PROSPECTUS SUPPLEMENT (to Prospectus dated September 20, 2002)
$286,898,000 (APPROXIMATE)
FIRST FRANKLIN MORTGAGE LOAN TRUST 2002-FFA
ASSET-BACKED CERTIFICATES, SERIES 2002-FFA
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
FAIRBANKS CAPITAL CORP.
SERVICER
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S- 9 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 2 IN THE PROSPECTUS.
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Financial Asset Securities Corp., Fairbanks Capital
Corp. or any of their affiliates. This prospectus supplement may be used to
offer and sell the certificates only if accompanied by the prospectus.
Only the five classes of certificates identified below are being offered by this
prospectus supplement and the accompanying prospectus.
THE OFFERED CERTIFICATES
o Represent ownership interests in a trust consisting primarily of a pool
of second lien, fixed-rate residential mortgage loans.
o The Class A Certificates, the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates will accrue interest at a
rate equal to one-month LIBOR plus a fixed margin, subject to certain
limitations described in this prospectus supplement.
o The Class S-1 Certificates will accrue interest for 30 months on their
notional amounts at a fixed pass-through rate.
CREDIT ENHANCEMENT
o Subordination as described in this prospectus supplement under
"Description of the Certificates--Credit Enhancement."
o Overcollateralization as described in this prospectus supplement under
"Description of the Certificates--Overcollateralization Provisions."
o Excess Interest as described in this prospectus supplement under
"Description of the Certificates--Overcollateralization Provisions."
o A Certificate Guaranty Insurance Policy will be issued for the benefit
of the Class A Certificates as described in this prospectus supplement
under "Description of the Certificates--The Class A Policy."
Certificate Insurer with respect to the Class A Certificates
ORIGINAL
CERTIFICATE PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO THE
CLASS PRINCIPAL BALANCE RATE PUBLIC DISCOUNT DEPOSITOR(3)
----- ----------------- ---- ------ -------- ------------
Class A..................... $235,258,000 Variable(2) 100.0000% 0.2500% 99.7500%
Class M-1................... $ 21,517,000 Variable(2) 100.0000% 0.2500% 99.7500%
Class M-2................... $ 15,779,000 Variable(2) 100.0000% 0.2500% 99.7500%
Class M-3................... $ 14,344,000 Variable(2) 100.0000% 0.2500% 99.7500%
Class S-1................... (1) 2.00% per annum N/A N/A N/A
________________
(1) Notional Amount as provided herein.
(2) Determined as provided herein.
(3) Before deducting expenses estimated to be $589,000.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Delivery of the Offered Certificates will be made in book-entry form through the
facilities of The Depository Trust Company, and upon request through the
facilities of Clearstream Banking Luxembourg and the Euroclear System on or
about September 26, 2002.
September 23, 2002
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
SUMMARY OF TERMS....................................................S-3
RISK FACTORS........................................................S-9
THE MORTGAGE POOL..................................................S-15
FIRST FRANKLIN FINANCIAL CORPORATION...............................S-23
THE SELLER.........................................................S-27
THE POOLING AGREEMENT..............................................S-27
DESCRIPTION OF THE CERTIFICATES....................................S-34
THE CERTIFICATE INSURER............................................S-49
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS......................S-51
USE OF PROCEEDS....................................................S-60
FEDERAL INCOME TAX CONSEQUENCES....................................S-60
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS..........................S-61
LEGAL INVESTMENT CONSIDERATIONS....................................S-62
METHOD OF DISTRIBUTION.............................................S-63
LEGAL MATTERS......................................................S-63
RATINGS............................................................S-64
EXPERTS............................................................S-64
INDEX OF DEFINED TERMS.............................................S-65
ANNEX I.............................................................I-1
S-2
SUMMARY OF TERMS
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES NOT
CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
O THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED BY
THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND OTHER
INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS RELATING TO
FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL ITEMS.
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED RESULTS. THOSE
RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL
REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE BEYOND OUR CONTROL.
ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY DIFFERENT FROM WHAT WE PREDICT
IN OUR FORWARD-LOOKING STATEMENTS.
OFFERED CERTIFICATES
On the Closing Date, First Franklin Mortgage Loan Trust 2002-FFA will issue ten
classes of certificates, five of which are being offered by this prospectus
supplement and the accompanying prospectus. The assets of the trust that will
support the certificates will consist primarily of a pool of second lien,
fixed-rate mortgage loans having the characteristics described in this
prospectus supplement. The Class A Certificates, the Class S-1 Certificates, the
Class M-1 Certificates, the Class M-2 Certificates and the Class M-3
Certificates are the only classes of offered certificates.
The Offered Certificates will be book-entry securities clearing through The
Depository Trust Company (in the United States) or upon request through
Clearstream Banking Luxembourg and the Euroclear System (in Europe) in minimum
denominations of $50,000.
OTHER CERTIFICATES
The trust will issue five additional classes of certificates. These certificates
will be designated as the Class S-2 Certificates, the Class C Certificates, the
Class P Certificates, the Class R Certificates and the Class X Certificates and
are not being offered to the public by this prospectus supplement and the
prospectus.
The Class S-2 Certificates will have an initial notional amount and pass-through
rate as set forth in this prospectus supplement. The Class S-2 Certificates are
described in this prospectus supplement because their amount, structure, rights,
risks and other characteristics affect the amount, structure, rights, risks and
other characteristics of some of the offered certificates. The Class S-2
Certificates will be delivered to the Seller or its designee as partial
consideration for the mortgage loans.
The Class C Certificates will have an initial certificate principal balance of
approximately $731 which is approximately equal to the overcollateralization on
the Closing Date. The Class C Certificates will be delivered to the Seller or
its designee as partial consideration for the mortgage loans.
The Class P Certificates will have an original 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 Class P Certificates will be delivered to the Seller or
its designee as partial consideration for the mortgage loans.
The Class R Certificates will not have an original principal balance and are the
class of certificates representing the residual interests in the trust. The
Class R Certificates will be delivered to the Seller or its designee as partial
consideration for the mortgage loans.
The Class X Certificates will not have an original principal balance and will be
entitled to any amounts collected in respect of written off mortgage loans as
described herein. The Class X Certificates will be delivered to the Seller or
its designee as partial consideration for the mortgage loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES-- GENERAL," "--BOOK-ENTRY
CERTIFICATES" AND "THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
S-3
CUT-OFF DATE
September 1, 2002.
CLOSING DATE
On or about September 26, 2002.
THE DEPOSITOR
Financial Asset Securities Corp., a Delaware corporation and an affiliate of
Greenwich Capital Markets, Inc. WE REFER YOU TO "THE DEPOSITOR" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
SERVICER
Fairbanks Capital Corp., a Utah corporation. Any obligation specified to be
performed by the master servicer in the prospectus is an obligation to be
performed by the servicer with respect to the Mortgage Loans. WE REFER YOU TO
"THE POOLING AGREEMENT--THE SERVICER" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
ORIGINATOR
First Franklin Financial Corporation, a Delaware corporation, originated or
acquired the mortgage loans. WE REFER YOU TO "FIRST FRANKLIN FINANCIAL
CORPORATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
SELLER
Greenwich Capital Financial Products, Inc., a Delaware corporation. WE REFER YOU
TO "THE SELLER" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
TRUSTEE
Wells Fargo Bank Minnesota, National Association, a national banking
association. WE REFER YOU TO "THE POOLING AGREEMENT--THE TRUSTEE" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
CERTIFICATE INSURER
Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance company, will
issue a certificate guaranty insurance policy for the benefit of the Class A
Certificates. WE REFER YOU TO "THE CERTIFICATE INSURER" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL INFORMATION.
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
O OFFERED CERTIFICATES
Class A Certificates, Class S-1 Certificates and Mezzanine Certificates.
o CLASS S CERTIFICATES
Class S-1 Certificates and Class S-2 Certificates.
o MEZZANINE CERTIFICATES
Class M-1 Certificates, Class M-2 Certificates and Class M-3 Certificates.
o SUBORDINATE CERTIFICATES
Mezzanine Certificates and Class C Certificates.
o RESIDUAL CERTIFICATES
Class R Certificates.
MORTGAGE LOANS
On the Closing Date, the trust will acquire a pool of second lien, fixed-rate
mortgage loans. The mortgage pool will consist of approximately 7,272 mortgage
loans having an aggregate outstanding principal balance as of the Cut-off Date
of approximately $286,898,831 (the "Mortgage Loans").
The statistical information in this prospectus supplement reflects the
characteristics of the Mortgage Loans as of the Cut-off Date. After the date of
this prospectus supplement and prior to the Closing Date, some mortgage loans
may be added to the mortgage pool and some mortgage loans may be removed from
the mortgage pool, as described under "The Mortgage Pool" in this prospectus
supplement. The Depositor believes that the information set forth in this
prospectus supplement is representative of the characteristics of the mortgage
pool as it will be constituted at the Closing Date, although certain
characteristics of the Mortgage Loans may vary.
S-4
The Mortgage Loans have the following characteristics (with all figures being
approximate and all percentages and weighted averages being based on scheduled
principal balances as of the Cut-off Date):
Mortgage Loans with Prepayment
Charges: 79.85%
Range of Remaining Term 109 months to
to Stated Maturities: 359 months
Weighted Average Remaining Term to
Stated Maturity: 180 months
Range of Original Principal Balances $10,000 to $300,000
Average Original Principal Balance: $39,549
Range of Outstanding Principal
Balances: $8,962 to $299,289
Average Outstanding Principal
Balance: $39,453
Range of Current Mortgage Rates: 8.750% to 14.250%
Weighted Average Current Mortgage
Rate: 11.775%
Balloon Loans: 95.92%
Geographic Concentration in Excess
of 5%:
California 55.84%
Florida 5.06%
DISTRIBUTION DATES
The Trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in October 2002 (each, a "Distribution Date") (i) to
the holder of record of the certificates as of the business day preceding such
date of distribution, in the case of the Class A Certificates and the Mezzanine
Certificates if held in book-entry form, or (ii) to the holder of record of the
certificates as of the last business day of the month immediately preceding the
month in which the distribution occurs, in the case of the Class S Certificates
or in the case of the Class A Certificates and the Mezzanine Certificates if
held in registered, certificated form. If the 25th day of a month is not a
business day, then the distribution will be made on the next business day.
DISTRIBUTIONS ON THE CERTIFICATES
INTEREST DISTRIBUTIONS
The initial pass-through rate for the Class A Certificates will be calculated at
the per annum rate of One-Month LIBOR + 35 basis points, subject to the
limitations described in this prospectus supplement.
The initial pass-through rate for the Class M-1 Certificates will be calculated
at the per annum rate of One-Month LIBOR + 100 basis points, subject to the
limitations described in this prospectus supplement.
The initial pass-through rate for the Class M-2 Certificates will be calculated
at the per annum rate of One-Month LIBOR + 150 basis points, subject to the
limitations described in this prospectus supplement.
The initial pass-through rate for the Class M-3 Certificates will be calculated
at the per annum rate of One-Month LIBOR + 230 basis points, subject to the
limitations described in this prospectus supplement.
In addition, if the Servicer fails to exercise its option to terminate the trust
on the earliest permitted date as described below under "Optional Termination,"
the pass-through rate on the Class A Certificates will then increase to the per
annum rate of One-Month LIBOR + 70 basis points, subject to the limitations
described in this prospectus supplement; the pass-through rate on the Class M-1
Certificates will then increase to the per annum rate of One-Month LIBOR + 150
basis points, subject to the limitations described in this prospectus
supplement; the pass-through rate on the Class M-2 Certificates will then
increase to the per annum rate of One-Month LIBOR + 200 basis points, subject to
the limitations described in this prospectus supplement and the pass-through
rate on the Class M-3 Certificates will then increase to the per annum rate of
One-Month LIBOR + 280 basis points, subject to the limitations described in this
prospectus supplement.
