of principal or interest as required
under the mortgage note.
RECORD DATE -- The close of business on the last business day of the
month preceding the month in which the applicable distribution date occurs.
RELIEF ACT -- The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
REMIC -- A real estate mortgage investment conduit as defined in
Sections 860A through 860G of the Code.
REMIC ADMINISTRATOR -- The trustee, the master servicer or another
specified party who administers the related REMIC.
REMIC CERTIFICATES -- Certificates evidencing interests in a trust fund
as to which a REMIC election has been made.
REMIC PROVISIONS -- Sections 860A through 860G of the Code.
REMIC REGULAR CERTIFICATE -- A REMIC Certificate designated as a
"regular interest" in the related REMIC.
REMIC REGULAR CERTIFICATEHOLDER -- A holder of a REMIC Regular
Certificate.
REMIC RESIDUAL CERTIFICATE -- A REMIC Certificate designated as a
"residual interest" in the related REMIC.
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REMIC RESIDUAL CERTIFICATEHOLDER -- A holder of a REMIC Residual
Certificate.
REMIC REGULATIONS -- The REMIC Provisions and the related Treasury
regulations.
REO MORTGAGE LOAN -- A mortgage loan where title to the related
mortgaged property has been obtained by the trustee or to its nominee on behalf
of securityholders of the related series.
RICO-- The Racketeer Influenced and Corrupt Organizations statute.
SECURITIES ACT -- The Securities Act of 1933, as amended.
SELLER -- The seller of the mortgage loans or mortgage securities
included in a trust fund to the company with respect a series of securities, who
shall bean Affiliated Seller or an Unaffiliated Seller.
SINGLE FAMILY PROPERTY -- An attached or detached one-family dwelling
unit, two-to four-family dwelling unit, condominium, townhouse, row house,
individual unit in a planned-unit development and other individual dwelling
units.
SMMEA-- The Secondary Mortgage Market Enhancement Act of 1984.
SPECIAL HAZARD LOSS -- (1) losses due to direct physical damage to a
mortgaged property other than any loss of a type covered by a hazard insurance
policy or a flood insurance policy, if applicable, and (2) losses from partial
damage caused by reason of the application of the co-insurance clauses contained
in hazard insurance policies.
STRIP SECURITY -- A security which will be entitled to (1) principal
distributions, with disproportionate, nominal or no interest distributions or
(2) interest distributions, with disproportionate, nominal or no principal
distributions.
TAX FAVORED PLANS -- Tax-qualified retirement plans described in
Section 401(a) of the Code and on individual retirement accounts described in
Section 408 of the Code.
TITLE V -- Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, enacted in March 1980.
TITLE VIII -- Title VIII of the Garn-St Germain Act.
UNAFFILIATED SELLERS -- Banks, savings and loan associations, mortgage
bankers, mortgage brokers, investment banking firms, the Resolution Trust
Corporation, the FDIC and other mortgage loan originators or sellers not
affiliated with the company.
UNITED STATES PERSON -- A citizen or resident of the United States, a
corporation or partnership (including an entity treated as a corporation or
partnership for federal income tax purposes) created or organized in, or under
the laws of, the United States or any state thereof or the District of
Columbia(except, in the case of a partnership, to the extent provided in
regulations),or an estate whose income is subject to United States federal
income tax regardless of its source, or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. To the extent prescribed in regulations by
the Secretary of the Treasury, which have not yet been issued, a trust which was
in existence on August 20,
133
1996 (other than a trust treated as owned by the grantor under subpart E of part
I of subchapter J of chapter 1 of the Code), and which was treated as a United
States person on August 20, 1996 may elect to continue to be treated as a United
States person notwithstanding the previous sentence.
VALUE -- With respect to a mortgaged property securing a single family,
multifamily, commercial or mixed-use loan, the lesser of (x) the appraised value
determined in an appraisal obtained at origination of the mortgage loan, if any,
or, if the related mortgaged property has been appraised subsequent to
origination, the value determined in the subsequent appraisal and (y) the sales
price for the related mortgaged property (except in circumstances in which there
has been a subsequent appraisal). However, in the case of refinanced, modified
or converted single family, multifamily, commercial or mixed-use loans, the
"Value" of the related mortgaged property will be equal to the lesser of (x) the
appraised value of the related mortgaged property determined at origination or
in an appraisal, if any, obtained at the time of refinancing, modification or
conversion and (y) the sales price of the related mortgaged property or, if the
mortgage loan is not a rate and term refinance mortgage loan and if the
mortgaged property was owned for a relatively short period of time prior to
refinancing, modification or conversion, the sum of the sales price of the
related mortgaged property plus the added value of any improvements. With
respect to a new Manufactured Home, the "Value" is no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site), including
"accessories" identified in the invoice, plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. With respect to a used
Manufactured Home, the "Value" is the least of the sale price, the appraised
value, and the National Automobile Dealer's Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a Manufactured Home
is based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
134
IMPAC SECURED ASSETS CORP.
COMPANY
$200,000,000
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 2002-1
PROSPECTUS SUPPLEMENT
BEAR, STEARNS & CO. INC.
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 OFFERED CERTIFICATES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered 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 90 days after the date hereof.