The pass-through rate for the Class S-1 Certificates will be 2.00% per annum for
the 1st Distribution Date through the 30th Distribution Date. After the 30th
Distribution Date, the pass-through rate for the Class S- 1 Certificates will be
0.00% per annum, and such class will therefore then cease to accrue interest.
The pass-through rate for the Class S-2 Certificates will be 2.00% per annum for
the 1st Distribution Date through the 8th Distribution Date. After the 8th
Distribution Date, the pass-through rate for the Class S- 2 Certificates will be
0.00% per annum, and such class will therefore then cease to accrue interest.
The "Notional Amount" of each class of Class S Certificates immediately prior to
any Distribution Date
S-5
will be equal to the lesser of (i) $28,689,000 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 and unscheduled collections of
principal received during the related Prepayment Period).
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PASS- THROUGH RATES" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
Interest distributable on the certificates accrues during an accrual period. The
accrual period for the Class A Certificates and the Mezzanine Certificates for
any Distribution Date is the period from the previous Distribution Date (or, in
the case of the first accrual period from the Closing Date) to the day prior to
the current Distribution Date. Interest will be calculated for the Class A
Certificates and the Mezzanine Certificates on the basis of the actual number of
days in the accrual period, based on a 360-day year. The accrual period for the
Class S Certificates for any Distribution Date is the calendar month preceding
the month in which such Distribution Date occurs. Interest will be calculated
for the Class S Certificates on the basis of a 360-day year consisting of twelve
30-day months.
The Class A Certificates and the Mezzanine Certificates will accrue interest on
their certificate principal balance outstanding immediately prior to each
Distribution Date. The Class S Certificates will accrue interest on their
Notional Amount outstanding immediately prior to each Distribution Date.
The Class C Certificates will accrue interest as provided in the pooling
agreement. The Class P Certificates, the Class X Certificates and the Residual
Certificates will not accrue interest.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
PRINCIPAL DISTRIBUTIONS
Principal will be distributed to the holders of the Class A Certificates and the
Mezzanine Certificates on each Distribution Date in the amounts described herein
under "Description of the Certificates--Allocation of
Available Funds."
DISTRIBUTION PRIORITIES
In general, on any Distribution Date, funds available for distribution from
payments and other amounts received on the Mortgage Loans will be distributed as
follows:
INTEREST DISTRIBUTIONS
first, concurrently, to distribute interest on the Class A Certificates and the
Class S Certificates, on a PRO RATA basis based on their respective
entitltements; and
second, to distribute interest on the Mezzanine
Certificates, but only in the amounts and to the extent
described herein;
PRINCIPAL DISTRIBUTIONS
first, to distribute principal on the Class A Certificates; and
second, to distribute principal on the Mezzanine Certificates, but only in the
order of priority, amounts and to the extent described herein.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
ADVANCES
The Servicer will make cash advances to cover delinquent payments of interest to
the extent it reasonably believes that the cash advances are recoverable from
future payments on the Mortgage Loans. Advances are intended to maintain a
regular flow of scheduled interest payments on the certificates and are not
intended to guarantee or insure against losses.
WE REFER YOU TO "THE POOLING AGREEMENT--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT
AND "DESCRIPTION OF THE SECURITIES--ADVANCES" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
OPTIONAL TERMINATION
The Servicer may purchase all of the Mortgage Loans and any REO Properties and
retire the certificates when the aggregate current principal balance of the
Mortgage Loans and REO Properties is equal to or less than 10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date.
WE REFER YOU TO "THE POOLING AGREEMENT --TERMINATION" AND "DESCRIPTION OF THE
CERTIFICATES--PASS-THROUGH RATES" IN THIS PROSPECTUS SUPPLEMENT AND "THE
AGREEMENTS--TERMINATION; OPTIONAL TERMINATION" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
CREDIT ENHANCEMENT
S-6
1. THE POLICY
An irrevocable and unconditional certificate insurance policy will be issued by
the Certificate Insurer with respect to the Class A Certificates. The policy
will guarantee the payment of principal and interest on the Class A Certificates
to the extent described in this prospectus supplement. If the Certificate
Insurer were unable to pay under the policy, the Class A Certificates could be
subject to losses.
THE CLASS S-1 CERTIFICATES AND THE MEZZANINE CERTIFICATES WILL NOT BE COVERED BY
THE POLICY.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--THE POLICY" AND "THE
CERTIFICATE INSURER" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
2. SUBORDINATION
The rights of the holders of the Mezzanine Certificates and the Class C
Certificates to receive distributions will be subordinated, to the extent
described in this prospectus supplement, to the rights of the holders of the
Class A Certificates and the Class S Certificates.
In addition, the rights of the holders of Mezzanine Certificates with higher
numerical class designations to receive distributions will be subordinated to
the rights of the holders of the Mezzanine Certificates with lower numerical
class designations, and the rights of the holders of the Class C Certificates to
receive distributions will be subordinated to the rights of the holders of the
Mezzanine Certificates, in each case to the extent described in this prospectus
supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
such certificates protection against realized losses on the Mortgage Loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CREDIT ENHANCEMENT" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
3. EXCESS INTEREST
The Mortgage Loans bear interest each month that in the aggregate is expected to
exceed the amount needed to distribute monthly interest on the Offered
Certificates and to pay certain fees and expenses of the trust. The excess
interest from the Mortgage Loans each month will be available to absorb realized
losses on the Mortgage Loans and to build and maintain overcollateralization at
required levels as described in the pooling agreement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
AND "--OVERCOLLATERALIZATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION. 4. OVERCOLLATERALIZATION
As of the Closing Date, there will be substantially no overcollateralization but
over time it is initially targeted to increase to approximately 5.25% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date. We
cannot assure you that sufficient interest will be generated by the Mortgage
Loans to build and maintain the required level of overcollateralization.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--OVERCOLLATERALIZATION
PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
5. ALLOCATION OF LOSSES
If, on any Distribution Date, there is not sufficient excess interest or
overcollateralization to absorb realized losses on the Mortgage Loans as
described under "Description of the Certificates-- Overcollateralization
Provisions" in this prospectus supplement, then realized losses on the Mortgage
Loans will be allocated to the Mezzanine Certificates as described below. If
realized losses on the Mortgage Loans are allocated to the Mezzanine
Certificates, such losses will be allocated first, to the Class M-3
Certificates, second, to the Class M-2 Certificates and third, to the Class M-1
Certificates. The pooling agreement does not permit the allocation of realized
losses on the Mortgage Loans to the Class A Certificates, the Class S
Certificates, the Class X Certificates or the Class P Certificates.
Once realized losses are allocated to the Mezzanine Certificates, such realized
losses will not be reinstated thereafter. However, the amount of any realized
losses allocated to the Mezzanine Certificates may be distributed to the holders
of these certificates according to the priorities set forth under "Description
of the Certificates --Overcollateralization Provisions" in this prospectus
supplement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES --ALLOCATION OF LOSSES;
SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
S-7
RATINGS
It is a condition of the issuance of the Offered Certificates that they be
assigned the following ratings by Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"):
Moody's: S&P:
-------- ----
A................ Aaa AAA
S-1.............. Aaa AAA
M-1.............. Aa2 AA
M-2.............. A2 A
M-3.............. Baa2 BBB
A security rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by any of the rating agencies.
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "RATING" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
TAX STATUS
One or more elections will be made to treat designated portions of the trust as
real estate mortgage investment conduits for federal income tax purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND "CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THE PROSPECTUS FOR
ADDITIONAL INFORMATION.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
It is expected that the Offered Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") so long as certain conditions are met. A fiduciary of an employee
benefit plan must determine that the purchase of a certificate is consistent
with its fiduciary duties under applicable law and does not result in a
nonexempt prohibited transaction under applicable law.
WE REFER YOU TO "CONSIDERATIONS FOR BENEFIT PLAN INVESTORS" IN THIS PROSPECTUS
SUPPLEMENT AND "ERISA CONSIDERATIONS" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND "LEGAL INVESTMENT" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
S-8
RISK FACTORS
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment in
the certificates. You should also carefully consider the information set forth
under "Risk Factors" in the prospectus.
SECOND LIEN LOAN RISK
The Mortgage Loans are secured by second liens on the related mortgaged
properties. The proceeds from any liquidation, insurance or condemnation
proceedings will generally be available to satisfy the outstanding balance of
the Mortgage Loans only to the extent that the claims of the related senior
mortgages have been satisfied in full, including any related foreclosure costs.
In circumstances when it has been determined to be uneconomical to foreclose on
the mortgaged property, the Servicer may write off the entire balance of the
Mortgage Loan as a bad debt. The foregoing considerations will be particularly
applicable to Mortgage Loans secured by second liens that have high combined
loan- to-value ratios because it is comparatively more likely that the Servicer
would determine foreclosure to be uneconomical in the case of such Mortgage
Loans. The rate of default of second lien Mortgage Loans may be greater than
that of Mortgage Loans secured by first liens on comparable properties. See
"Risk Factors" in the prospectus.
BALLOON LOAN RISK
Balloon loans pose a risk because a mortgagor must make a large lump
sum payment of principal at the end of the loan term. If the mortgagor is unable
to pay the lump sum or refinance such amount, you may suffer a loss.
Approximately 95.92% of the Mortgage Loans (by aggregate principal balance of
the Mortgage Loans as of the Cut-off Date) are balloon loans.
UNPREDICTABILITY OF PREPAYMENTS AND EFFECT ON YIELDS
Mortgagors may prepay their Mortgage Loans in whole or in part at any
time. We cannot predict the rate at which mortgagors will repay their Mortgage
Loans. A prepayment of a Mortgage Loan generally will result in a 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 S-1 Certificates will become
extremely sensitive to the rate of principal prepayments on the
Mortgage Loans, if on or prior to the Determination Date in the month
preceding the 30th Distribution Date the aggregate principal balance of
the Mortgage Loans is reduced to or below $28,689,000. Investors in the
Class S-1 Certificates should 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 prevailing interest rates
decline significantly below the mortgage rates on the Mortgage Loans,
the Mortgage Loans are more likely to prepay than if prevailing rates
remain above the mortgage rates on the Mortgage Loans. In addition, if
interest rates decline, mortgage loan prepayments may increase due to
the availability of mortgage loans at lower interest rates. Conversely,
if prevailing interest rates rise significantly, the prepayments on
mortgage loans may decrease.
o Approximately 79.85% of the Mortgage Loans (by aggregate principal
balance of the Mortgage Loans as of the Cut-off Date) require the
mortgagor to pay a prepayment charge in certain instances if the
mortgagor prepays the Mortgage Loan during a stated period, which may
be from one year to three years after the Mortgage Loan
S-9
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. In addition, the Servicer has the option to
purchase Mortgage Loans that become 90 days or more delinquent. These
purchases will have the same effect on the holders of the Class A
Certificates and the Mezzanine Certificates as a prepayment of the
Mortgage Loans.
o The Servicer may purchase all of the Mortgage Loans when the aggregate
principal balance of the Mortgage Loans is equal to or less than 10% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date.
o If the rate of default and the amount of losses on the Mortgage Loans
is higher than you expect, then your yield may be lower than you
expect.
o As a result of the absorption of realized losses on the Mortgage Loans
by excess interest and overcollateralization as described herein,
liquidations of defaulted Mortgage Loans, whether or not realized
losses are incurred upon such liquidations, will result in an earlier
return of the principal of the Class A Certificates and the Mezzanine
Certificates and will influence the yield on such certificates in a
manner similar to the manner in which principal prepayments on the
Mortgage Loans will influence the yield on the Class A Certificates and
the Mezzanine Certificates.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the Offered
Certificates then entitled to principal distributions at any time that
the overcollateralization provided by the mortgage pool is below the
required level.
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.
TERRORIST ATTACKS AND MILITARY ACTION COULD ADVERSELY AFFECT THE YIELD ON THE
OFFERED CERTIFICATES
The effects that the terrorist attacks in the United States on
September 11, 2001 and related military action may have on the performance of
the Mortgage Loans and the Offered Certificates can not be determined at this
time. Investors should consider the possible effects on the delinquency, default
and prepayment experience of the Mortgage Loans. In accordance with the
servicing standard set forth in the pooling agreement, the Servicer may defer,
reduce or forgive payments and delay foreclosure proceedings in respect of
Mortgage Loans to borrowers affected in some way by recent and possible future
events. In addition, activation of a substantial number of United States
military reservists or members of the National Guard may significantly increase
the proportion of Mortgage Loans whose mortgage rates are reduced by the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"). See "Certain Legal Aspects of Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the prospectus.
DELINQUENT MORTGAGE LOAN RISK
Approximately 0.30% of the Mortgage Loans (by aggregate principal
balance of the Mortgage Loans as of the Cut-off Date) were 30 days or more
delinquent in their monthly payments as of August 31, 2002. However, investors
in the Mortgage Loans should realize that approximately 33.63% of the Mortgage
Loans (by aggregate principal balance of the Mortgage Loans as of the Cut-off
Date), have a first payment date occurring on or after August 1, 2002 and,
therefore, such Mortgage Loans could not have been 30 days or more delinquent as
of August 31, 2002.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR 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
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receive regular distributions of interest and principal and that the holders of
the Class S Certificates will receive regular distributions of interest.
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. If delinquencies or
defaults occur on the Mortgage Loans, neither the Servicer nor any other entity
will advance scheduled monthly payments of interest on delinquent or defaulted
Mortgage Loans if such advances are not likely to be recovered.
If substantial losses occur as a result of defaults and delinquent
payments on the Mortgage Loans, you may suffer losses.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN
OVERCOLLATERALIZATION
The weighted average of the mortgage rates on the Mortgage Loans is expected
to be higher than the pass- through rates on the Offered Certificates. The
Mortgage Loans are expected to generate more interest than is needed to
distribute interest owed on the Offered Certificates and to pay certain fees and
expenses of the trust. Any remaining interest generated by the Mortgage Loans
will then be used to absorb losses that occur on the Mortgage Loans. After these
financial obligations of the trust are covered, the available excess interest
generated by the Mortgage Loans will be used to build and maintain
overcollateralization. We cannot assure you, however, that enough excess
interest will be generated to build and maintain the required level of
overcollateralization. The factors described below will affect the amount of
excess interest that the Mortgage Loans will generate:
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 or written off, 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
to make required distributions on the Offered Certificates.
o The Mortgage Loans have mortgage rates that are fixed and will not
adjust based on any index while an index is used to determine the
pass-through rates on the Class A Certificates and the Mezzanine
Certificates. As a result, the pass-through rates on the Class A
Certificates and the Mezzanine Certificates may increase while the
mortgage rates on the Mortgage Loans remain fixed. This would require
that more of the interest generated by the Mortgage Loans be applied to
cover interest on the Class A Certificates and the Mezzanine
Certificates.
o If prepayments, defaults and liquidations occur more rapidly on the
Mortgage Loans with relatively higher mortgage rates than on the
Mortgage Loans with relatively lower mortgage rates, the amount of
excess interest generated by the Mortgage Loans will be less than would
otherwise be the case.
EFFECT OF MORTGAGE RATES ON THE OFFERED CERTIFICATES
The Class A Certificates and the Mezzanine Certificates accrue interest
at pass-through rates based on the one- month LIBOR index plus specified
margins, but are subject to a limit. The limit on the pass-through rates for the
Class A Certificates and the Mezzanine Certificates is based on the weighted
average of the mortgage rates on the Mortgage Loans net of interest
distributable on the Class S Certificates, the premium payable to the
Certificate Insurer and certain other fees and expenses of the trust.
The Mortgage Loans have mortgage rates that will not adjust. As a
result of the limit on the pass-through rates on the Class A Certificates and
the Mezzanine Certificates, such certificates may accrue less interest than they
would accrue if their pass-through rates were based solely on the one-month
LIBOR index plus the specified margin.
A variety of factors could limit the pass-through rates on the Class A
Certificates and the Mezzanine Certificates. Some of these factors are described
below:
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o The pass-through rates for the Class A Certificates and the Mezzanine
Certificates adjust monthly while the mortgage rates on the Mortgage
Loans do not adjust. Consequently, the limit on the pass-through rates
on the Class A Certificates and the Mezzanine Certificates may prevent
any increases in the pass-through rates on such certificates for
extended periods in a rising interest rate environment.
o If prepayments, defaults and liquidations occur more rapidly on the
Mortgage Loans with relatively higher mortgage rates than on the
Mortgage Loans with relatively lower mortgage rates, the pass-through
rates on the Class A Certificates and the Mezzanine Certificates are
more likely to be limited.
The rate cap on the Class A Certificates and the Mezzanine Certificates
will also be affected by the amount of interest distributable on the Class S
Certificates. As the aggregate principal balance of the Mortgage Loans is
reduced by payments of principal including prepayments and collections upon
defaults, liquidations and repurchases on the Mortgage Loans, the portion of the
total amount of interest generated by the mortgage pool that is used to
distribute interest on the Class S Certificates will increase. A rapid rate of
prepayments on the Mortgage Loans before the end of the first 30 Distribution
Dates would lower the rate cap applicable to the Class A Certificates and the
Mezzanine Certificates increasing the likelihood that the rate cap will limit
the pass-through rate on one or more classes of those certificates.
THE HOLDERS OF THE CLASS A CERTIFICATES AND THE MEZZANINE CERTIFICATES
WILL NOT BE ENTITLED TO RECOVER ANY AMOUNT OF BASIS RISK SHORTFALL TO THE EXTENT
THAT THE PASS-THROUGH RATES FOR SUCH CERTIFICATES ARE LIMITED BY THE RATE CAP.
RISKS ASSOCIATED WITH THE MEZZANINE CERTIFICATES
The weighted average lives of, and the yields to maturity on, the
Mezzanine Certificates will be progressively more sensitive, in increasing order
of their numerical class designations, 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 Loans are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized losses on the Mortgage Loans, to the
extent they exceed the amount of excess interest and overcollateralization
following distributions of interest and principal on the related Distribution
Date, will reduce the certificate principal balance of the class of Mezzanine
Certificate then outstanding with the highest numerical class designation. 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 principal or interest will be distributable with
respect to such written down amount. However, the amount of any realized losses
allocated to the Mezzanine Certificates may be distributed 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 October 2005 or a later date as provided
in this prospectus supplement or during any period in which delinquencies or
realized losses on the Mortgage Loans exceed certain levels. 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 among all of
the certificates at the same time. 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 such
certificates might not receive any principal if certain delinquency or realized
loss levels occur, it is possible for such certificates to receive no principal
distributions even if no losses have occurred on the Mortgage Loans.
In addition, the multiple class structure of the Mezzanine Certificates causes
the yield of such classes to be particularly sensitive to changes in the rates
of prepayment of the Mortgage Loans. Because distributions of principal will be
made to the holders of such certificates according to the priorities described
in this prospectus supplement, the yield to maturity on such classes of
certificates will be sensitive to the rates of prepayment on the Mortgage Loans
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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,
the Class C Certificates or a class of Mezzanine Certificates with a higher
numerical class designation. 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.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS
When a Mortgage Loan is prepaid, the mortgagor is charged interest on
the amount prepaid only up to the date on which the prepayment is made, rather
than for an entire month. This may result in a shortfall in interest collections
available for distribution on the next Distribution Date. The 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 Servicer's
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 Servicer. The Certificate Insurer's policy with respect to the
Class A Certificates will not cover any such prepayment interest shortfalls or
Relief Act shortfalls.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Servicer will be allocated, first,
to the interest distribution amount with respect to 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 DISTRIBUTED TO THOSE CERTIFICATES WILL BE
REDUCED, ADVERSELY AFFECTING THE YIELD ON YOUR INVESTMENT.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
PRINCIPAL BALANCE OF MORTGAGE LOANS
Substantial delays could be encountered in connection with the
liquidation of delinquent Mortgage Loans. Further, reimbursement of advances
made on a Mortgage Loan, liquidation expenses such as legal fees, real estate
taxes, hazard insurance and maintenance and preservation expenses may reduce the
portion of liquidation proceeds distributable to you. If a mortgaged property
fails to provide adequate security for the Mortgage Loan, you will incur a loss
on your investment if the credit enhancements are insufficient to cover the
loss.
HIGH COMBINED LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Mortgage loans with higher combined loan-to-value ratios may present a
greater risk of loss than mortgage loans with combined loan-to-value ratios of
80.00% or below. Approximately 99.52% of the Mortgage Loans (by aggregate
principal balance of the Mortgage Loans as of the Cut-off Date) had combined
loan-to-value ratios in excess of 80.00%, but no more than 100.00% at
origination. Additionally, the Originator's determination of the value of a
mortgaged property used in the calculation of the combined loan-to-value ratios
of the Mortgage Loans may differ from the appraised value of such mortgaged
properties. See "First Franklin Financial Corporation--Underwriting Standards"
herein.
GEOGRAPHIC CONCENTRATION
The chart presented under "Summary of Terms--Mortgage Loans" lists the
states with the highest concentrations of Mortgage Loans. Mortgaged properties
in California may be particularly susceptible to certain types of uninsurable
hazards, such as earthquakes, floods, mudslides and other natural disasters for
which there may or may not be insurance.
In addition, the conditions below will have a disproportionate impact
on the Mortgage Loans in general:
S-13
o Economic conditions in states with high concentrations of Mortgage
Loans may affect the ability of mortgagors to repay their loans on time
even if such conditions do not affect real property values.
o Declines in the residential real estate markets in the states with high
concentrations of Mortgage Loans may reduce the values of properties
located in those states, which would result in an increase in
loan-to-value ratios.
o Any increase in the market value of properties located in the states
with high concentrations of Mortgage Loans would reduce loan-to-value
ratios and could, therefore, make alternative sources of financing
available to mortgagors at lower interest rates, which could result in
an increased rate of prepayment of the Mortgage Loans.
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 certain disclosure, and require licensing of the Originator. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the mortgagors
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.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the trust to damages and
administrative enforcement. In particular, the Originator's failure to comply
with certain requirements of the Federal Truth-in-Lending Act, as implemented by
Regulation Z, could subject the trust (and other assignees of the Mortgage
Loans) to monetary penalties, and result in the obligors' rescinding the
Mortgage Loans against either the trust or subsequent holders of the Mortgage
Loans. See "Certain Legal Aspects of the Loans--Anti-Deficiency Legislation and
Other Limitations on Lenders" in the prospectus.
The Seller will represent that as of the Closing Date, each Mortgage
Loan originated by the Originator is in compliance with applicable federal and
state laws and regulations. In the event of a breach of such representation, the
Seller will be obligated to cure such breach or repurchase or replace the
affected Mortgage Loan in the manner described under "The Pooling
Agreement--Assignment of the Mortgage Loans" in this prospectus supplement.
THE OFFERED CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The Offered Certificates will not represent an interest in or
obligation of the Depositor, the Servicer, the Originator, the Seller, the
Trustee or any of their respective affiliates. Neither the Offered Certificates
nor the underlying Mortgage Loans will be guaranteed or insured by any
governmental agency or instrumentality, or by the Depositor, the Servicer, the
Trustee, the Originator, the Seller or any of their respective affiliates.
Proceeds of the assets included in the trust, and, with respect to the Class A
Certificates, payments under the Policy, will be the sole source of
distributions on the Offered Certificates, and there will be no recourse to the
Depositor, the Servicer, the Originator, the Seller, the Trustee or any other
entity in the event that such proceeds are insufficient or otherwise unavailable
to make all distributions provided for under the Offered Certificates.
LACK OF LIQUIDITY
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Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the classes of certificates actually purchased by it, but
has no obligation to do so. There is no assurance that such a secondary market
will develop or, if it develops, that it will continue. Consequently, you may
not be able to sell your certificates readily or at prices that will enable you
to realize your desired yield. The market values of the certificates are likely
to fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary markets for asset-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
NATURE OF THE MORTGAGE LOANS
Substantially all of the Mortgage Loans in the trust are loans that do
not meet the customary credit standards of Fannie Mae or Freddie Mac. As a
result, delinquencies and liquidation proceedings are more likely with these
Mortgage Loans than with mortgage loans that satisfy such credit standards. In
the event the Mortgage Loans do become delinquent or subject to liquidation, you
may face delays in receiving distributions and losses if the credit enhancements
are insufficient to cover the delays and losses.
REDUCTION OR WITHDRAWAL OF RATINGS
Each rating agency rating the Offered Certificates may change or
withdraw its initial ratings at any time in the future if, in its judgment,
circumstances warrant a change. No person is obligated to maintain the ratings
at their initial levels. If a rating agency reduces or withdraws its rating on
one or more classes of the Offered Certificates, the liquidity and market value
of the affected certificates is likely to be reduced.
SUITABILITY OF THE OFFERED CERTIFICATES AS INVESTMENTS
The Offered Certificates are not suitable investments for any investor
that requires a regular or predictable schedule of monthly distributions or
distribution on any specific date. The Offered Certificates are complex
investments that should be considered only by investors who, either alone or
with their financial, tax and legal advisors, have the expertise to analyze the
prepayment, reinvestment, default and market risk, the tax consequences of an
investment and the interaction of these factors.
THE MORTGAGE POOL
The information set forth in the following paragraphs is based on
servicing records and representations about the Mortgage Loans that were made by
First Franklin Financial Corporation at the time it sold the Mortgage Loans.
None of the Underwriters, the Trustee or the Certificate Insurer or any of their
respective affiliates have made or will make any representation as to the
accuracy or completeness of such information.
The statistical information presented in this prospectus supplement
relates to the Mortgage Loans and related Mortgaged Properties as of the Cut-off
Date, as adjusted for scheduled principal payments due on or before the Cut-off
Date whether or not received. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other Mortgage
Loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such Mortgage Loans would materially alter the
characteristics of the Mortgage Loans as described in this prospectus
supplement. The Depositor believes that the information set forth in this
prospectus supplement with respect to the Mortgage Loans will be representative
of the characteristics of the Mortgage Pool as it will be constituted at the
time the Certificates are issued, although the range of Mortgage Rates and
maturities and certain other characteristics of the Mortgage Loans may vary.
Unless otherwise noted, all statistical percentages or weighted
averages set forth in this prospectus supplement are measured as a percentage of
the aggregate Principal Balance as of the Cut-off Date of the Mortgage Loans
(the "Cut- off Date Principal Balance"). The "Principal Balance" of a Mortgage
Loan as of any date is equal to the principal
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balance of such Mortgage Loan at its origination, less the sum of scheduled and
unscheduled payments in respect of principal made on such Mortgage Loan. The
"Pool Balance" as of any date is equal to the aggregate of the Principal
Balances of the Mortgage Loans in the Mortgage Pool.
GENERAL
First Franklin Mortgage Loan Trust 2002-FFA (the "Trust") will consist
of a pool of fixed-rate, second lien, fully-amortizing and balloon payment
residential mortgage loans (the "Mortgage Loans" or the "Mortgage Pool"). The
Mortgage Loans consist of approximately 7,272 Mortgage Loans with a Cut-off Date
Principal Balance of approximately $286,898,831.
All of the Mortgage Loans will be secured by second mortgages or deeds
of trust or other similar security instruments (each, a "Mortgage"). The
Mortgages create second liens on one- to four-family residential properties
consisting of attached or detached one- to four-family dwelling units and
individual condominium units (each, a "Mortgaged Property").
The Depositor will purchase the Mortgage Loans from the Seller pursuant
to the Mortgage Loan Purchase Agreement, dated as of September 23, 2002 (the
"Mortgage Loan Purchase Agreement"), between the Seller and the Depositor.
Pursuant to the Pooling and Servicing Agreement, dated as of September 1, 2002
(the "Pooling Agreement"), among the Depositor, the Servicer and the Trustee,
the Depositor will cause the Mortgage Loans and the Depositor's rights under the
Mortgage Loan Purchase Agreement to be assigned to the Trustee for the benefit
of the Certificateholders and the Certificate Insurer. See "The Pooling
Agreement" herein and "The Agreements" in the prospectus.
Each of the Mortgage Loans was selected from the Seller's portfolio of
mortgage loans. The Mortgage Loans were originated by the Originator or acquired
by the Originator in the secondary market in the ordinary course of its business
and were underwritten or re-underwritten by the Originator in accordance with
its underwriting standards as described under "First Franklin Financial
Corporation--Underwriting Standards" in this prospectus supplement.
Under the Mortgage Loan Purchase Agreement, the Seller will make
certain representations and warranties to the Depositor relating to, among other
things, the due execution and enforceability of the Mortgage Loan Purchase
Agreement and certain characteristics of the Mortgage Loans. Subject to certain
limitations, the Seller will be obligated to repurchase or substitute a similar
mortgage loan for any Mortgage Loan as to which there exists deficient
documentation or an uncured breach of any such representation or warranty, if
such breach of any such representation or warranty materially and adversely
affects the Certificateholders' or the Certificate Insurer's interests in such
Mortgage Loan. The Seller is selling the Mortgage Loans without recourse and
will have no obligation with respect to the Certificates in its capacity as
Seller, other than the repurchase or substitution obligations described above.
The Originator will have no obligation with respect to the Certificates in its
capacity as Originator.
The Mortgage Loans are subject to the "due-on-sale" provisions included
therein which provide that the Mortgage Loan is assumable by a creditworthy
purchaser of the related Mortgaged Property.
Each Mortgage Loan will accrue interest at the fixed-rate calculated as
specified under the terms of the related mortgage note (each such rate, a
"Mortgage Rate").
Approximately 79.85% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on partial prepayments and prepayments in full made within a
stated number of months that is between 12 and 36 months from the date of
origination of such Mortgage Loan. The amount of the prepayment charge is
provided in the related mortgage note and with respect to approximately 88.89%
of the Mortgage Loans that have a prepayment charge, the prepayment charge is
equal to six months' interest on any amounts prepaid in excess of 20% of the
original Principal Balance of the related Mortgage Loan in any 12 month period.
The holders of the Class P Certificates will be entitled to all prepayment
charges received on the Mortgage Loans, and such amounts will not be available
for distribution on the other classes of Certificates. Under certain
circumstances, as described in the Pooling Agreement, the Servicer may waive the
payment of any otherwise applicable prepayment charge. Investors should conduct
their own analysis of the effect, if any, that the prepayment charges, and
decisions by the Servicer with respect
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to the waiver thereof, may have on the prepayment performance of the Mortgage
Loans. The Depositor makes no representations as to the effect that the
prepayment charges, and decisions by the Servicer with respect to the waiver
thereof, may have on the prepayment performance of the Mortgage Loans.
MORTGAGE LOAN STATISTICS
The following statistical information, unless otherwise specified, is
based upon percentages of the Principal Balances of the Mortgage Loans as of the
Cut-off Date.
Approximately 99.52% of the Mortgage Loans had combined loan-to-value
ratios at origination in excess of 80.00%. No Mortgage Loan had a combined
loan-to-value ratio at origination in excess of 100.00%. The weighted average
combined loan-to-value ratio of the Mortgage Loans at origination was
approximately 99.19%. There can be no assurance that the combined loan-to-value
ratio of any Mortgage Loan determined at any time after origination is less than
or equal to its original loan-to-value ratio. Additionally, the Originator's
determination of the value of a Mortgaged Property used in the calculation of
the original combined loan-to-value ratios of the Mortgage Loans may differ from
the appraised value of such Mortgaged Property or the actual value of such
Mortgaged Property at origination. See "Risk Factors--High Loan-to-Value Ratios
Increase Risk of Loss."
All of the Mortgage Loans have a scheduled payment due each month (the
"Due Date") on the first day of the month.
The weighted average remaining term to maturity of the Mortgage Loans
was approximately 180 months as of the Cut-off Date. None of the Mortgage Loans
had a first Due Date prior to September 1, 2001 or after October 1, 2002, or has
a remaining term to maturity of less than 109 months or greater than 359 months
as of the Cut-off Date. The latest maturity date of any Mortgage Loan is August
1, 2032.
The average Principal Balance of the Mortgage Loans at origination was
approximately $39,549. The average Cut-off Date Principal Balance of the
Mortgage Loans was approximately $39,453. No Mortgage Loan had a Cut-off Date
Principal Balance of greater than approximately $299,289 or less than
approximately $8,962.
As of the Cut-off Date, the Mortgage Loans had Mortgage Rates of not
less than 8.750% per annum and not more than 14.250% per annum and the weighted
average Mortgage Rate of the Mortgage Loans was approximately 11.775% per annum.
The Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
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CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS(1)
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
PRINCIPAL BALANCE ($) MORTGAGE LOANS DATE CUT-OFF DATE
--------------------- -------------- ---- ------------
8,962 - 50,000......................... 5,479 $155,447,665.43 54.18%
50,001 - 100,000......................... 1,576 104,046,642.74 36.27
100,001 - 150,000......................... 199 23,863,631.03 8.32
150,001 - 200,000......................... 15 2,769,398.99 0.97
200,001 - 250,000......................... 2 472,204.19 0.16
250,001 - 299,289......................... 1 299,288.69 0.10
----- --------------- ------
Total................................ 7,272 $286,898,831.07 100.00%
===== =============== ======
___________________
(1) The average Cut-off Date Principal Balance of the Mortgage Loans was
approximately $39,453.
CREDIT SCORES FOR THE MORTGAGE LOANS(1)
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
CREDIT SCORE MORTGAGE LOANS DATE CUT-OFF DATE
------------ -------------- ---- ------------
531 - 550................................. 1 $ 27,350.24 0.01%
551 - 600................................. 106 2,993,832.91 1.04
601 - 650................................. 3,530 117,723,041.30 41.03
651 - 700................................. 2,243 96,879,445.39 33.77
701 - 750................................. 1,032 50,674,197.65 17.66
751 - 800................................. 352 18,244,287.95 6.36
801 - 814................................. 8 356,675.63 0.12
----- --------------- ------
Total................................ 7,272 $286,898,831.07 100.00%
===== =============== ======
______________________
(1) The weighted average Credit Score of the Mortgage Loans that had Credit
Scores was approximately 668.
S-18
ORIGINAL TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
ORIGINAL TERM (MONTHS) MORTGAGE LOANS DATE CUT-OFF DATE
---------------------- -------------- ---- ------------
120....................................... 206 $ 5,597,947.51 1.95%
180....................................... 6,503 259,742,342.07 90.53
240....................................... 526 20,461,605.31 7.13
360....................................... 37 1,096,936.18 0.38
----- --------------- ------
Total................................ 7,272 $286,898,831.07 100.00%
===== =============== ======
____________________
(1) The weighted average original term to maturity of the Mortgage Loans was
approximately 184 months.
REMAINING TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
REMAINING TERM (MONTHS) MORTGAGE LOANS DATE CUT-OFF DATE
----------------------- -------------- ---- ------------
109 - 114................................. 61 1,831,335.62 0.64%
115 - 120................................. 145 3,766,611.89 1.31
163 - 168................................. 2 65,620.07 0.02
169 - 174................................. 1,327 53,335,021.71 18.59
175 - 180................................. 5,174 206,341,700.29 71.92
229 - 234................................. 61 1,887,635.65 0.66
235 - 240................................. 465 18,573,969.66 6.47
349 - 354................................. 6 197,251.65 0.07
355 - 359................................. 31 899,684.53 0.31
----- --------------- ------
Total................................ 7,272 $286,898,831.07 100.00%
===== =============== ======
____________________
(1) The weighted average remaining term to maturity of the Mortgage Loans was
approximately 180 months.
S-19
PROPERTY TYPES OF THE MORTGAGE LOANS
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
PROPERTY TYPE MORTGAGE LOANS DATE CUT-OFF DATE
------------- -------------- ---- ------------
Single Family ............................ 5,209 $195,920,936.04 68.29%
PUD(1).................................... 1,195 56,329,850.03 19.63
Condominium Low Rise...................... 606 23,991,018.36 8.36
2-4 Units................................. 259 10,509,641.51 3.66
Condominium High Rise..................... 3 147,385.13 0.05
----- --------------- ------
Total................................ 7,272 $286,898,831.07 100.00%
===== =============== ======
____________________
(1) PUD refers to a home or "unit" in a Planned Unit Development.
OCCUPANCY STATUS OF THE MORTGAGE LOANS(1)
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
OCCUPANCY STATUS MORTGAGE LOANS DATE CUT OFF DATE
---------------- -------------- ---- ------------
Primary................................... 7,255 $285,822,147.17 99.62%
Non-owner................................. 14 996,549.07 0.35
Second Home............................... 3 80,134.83 0.03
----- --------------- ------
Total................................ 7,272 $286,898,831.07 100.00%
===== =============== ======
____________________
(1) Occupancy as represented by the mortgagor at the time of origination.
PURPOSE OF THE MORTGAGE LOANS
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
PURPOSE MORTGAGE LOANS DATE CUT OFF DATE
------- -------------- ---- ------------
Purchase.................................. 6,497 $255,225,631.97 88.96%
Cash Out Refinance........................ 640 25,850,506.41 9.01
Rate/Term Refinance....................... 135 5,822,692.69 2.03
----- --------------- ------
Total................................ 7,272 $286,898,831.07 100.00%
===== =============== ======
S-20
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)(2)(3)
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
ORIGINAL COMBINED LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS DATE CUT OFF DATE
----------------------------------------- -------------- ---- ------------
19.99 - 20.00........................... 1 $ 34,934.50 0.01%
25.01 - 30.00........................... 1 28,963.38 0.01
65.01 - 70.00........................... 1 84,787.61 0.03
70.01 - 75.00........................... 1 87,257.39 0.03
75.01 - 80.00........................... 9 1,143,344.75 0.40
80.01 - 85.00........................... 15 1,676,782.03 0.58
85.01 - 90.00........................... 110 6,215,649.22 2.17
90.01 - 95.00........................... 347 16,983,118.55 5.92
95.01 - 100.00............................ 6,787 260,643,993.64 90.85
----- --------------- ------
Total................................ 7,272 $286,898,831.07 100.00%
===== =============== ======
__________________
(1) The weighted average original combined loan-to-value ratio of the Mortgage
Loans as of the Cut-off Date was approximately 99.19%.
(2) The original combined loan-to-value ratio of any Mortgage Loan is equal to
(a) the principal balance of the Mortgage Loan at origination plus the
principal balance of the related senior loan divided by (b) the value of
the Mortgaged Property.
(3) For a description of the determination of original combined loan-to-value
ratio by the Originator see "First Franklin Financial
Corporation--Underwriting Standards" herein.
S-21
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES RELATED TO THE MORTGAGE LOANS(1)
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
LOCATION MORTGAGE LOANS DATE CUT OFF DATE
-------- -------------- ---- ------------
Alabama................................... 23 $ 587,179.77 0.20%
Arizona................................... 141 4,237,000.61 1.48
California................................ 2,948 160,208,777.96 55.84
Colorado.................................. 111 5,134,609.82 1.79
Connecticut............................... 56 1,798,983.25 0.63
Delaware.................................. 2 60,623.21 0.02
Florida................................... 504 14,504,399.77 5.06
Georgia................................... 154 4,984,601.17 1.74
Idaho..................................... 16 396,208.45 0.14
Illinois.................................. 175 5,895,701.74 2.05
Indiana................................... 69 1,576,380.18 0.55
Iowa...................................... 30 495,567.47 0.17
Kansas.................................... 21 485,410.30 0.17
Kentucky.................................. 72 1,575,602.78 0.55
Louisiana................................. 10 235,889.85 0.08
Maine..................................... 10 229,797.40 0.08
Maryland.................................. 83 3,495,683.01 1.22
Massachusetts............................. 60 2,409,142.79 0.84
Michigan.................................. 219 6,384,904.07 2.23
Minnesota................................. 52 1,675,795.19 0.58
Mississippi............................... 36 699,578.81 0.24
Missouri.................................. 85 2,109,010.95 0.74
Montana................................... 1 27,152.44 0.01
Nebraska.................................. 23 486,008.38 0.17
Nevada.................................... 143 5,274,555.43 1.84
New Hampshire............................. 16 495,826.47 0.17
New Jersey................................ 31 1,240,968.08 0.43
New Mexico................................ 8 204,910.70 0.07
New York.................................. 70 2,515,966.70 0.88
North Carolina............................ 136 3,583,156.31 1.25
Ohio...................................... 403 9,118,581.68 3.18
Oklahoma.................................. 7 183,914.10 0.06
Oregon.................................... 274 8,661,130.93 3.02
Pennsylvania.............................. 71 1,374,030.37 0.48
Rhode Island.............................. 11 294,472.46 0.10
South Carolina............................ 70 1,508,899.54 0.53
South Dakota.............................. 7 159,795.31 0.06
Tennessee................................. 301 6,722,679.37 2.34
Texas..................................... 284 8,187,636.94 2.85
Utah...................................... 145 4,591,774.32 1.60
Vermont................................... 3 86,931.52 0.03
Virginia.................................. 52 1,793,634.62 0.63
Washington................................ 259 9,334,251.13 3.25
West Virginia............................. 3 46,591.44 0.02
Wisconsin................................. 70 1,699,563.36 0.59
Wyoming................................... 7 125,550.92 0.04
----- --------------- ------
Total................................ 7,272 $286,898,831.07 100.00%
===== =============== ======
___________________
(1) The greatest ZIP Code geographic concentration of Mortgage Loans was
approximately 0.65% in the 91913 ZIP Code.
S-22
DOCUMENTATION LEVELS OF THE MORTGAGE LOANS(1)
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
DOCUMENTATION LEVEL MORTGAGE LOANS DATE CUT OFF DATE
-------------------- -------------- ---- ------------
Full Documentation........................ 7,106 $279,370,573.77 97.38%
Limited Income Verification............... 163 7,431,994.66 2.59
No Income Verification.................... 3 96,262.64 0.03
Total................................ 7,272 $286,898,831.07 100.00%
____________________
(1) For a description of each Documentation Level, see "First Franklin Financial
Corporation--Underwriting Standards" herein.
CURRENT MORTGAGE RATES OF THE MORTGAGE LOANS(1)
PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
NUMBER OF OUTSTANDING AS OF THE CUT-OFF BALANCE OUTSTANDING AS OF THE
CURRENT MORTGAGE RATE (%) MORTGAGE LOANS DATE CUT OFF DATE
------------------------- -------------- ---- ------------
8.750 - 9.000......................... 303 $ 6,864,244.80 2.39%
9.001 - 10.000.......................... 472 25,570,721.80 8.91
10.001 - 11.000........................... 1,219 63,997,505.26 22.31
11.001 - 12.000........................... 1,580 66,873,546.46 23.31
12.001 - 13.000........................... 2,096 76,231,688.99 26.57
13.001 - 14.000........................... 1,601 47,335,215.01 16.50
14.001 - 14.250........................... 1 25,908.75 0.01
Total................................ 7,272 $286,898,831.07 100.00%
__________________
(1) The weighted average current Mortgage Rate of the Mortgage Loans as of the
Cut-off Date was approximately 11.775% per annum.
FIRST FRANKLIN FINANCIAL CORPORATION
GENERAL
First Franklin Financial Corporation (the "Originator") is a Delaware
corporation headquartered in San Jose, California. The information set forth in
the following paragraphs has been provided by the Originator, and none of the
Depositor, the Servicer, the Seller, the Trustee, the Certificate Insurer, the
Underwriters or any other party makes any representation as to the accuracy or
completeness of such information.
The Originator is a direct, wholly-owned subsidiary of National City
Bank of Indiana ("NCBA"). NCBA is a wholly-owned subsidiary of National City
Corporation. At June 30, 2002, the Originator had approximately $1.08 billion in
assets, approximately $623.6 million in liabilities and approximately $459.3
million in equity.
The Originator is a HUD-approved mortgagee and an approved
seller/servicer by both Fannie Mae and Freddie Mac. It currently operates twenty
nine wholesale branches, one retail branch and one portfolio retention platform
in the United States including offices in Atlanta, Georgia; Baltimore, Maryland;
Boston, Massachusetts; Charlotte, North Carolina; Chicago, Illinois; Cincinnati
and Cleveland, Ohio; Dallas and Houston, Texas; Denver, Colorado; Detroit,
Michigan; Indianapolis, Indiana; Las Vegas, Nevada; Miami and Orlando, Florida;
Minneapolis, Minnesota; New York, New York; Phoenix, Arizona; Pittsburgh,
Pennsylvania; Portland, Oregon; Salt Lake City, Utah; Seattle, Washington and
Irvine, Laguna Hills, San Bernardino, San Diego, San Jose, Studio City, Walnut
Creek and Westlake Village, California. The Originator's primary source of
originations is through mortgage brokerage companies.
S-23
Founded in 1981, the Originator has grown from a small mortgage broker
to a full-service mortgage lender with a wide variety of products. During the
late 1980's and early 1990's, the Originator focused primarily on originating
and purchasing Agency mortgage loans. Agency origination volume peaked in 1993
at over $3.5 billion.
In 1994, the Originator embarked on a transformation to a full service
"A" through "D" credit lender. Since that time, Agency mortgage loan origination
volume has declined significantly as activities have been focused on
originating and acquiring non-Agency mortgage loans. For all of 2001,
originations totaled approximately $183.9 million and $6.1 billion of retail and
wholesale non-Agency mortgage loans, respectively.
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by the
Originator, generally in accordance with the underwriting criteria described
herein. The information set forth in the following paragraphs has been provided
by the Originator, and none of the Depositor, the Servicer, the Seller, the
Trustee, the Certificate Insurer, the Underwriters or any other party makes any
representation as to the accuracy or completeness of such information.
The Originator's underwriting standards are primarily intended to
assess the ability and willingness of the borrower to repay the debt and to
evaluate the adequacy of the mortgaged property as collateral for the mortgage
loan. All of the Mortgage Loans were underwritten with a view toward the resale
thereof in the secondary mortgage market. The Originator considers, among other
things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio ("Debt Ratio"), as well as the value, type and use of
the mortgaged property. The Mortgage Loans generally bear higher rates of
interest than mortgage loans that are originated in accordance with Fannie Mae
and Freddie Mac standards, and may experience rates of delinquencies and
foreclosures that are higher, and that may be substantially higher, than those
experienced by portfolios of mortgage loans underwritten in a more traditional
manner. Unless prohibited by state law or otherwise waived by the Originator
upon the payment by the related mortgagor of higher origination fees and a
higher Mortgage Rate, a majority of the Mortgage Loans provide for the payment
by the mortgagor of a prepayment charge on certain full or partial prepayments
made within one year, two years, three years, four years or five years from the
date of origination of the related Mortgage Loan as described under "The
Mortgage Pool--Mortgage Loan Statistics" above. The amount of the prepayment
charge is provided in the related mortgage note and with respect to
approximately 88.89% of the Mortgage Loans that have a prepayment charge, the
prepayment charge is equal to six months' interest on any amounts prepaid in
excess of 20% of the original Principal Balance of the related Mortgage Loan in
any 12 month period.
Substantially all of the mortgage loans originated by the Originator
are based on loan application packages submitted through mortgage brokerage
companies. These brokers must meet minimum standards set by the Originator based
on an analysis of the following information submitted with an application for
approval: applicable state lending license (in good standing), satisfactory
credit report only if no Fed ID#, signed Broker agreement, and signed Broker
authorization. Once approved, mortgage brokerage companies are eligible to
submit loan application packages in compliance with the terms of a signed broker
agreement.
The Originator has one underwriting program called the Direct Access
Program. Within the Direct Access Program, there are four documentation
programs, the Full Documentation Program, the Limited Income Verification
Program (the "LIV"), the No Income Verification Program (the "NIV") and the No
Documentation Program (the "No Doc"). All of the Mortgage Loans were originated
in accordance with the Originator's Direct Access Program. While each
underwriting program is intended to assess the risk of default, the Direct
Access Program makes use of credit bureau risk scores (the "Credit Bureau Risk
Score"). The Credit Bureau Risk Score is a statistical ranking of likely future
credit performance developed by Fair, Isaac & Company ("Fair, Isaac") and the
three national credit repositories--Equifax, Trans Union and First American
(formerly Experian which was formerly TRW). The Credit Bureau Risk Scores
available from the three national credit repositories are calculated by the
assignment of weightings to the most predictive data collected by the credit
repositories and range from the 300's to the 900's. Although the Credit Bureau
Risk Scores are based solely on the information at the particular credit
repository, such Credit Bureau Risk Scores have been calibrated to indicate the
same level of credit risk regardless of which credit repository is used. The
Credit Bureau Risk Score is used as an aid to, not a substitute for, the
underwriter's judgment.
The Direct Access Program was developed to simplify the origination
process for the mortgage brokerage companies approved by the Originator. In
contrast to assignment of credit grades according to traditional Non-Agency
S-24
credit assessment methods, i.e., mortgage and other credit delinquencies, Direct
Access relies upon a borrower's Credit Bureau Risk Score initially to determine
a borrower's likely future credit performance. Mortgage brokerage companies are
able to access Credit Bureau Risk Scores at the initial phases of the loan
application process and use the score to determine a borrower's interest rate
based upon the Originator's Direct Access Program risk-based pricing matrix
(subject to final loan approval by the Originator).
Under the Direct Access Program, the Originator requires that the
Credit Bureau Risk Score of the primary borrower (the borrower with at least
51.00% of total income for all LTVs) be used to determine program eligibility.
Credit Bureau Risk Scores must be obtained from at least two national credit
repositories, with the lower of the two scores being utilized in program
eligibility determination. If Credit Bureau Risk Scores are obtained from three
credit repositories, the middle of the three scores can be utilized. In all
cases, a borrower's complete credit history must be detailed in the credit
report that produces a given Credit Bureau Risk Score or the borrower is not
eligible for the Direct Access Program. Generally, the minimum Credit Bureau
Risk Score allowed under the Direct Access Program is 500.
The Credit Bureau Risk Score, along with loan-to-value ratio, is an
important tool in assessing the creditworthiness of a Direct Access borrower.
However, these two factors are not the only considerations in underwriting a
Direct Access loan. The Originator's underwriting staff fully reviews each
Direct Access loan to determine whether the Originator's guidelines for income,
assets, employment and collateral are met.
All of the Mortgage Loans were underwritten by the Originator's
underwriters having the appropriate signature authority. Each underwriter is
granted a level of authority commensurate with their proven judgment, maturity
and credit skills. On a case by case basis, the Originator may determine that,
based upon compensating factors, a prospective mortgagor not strictly qualifying
under the underwriting risk category guidelines described below warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low loan-to-value ratio, low Debt Ratio, substantial liquid assets, good
credit history, stable employment and time in residence at the applicant's
current address. It is expected that a substantial portion of the Mortgage Loans
may represent such underwriting exceptions.
The Originator's underwriters verify the income of each applicant under
various documentation programs as follows: under the Full Documentation Program,
applicants are generally required to submit verification of stable income for
the periods of six months to two years preceding the application dependent on
credit score range; under the LIV Program, the borrower is qualified based on
the income stated on the application and applicants are generally required to
submit verification of adequate cash flow to meet credit obligations for the 6
month period preceding the application; under the NIV Program, applicants are
qualified based on monthly income as stated on the mortgage application; and
under the No Doc Program, employment, income and assets are not verified. For
Direct Access loans with credit scores greater than or equal to 640, regardless
of being originated with a corresponding second lien mortgage, twelve months
bank statements are acceptable as full documentation. In all cases, the income
stated must be reasonable and customary for the applicant's line of work.
Although the income is not verified under the LIV and NIV Programs, a preclosing
audit generally will confirm that the business exists. Verification may be made
through phone contact to the place of business, obtaining a valid business
license or through Dun and Bradstreet Information Services.
The applicant generally must have a sufficiently established credit
history to qualify for the appropriate Credit Bureau Risk Score range under the
Direct Access Program. This credit history is substantiated by a two repository
merged report prepared by an independent credit report agency. The report
typically summarizes the applicant's entire credit history, and generally
includes a seven year public record search for each address where the applicant
has lived during the two years prior to the issuance of the credit report and
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcy, repossession, suits or judgments. In some instances,
borrowers with a minimal credit history are eligible for financing under the
Direct Access Program.
The Originator originates loans secured by 1-4 unit residential
properties made to eligible borrowers with a vested fee simple (or in some cases
a leasehold) interest in the property. The Originator's guidelines are applied
in accordance with a procedure which complies with applicable federal and state
laws and regulations and generally require an appraisal of the mortgaged
property which conforms to Freddie Mac and/or Fannie Mae standards; and if
appropriate, a review appraisal. Generally, appraisals are provided by
appraisers approved by the Originator. Review appraisals may only be provided by
appraisers approved by the Originator. In some cases, the Originator relies on a
statistical appraisal methodology provided by a third-party.
S-25
Qualified independent appraisers must meet minimum standards of
licensing and provide errors and omissions insurance in states where it is
required to become approved to do business with the Originator. Each Uniform
Residential Appraisal Report includes a market data analysis based on recent
sales of comparable homes in the area and, where deemed appropriate, replacement
cost analysis based on the current cost of constructing a similar home. The
review appraisal may be a desk, field review or an automated valuation report
that confirms or supports the original appraiser's value of the mortgaged
premises.
The Originator requires title insurance on all mortgage loans secured
by liens on real property. The Originator also requires that fire and extended
coverage casualty insurance be maintained on the secured property in an amount
at least equal to the principal balance of the related residential loan or the
replacement cost of the property, whichever is less.
The Originator conducts a number of quality control procedures,
including a post-funding compliance audit as well as a full re-underwriting of a
random selection of loans to assure asset quality. Under the compliance audit,
all loans are reviewed to verify credit grading, documentation compliance and
data accuracy. Under the asset quality procedure, a random selection of each
month's originations is reviewed. The loan review confirms the existence and
accuracy of legal documents, credit documentation, appraisal analysis and
underwriting decision. A report detailing audit findings and level of error is
sent monthly to each branch for response. The audit findings and branch
responses are then reviewed by the Originator's senior management. Adverse
findings are tracked monthly and over a rolling six month period. This review
procedure allows the Originator to assess programs for potential guideline
changes, program enhancements, appraisal policies, areas of risk to be reduced
or eliminated and the need for additional staff training.
Under the mortgage loan programs, various risk categories are used to
grade the likelihood that the applicant will satisfy the repayment conditions of
the loan. These risk categories establish the maximum permitted loan-to-value
ratio and loan amount, given the occupancy status of the mortgaged property and
the applicant's credit history and Debt Ratio. In general, higher credit risk
mortgage loans are graded in categories which permit higher Debt Ratios and more
(or more recent) major derogatory credit items such as outstanding judgments or
prior bankruptcies; however these loan programs establish lower maximum
loan-to-value ratios and lower maximum loan amounts for loans graded in such
categories.
"Equity Refinance" transactions are defined as those instances where
the borrower receives the lesser of 2% of the new loan amount or $2,000
cash-in-hand. Funds used for debt consolidation are not included in this amount.
The Originator's guidelines under the Direct Access Program generally
have the following criteria for borrower eligibility for the specified Credit
Bureau Risk Score range.
"600 and higher": For LTVs greater than 80.00%, no liens or judgments
affecting title may remain open after the funding of the loan. Collections,
charge-offs, or judgments not affecting title with aggregate balances greater
than $5,000 or 2% of the loan amount must be paid prior to loan closing unless
the time elapsed since the collection, charge- off, or judgment is greater than
two years. If charge-offs, collections, judgments, liens and disputed trade
lines are seasoned more than 24 months, it is not required that they be paid
off. For LTVs less than or equal to 80.00%, no payoff is required. The maximum
loan-to-value ratio of 100.00% is permitted for owner occupied single family
(1-2 units) property. The maximum loan-to-value ratio generally is reduced by
5.00% on a mortgaged property consisting of 3-4 units. Loan-to-value ratio is
limited to 90.00% with credit score equal to or higher than 620 for non-owner
occupied properties and 80.00% for second homes. The Debt Ratio generally may
not exceed 55.00% for all credit scores on full documentation and LIV loans.
Debt ratio may not exceed 50.00% for NIV loans.
"570-599": For LTVs greater than 80.00%, no liens or judgments
affecting title may remain open after the funding of the loan. Collections,
charge-offs, or judgments not affecting title with aggregate balances greater
than $5,000 or 2% of the loan amount must be paid prior to loan closing unless
the time elapsed since the collection, charge-off, or judgment is greater than
two years. If charge-offs, collections, judgments, liens and disputed trade
lines are seasoned more than 24 months, it is not required that they be paid
off. For LTVs less than or equal to 80.00%, no payoff is required. A maximum
loan-to-value ratio of 90.00% is permitted for a purchase, rate/term, debt
consolidation or cash-out transaction. The maximum loan-to-value ratio generally
is reduced by 5.00% on a mortgaged property consisting of 3-4 units. Properties
with rural characteristics may be subject to further loan-to-value ratio
reduction. Loan-to-value ratios for non-owner occupied properties and second
homes are limited to 80.00%. Generally, the Debt Ratio may not exceed 55.00%.
"540-569": No liens or judgments affecting title may remain open after
the funding of the loan. Collections, charge-offs, or judgments not affecting
title with aggregate balances greater than $5,000 or 2% of the loan amount must
be paid prior to loan closing unless the time elapsed since the collection,
charge-off, or judgment is greater than two years. If charge-offs, collections,
judgments, liens and disputed trade lines are seasoned more than 24 months, it
is not required that they be paid off. A maximum loan-to-value ratio of 85.00%
is permitted for a purchase, rate/term, debt consolidation or cash-out
transaction. Properties with rural characteristics may be subject to further
loan-to-value ratio reduction. Loan-to-value ratios
S-26
for non-owner occupied properties and second homes are limited to 75.00%. The
Debt Ratio must be 55.00% or less.
"500-539": No liens or judgment affecting title may remain open after
the funding of the loan. A maximum loan-to-value ratio of 75.00% is permitted
for purchase, rate/term, debt consolidation or cash out transaction for
borrowers whose credit score falls within 520-539; a maximum loan-to-value ratio
of 70.00% for 500-519. Non-owner occupied and second home not eligible. The Debt
Ratio must be 55.00% or less. Debt ratios greater than 55.00% generally require
a predetermined minimum monthly gross income.
For all of the above, collections, charge-offs, judgments and liens not
affecting title may remain open for loan- to-value ratios less than or equal to
75.00%.
The Originator will make representations and warranties with respect to
the Mortgage Loans as of the date the Mortgage Loans are sold by the Originator
to the Seller. The Originator will be obligated to repurchase or substitute for
Mortgage Loans in respect of which a material breach of the representations and
warranties it has made has occurred as of such date (other than those breaches
which have been cured).
THE SELLER
The Seller of the Mortgage Loans is Greenwich Capital Financial
Products, Inc., a Delaware corporation. The Seller previously acquired the
Mortgage Loans from the Originator.
THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. The
Trust created under the Pooling Agreement will consist of (i) all of the
Depositor's right, title and interest in the Mortgage Loans, the related
mortgage notes, Mortgages and other related documents, (ii) all payments on or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired on
behalf of Certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the rights of the Trustee under all
insurance policies required to be maintained pursuant to the Pooling Agreement
and (v) the rights of the Depositor under the Mortgage Loan Purchase Agreement.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the Trust all of
its right, title and interest in and to each Mortgage Loan, the related mortgage
note, Mortgage, assignment of mortgage in recordable form in blank or to the
Trustee and other related documents (collectively, the "Related Documents"),
including all scheduled payments with respect to each such Mortgage Loan due
after the Cut-off Date. The Trustee, concurrently with such transfer, will
deliver the Certificates to the Depositor. Each Mortgage Loan transferred to the
Trust will be identified on a schedule (the "Mortgage Loan Schedule") delivered
to the Trustee pursuant to the Pooling Agreement. The Mortgage Loan Schedule
will include information such as the Principal Balance of each Mortgage Loan as
of the Cut-off Date and its Mortgage Rate as well as other information with
respect to each Mortgage Loan.
The Pooling Agreement will require that, within the time period
specified therein, the Depositor will deliver or cause to be delivered to the
Trustee (or a custodian, as the Trustee's agent for such purpose) the mortgage
notes endorsed to the Trustee on behalf of the Certificateholders and the
Related Documents. In lieu of delivery of original
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Mortgages or mortgage notes, if such original is not available or lost, the
Depositor may deliver or cause to be delivered true and correct copies thereof,
or, with respect to a lost mortgage note, a lost note affidavit executed by the
Seller. The assignments of Mortgage will not be recorded by or on behalf of the
Depositor in the appropriate offices for real property records; provided,
however, upon the occurrence of certain events set forth in the Pooling
Agreement, each such assignment of Mortgage shall be recorded by the Seller as
set forth in the Pooling Agreement.
Within 45 days of the Closing Date, the Trustee will review the
Mortgage Loans and the Related Documents pursuant to the Pooling Agreement and
if any Mortgage Loan or Related Document is found to be defective in any
material respect and such defect is not cured within 120 days following
notification thereof to the Seller by the Trustee, the Seller will be obligated
to either (i) substitute for such Mortgage Loan a Qualified Substitute Mortgage
Loan; however, such substitution is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify any of the REMICs (as defined
in the Pooling Agreement) as a REMIC or result in a prohibited transaction tax
under the Code or (ii) purchase such Mortgage Loan at a price (the "Purchase
Price") equal to the outstanding Principal Balance of such Mortgage Loan as of
the date of purchase, plus all accrued and unpaid interest thereon, computed at
the Mortgage Rate through the end of the calendar month in which the purchase is
effected, plus the amount of any unreimbursed Advances and Servicing Advances
(each as defined herein) made by the Servicer. The Purchase Price will be
required to be remitted to the Servicer for deposit in the Collection Account
(as defined herein) on or prior to the next succeeding Determination Date (as
defined herein) after such obligation arises. The obligation of the Seller to
repurchase or substitute for a Deleted Mortgage Loan (as defined herein) is the
sole remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trustee or the Certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Seller will be required to remit to the Servicer for deposit in the
Collection Account on or prior to the next succeeding Determination Date after
such obligation arises an amount (the "Substitution Adjustment") equal to the
excess of the Principal Balance of the related Deleted Mortgage Loan over the
Principal Balance of such Qualified Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted
by the Seller for a Deleted Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Deleted Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Deleted Mortgage Loan; (ii) have a Mortgage Rate
not less than the Mortgage Rate of the Deleted Mortgage Loan and not more than
1% in excess of the Mortgage Rate of such Deleted Mortgage Loan; (iii) have the
same Due Date as the Deleted Mortgage Loan; (iv) have a remaining term to
maturity not more than one year earlier and not later than the remaining term to
maturity of the Deleted Mortgage Loan; (v) comply with each representation and
warranty as to the Mortgage Loans set forth in the Mortgage Loan Purchase
Agreement (deemed to be made as of the date of substitution); (vi) have been
underwritten or re-underwritten by the Originator in accordance with the same
underwriting criteria and guidelines as the Mortgage Loans being replaced; (vii)
be of the same or better credit quality as the Mortgage Loan being replaced and
(viii) satisfy certain other conditions specified in the Pooling Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., the Mortgage Rate). In
addition, the Seller will represent and warrant, on the Closing Date, that,
among other things: (i) at the time of transfer to the Depositor, the Seller
transferred or assigned all of its right, title and interest in each Mortgage
Loan and the Related Documents, free of any lien and (ii) each Mortgage Loan
complied, at the time of origination, in all material respects with applicable
state and federal laws. Upon discovery of a breach of any such representation
and warranty which materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer in the related Mortgage Loan and
Related Documents, the Seller will have a period of 120 days after discovery or
notice of the breach to effect a cure. If the breach cannot be cured within the
120-day period, the Seller will be obligated to (i) substitute for such Deleted
Mortgage Loan a Qualified Substitute Mortgage Loan or (ii) repurchase such
Deleted Mortgage Loan from the Trust. The same procedure and limitations that
are set forth above for the substitution or repurchase of Deleted Mortgage Loans
as a result of deficient documentation relating thereto will apply to the
substitution or purchase of a Deleted Mortgage Loan as a result of a breach of a
representation or warranty in the Mortgage Loan Purchase Agreement that
materially and adversely affects the interests of the Certificateholders or the
Certificate Insurer.
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Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Deleted Mortgage Loans."
Pursuant to the Pooling Agreement, the Servicer will service and
administer the Mortgage Loans as more fully set forth therein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer shall establish and maintain or cause to be maintained one
or more separate trust accounts (each, a "Collection Account") for the benefit
of the Certificateholders and the Certificate Insurer. Each Collection Account
will be an Eligible Account (as defined in the Pooling Agreement). Upon receipt
by the Servicer of amounts in respect of the Mortgage Loans (excluding amounts
representing the Servicing Fee or other servicing compensation,
reimbursement for Advances and Servicing Advances and insurance proceeds to be
applied to the restoration or repair of a Mortgaged Property or similar items),
the Servicer will deposit such amounts in the Collection Account. Amounts so
deposited may be invested in Permitted Investments (as described in the Pooling
Agreement) maturing no later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Distribution
Account. The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date and payment of certain
fees and expenses of the Trust. The Distribution Account will be an Eligible
Account. Amounts on deposit therein may be invested in Permitted Investments
maturing on or before the Business Day prior to the related Distribution Date
unless such Permitted Investments are invested in investments managed or advised
by the Trustee or an affiliate thereof, in which case such Permitted Investments
may mature on the related Distribution Date.
THE SERVICER
The information set forth in the following paragraphs has been provided
by the Servicer (which is referred to in this section as "Fairbanks"). None of
the Depositor, the Trustee, the Originator, the Seller, the Certificate Insurer,
the Underwriters or any of their affiliates has made or will make any
representation as to the accuracy or completeness of such information.
GENERAL. Fairbanks commenced mortgage servicing operations in 1989
for its own account and has managed and serviced third-party mortgage loan
portfolios since 1994. Fairbanks conducts operations in Salt Lake City, Utah,
Hatboro, Pennsylvania, Jacksonville, Florida and Austin, Texas.
Fairbanks is approved by the U.S. Department of Housing and Urban
Development as a non-supervised mortgagee with servicing approval, and is a
Fannie Mae-approved seller/servicer and a Freddie Mac-approved servicer engaged
in the servicing of first and junior lien mortgage loans. Fairbanks was
incorporated on February 24, 1989 under the laws of the State of Utah.
Fairbanks' corporate offices are located at 3815 South West Temple, Salt Lake
City, Utah 84165-0250.
SERVICING PORTFOLIO. At June 30, 2002 and December 31, 2001, Fairbanks
serviced a total portfolio of 466,856 and 225,934 mortgage loans and real estate
owned, respectively, having aggregate unpaid principal balances of approximately
$33.552 billion and approximately $14.106 billion, respectively, for itself and
others. At June 30, 2002 and December 31, 2001, Fairbanks serviced a total of
78,184 and 43,567 second-lien mortgage loans and related real estate owned,
respectively, having unpaid principal balances of approximately $2.821 billion
and approximately $1.313 billion, respectively.
FAIRBANKS' DELINQUENCY AND FORECLOSURE EXPERIENCE. The following table
sets forth the delinquency and foreclosure experience of the second lien
mortgage loans and related real estate owned that were serviced by Fairbanks as
of the date indicated.
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DELINQUENCIES AND FORECLOSURE EXPERIENCE(1)
(DOLLARS IN THOUSANDS)
AS OF AS OF
JUNE 30, 2002 DECEMBER 31, 2001
---------------------------------------------------------------------------------------
% BY % BY
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
LOANS BALANCE(2) BALANCE LOANS BALANCE(2) BALANCE
----- ---------- ------- ----- ---------- -------
CURRENT LOANS .......... $ 60,962 1,805,994 78.50% $ 35,570 1,082,925 82.47%
Period of Delinquency(3)
30-59 days ......... 5,121 149,963 6.52 2,414 67,127 5.11
60-89 days ......... 1,426 39,598 1.72 539 14,681 1.12
90 days or more .... 3,558 94,001 4.09 1,498 39,620 3.02
TOTAL DELINQUENCIES .... 10,105 283,562 12.32% 4,451 121,428 9.25%
Foreclosures ........... 2,328 80,892 3.52 1,185 41,180 3.14
Bankruptcies ........... 4,585 123,602 5.37 2,299 65,433 4.98
TOTAL FORECLOSURES/
BANKRUPTCIES ....... 6,913 204,494 8.89% 3,484 106,613 8.12%
Real Estate Owned ...... 203 6,696 0.29 62 2,161 0.16
TOTAL PORTFOLIO ........ $ 78,183 2,300,746 100.00% $ 43,567 1,313,127 100.00%
______________________
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. (2) For
the Real Estate Owned properties, the principal balance is at the time of
foreclosure or delivery of a deed-in-lieu of foreclosure. (3) No mortgage loan
is included in this section of the table as delinquent until it is one month
past due. (4) Certain totals may not equal 100% due to rounding.
Fairbanks' portfolio of second lien mortgage loans may differ
significantly from the mortgage loans in the mortgage pool in terms of interest
rates, principal balances, geographic distribution, types of properties,
origination and underwriting criteria, prior servicer performance and other
possibly relevant characteristics. For example, the delinquency and loss
experience of Fairbanks' second lien servicing portfolio may include loans and
financial assets originated pursuant to different underwriting standards than
the Mortgage Loans and loans and financial assets having a geographic
distribution that varies from the geographic distribution of the Mortgage Loans.
In addition, Fairbanks' second lien servicing portfolio may include loans with a
variety of payment and other characteristics that may not correspond to those of
the Mortgage Loans. There can be no assurance, and no representation is made,
that the delinquency and foreclosure experience with respect to the Mortgage
Loans will be similar to that reflected in the table above, nor is any
representation made as to the rate at which losses may be experienced on
liquidation of defaulted Mortgage Loans. The actual delinquency experience on
the Mortgage Loans will depend, among other things, upon the value of the real
estate securing such Mortgage Loans and the ability of the related borrower to
make required payments. It should be noted that if the residential real estate
market should experience an overall decline in property values, the actual rates
of delinquencies and foreclosures could be higher than those previously
experienced by Fairbanks. In addition, adverse economic conditions may affect
the timely payment by borrowers of scheduled payments of principal and interest
on the Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Pool. Finally, the statistics shown
above represent the delinquency experience for Fairbanks' second lien mortgage
servicing portfolio only for the periods presented, whereas the aggregate
delinquency experience on the Mortgage Loans will depend on the results obtained
over the life of the Mortgage Pool. It should be noted that Fairbanks' business
emphasizes, to a certain degree, the acquisition of servicing rights with
respect to non-performing and subperforming mortgage loans, and Fairbanks has
been an active participant in the market for such servicing rights over the past
several years. The acquisition of such servicing rights may have affected the
delinquency and foreclosure experience of Fairbanks in the periods ended on June
30, 2002 and December 31, 2001.
ADVANCES
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced on or before each Distribution Date from (i) its
own funds, (ii) funds in the Collection Account that are not included in the
Available Funds for such Distribution Date or (iii) a combination of (i) and
(ii), an amount equal to (i) with respect to
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any Mortgage Loan other than a balloon loan, the aggregate of all payments of
interest (net of Servicing Fees) that were due during the related Due Period on
the Mortgage Loans and that were delinquent on the related Determination Date,
plus certain amounts representing assumed payments not covered by any current
net income on the Mortgaged Properties acquired by foreclosure or deed in lieu
of foreclosure and (ii) with respect to any balloon loans on which the balloon
payment is not made when due, the assumed payment of interest that would have
been due on the related Due Date based on the original principal amortization
schedule for such balloon loan (any such advance, an "Advance").
Advances are required to be made only to the extent they are deemed by
the Servicer to be recoverable from related late collections, insurance
proceeds, condemnation proceeds and liquidation proceeds. The purpose of making
such Advances is to maintain a regular cash flow to the Certificateholders,
rather than to guarantee or insure against losses. The Servicer will not be
required, however, to make any Advances with respect to reductions in the amount
of the monthly payments on the Mortgage Loans due to bankruptcy proceedings or
the application of the Relief Act. Subject to the recoverability standard above,
the Servicer's obligation to make Advances as to any Mortgage Loan will continue
until the Mortgage Loan is paid in full or until the recovery of all Liquidation
Proceeds thereon.
All Advances will be reimbursable to the Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made unless
such amounts are deemed to be nonrecoverable by the Servicer from the proceeds
of the related Mortgage Loan, in which event reimbursement will be made to the
Servicer from general funds in the Collection Account. The Servicer may recover
from amounts in the Collection Account the amount of any Advance that remains
unreimbursed to the Servicer from the related liquidation proceeds after the
final liquidation of the related Mortgage Loan, and such reimbursement amount
will not be available for remittance to the Trustee for distribution on the
Certificates. In the event the Servicer fails in its obligation to make any
required Advance, the Trustee, in its capacity as successor Servicer, will be
obligated to make any such Advance, to the extent required in the Pooling
Agreement.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of- pocket" costs and expenses
(including reasonable attorneys' fees and disbursements) incurred in the
performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration, inspection and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage and (iv) certain insurance
premiums and certain ongoing expenses associated with the Mortgage Pool and
incurred by the Servicer in connection with its responsibilities under the
Pooling Agreement. Each such expenditure will constitute a "Servicing Advance."
The Servicer's right to reimbursement for Servicing Advances is limited
to late collections on the related Mortgage Loan, including liquidation
proceeds, condemnation proceeds, released mortgaged property proceeds, insurance
proceeds and such other amounts as may be collected by the Servicer from the
related mortgagor or otherwise relating to the Mortgage Loan in respect of which
such unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Servicer from the proceeds of the related Mortgage Loan,
in which event reimbursement will be made to the Servicer from general funds in
the Collection Account.
The Pooling Agreement provides that the Trustee, on behalf of the Trust
and with the consent of the Servicer, may enter into a facility with any person
which provides that such person (an "Advancing Person") may fund Advances and/or
Servicing Advances, although no such facility shall reduce or otherwise affect
the Servicer's obligation to fund such Advances and/or Servicing Advances. Any
Advances and/or Servicing Advances made by an Advancing Person will be
reimbursed to the Advancing Person in the same manner as reimbursements would be
made to the Servicer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Servicer in respect of its
servicing activities (the "Servicing Fee") for the Certificates will be at the
"Servicing Fee Rate" of 0.50% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Servicer is entitled to
retain all service-related fees, including assumption fees, modification fees,
extension fees, late payment charges and Prepayment Interest Excess (as defined
in the Pooling Agreement), non-sufficient fund fees and other ancillary fees
(but not prepayment charges, which will be distributed to the holders of the
Class P Certificates), to the extent collected from mortgagors, together with
any interest or other income earned on funds held in the Collection Account and
any Servicing Accounts. The Servicer is obligated to deposit into the Collection
Account the amount of any Prepayment Interest Shortfall (payments made by the
Servicer
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in satisfaction of such obligation, "Compensating Interest") but only in an
amount up to its Servicing Fee for the related Distribution Date.
With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment was applied during the portion of the related
Prepayment Period (as defined below) occurring in the month preceding the month
of such Determination Date, the "Prepayment Interest Shortfall" is an amount
equal to the interest at the applicable Mortgage Rate (net of the Servicing Fee)
on the amount of such principal prepayment for the number of days from the date
on which the principal prepayment is applied until the last day of such
preceding calendar month.
THE TRUSTEE
Wells Fargo Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States, will be
named Trustee pursuant to the Pooling Agreement. The Trustee will make available
a monthly statement to Certificateholders containing information regarding the
Certificates. The Trustee may make such statement available each month, to any
interested party, via the Trustee's website. See "Description of the
Certificates--Reports to Certificateholders."
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling Agreement will be equal to certain investment
earnings on the amounts on deposit in the Distribution Account and a fee (the
"Trustee Fee") equal to accrued interest at the "Trustee Fee Rate" of 0.0095%
per annum on the Principal Balance of the Mortgage Loans. The Pooling Agreement
will provide that the Trustee and any director, officer, employee or agent of
the Trustee will be indemnified by the Trust and will be held harmless against
any loss, liability or expense (not including expenses, disbursements and
advances incurred or made by the Trustee, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trustee's performance in accordance with the provisions of the Pooling
Agreement) incurred by the Trustee arising out of or in connection with the
acceptance or administration of its obligations and duties under the Pooling
Agreement, other than any loss, liability or expense (i) that constitutes a
specific liability of the Trustee under the Pooling Agreement or (ii) incurred
by reason of willful misfeasance, bad faith or negligence in the performance of
the Trustee's duties under the Pooling Agreement or as a result of a breach, or
by reason of reckless disregard, of the Trustee's obligations and duties under
the Pooling Agreement. The Pooling Agreement will provide that the Trustee may
withdraw amounts owing to it under the Pooling Agreement prior to distributions
to Certificateholders.
VOTING RIGHTS
At all times 97% of all voting rights will be allocated among the
holders of the Offered Certificates and the Class C Certificates in proportion
to the then outstanding Certificate Principal Balances of their respective
Certificates. At all times 1% of all voting rights will be allocated to the
holders of the Class S Certificates, 1% of all voting rights will be allocated
to the holders of the Class P Certificates and 1% of all voting rights will be
allocated to the holders of the Class R Certificates. With respect to any date
of determination, if no Insurer Default (as defined herein) exists and is
continuing, all of the voting rights of the Class A Certificates will be vested
in the Certificate Insurer. 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 of such holders in
such class.
AMENDMENT
The Pooling Agreement may be amended under the circumstances set forth
under "The Agreements --Amendment" in the prospectus provided, however, that
unless an Insurer Default exists and is continuing, the consent of the
Certificate Insurer shall be required (if any Class A Certificates are
outstanding); provided, further, that if an Insurer Default exists and is
continuing, the consent of the Certificate Insurer shall be required for any
amendment that would affect the Certificate Insurer's right to reimbursement.
TERMINATION
The Servicer will have the right to purchase all of the Mortgage Loans
and REO Properties and thereby effect the early retirement of the Certificates,
on any Distribution Date on which the aggregate Principal Balance of the
Mortgage Loans and REO Properties is equal to or less than 10% of the aggregate
Principal Balance of the Mortgage Loans as of the Cut-off Date. The first
Distribution Date on which such option could be exercised is referred to herein
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as the "Optional Termination Date." In the event that the option is exercised,
the repurchase will be made at a price (the "Termination Price") generally equal
to the fair market value of the Mortgage Loans and REO Properties, in each case
plus accrued and unpaid interest for each Mortgage Loan at the related Mortgage
Rate to but not including the first day of the month in which such repurchase
price is paid plus unreimbursed Servicing Advances, Advances and any unpaid
Servicing Fees allocable to such Mortgage Loans and REO Properties. However,
this option can only be exercised if (i) the fair market value of the Mortgage
Loans and REO Properties is at least equal to the aggregate Principal Balance of
the Mortgage Loans and the appraised value of the REO Properties and (ii) the
Termination Price is sufficient to pay (a) all amounts owed to the Certificate
Insurer under the Insurance Agreement and (b) all interest accrued on, as well
as amounts necessary to retire the principal balance of, the notes issued
pursuant to the Indenture between First Franklin NIM Trust 2002-FFA as issuer
and the Trustee as indenture trustee. In the event the Servicer exercises this
option, the portion of the purchase price allocable to the Offered Certificates
will be, to the extent of available funds:
(i) 100% of the then outstanding Certificate Principal Balance of the
Class A Certificates and the Mezzanine Certificates, plus
(ii) interest for the final Accrual Period on the then outstanding
Certificate Principal Balance (or Notional Amount, in the case of
the Class S Certificates) of the Offered Certificates at the then
applicable Pass- Through Rate for the class, plus
(iii) any previously accrued but unpaid interest thereon to which the
holders of the Offered Certificates are entitled, plus
(iv) in the case of the Mezzanine Certificates, any previously unpaid
Allocated Realized Loss Amount.
LOSS MITIGATION PROCEDURES
The Servicer is authorized to engage in a wide variety of loss
mitigation practices. With respect to such of the Mortgage Loans as come into
and continue in default, the Servicer will decide whether to (i) foreclose upon
the Mortgaged Properties securing those Mortgage Loans, (ii) write off the
unpaid principal balance of the Mortgage Loans as bad debt, (iii) take a deed in
lieu of foreclosure, (iv) accept a short sale (a payoff of the Mortgage Loan for
an amount less than the total amount contractually owed in order to facilitate a
sale of the Mortgaged Property by the mortgagor) or permit a short refinancing
(a payoff of the Mortgage Loan for an amount less than the total amount
contractually owed in order to facilitate refinancing transactions by the
mortgagor not involving a sale of the Mortgaged Property), (v) arrange for a
repayment plan, or (vi) agree to a modification in accordance with the Pooling
Agreement. No later than the day on which a Mortgage Loan becomes 180 days
delinquent, the Servicer will determine whether a significant net recovery is
possible through foreclosure proceedings or other liquidation of the related
Mortgaged Property. If the Servicer determines that no such recovery is
possible, it must charge off the related Mortgage Loan no later than the time it
becomes 180 days delinquent, and it may charge off the related Mortgage Loan
prior to that time. Once a Mortgage Loan has been charged off, the Servicer will
discontinue making Advances, the Servicer will not be entitled to the Servicing
Fee for such Mortgage Loan, and the Mortgage Loan will be treated as a
Liquidated Mortgage Loan giving rise to a Realized Loss.
Any such Mortgage Loan that is charged off will continue to be serviced
by the Servicer for the holders of the Class X Certificates using
non-foreclosure collection procedures. The Servicer will not be entitled to a
Servicing Fee or for reimbursement of expenses in connection with such Mortgage
Loans after the date of charge off. Any such Mortgage Loans serviced by the
Servicer in accordance with the non-foreclosure procedures shall be serviced for
approximately six months. Any net recoveries received on such Mortgage Loans
during such six month period will be treated as liquidation proceeds distributed
to the holders of the Class X Certificates. On the date which is six months
after the date on which the Servicer begins servicing such Mortgage Loans using
the non-foreclosure collection procedures, such charged off Mortgage Loan will
be released to the holders of the Class X Certificates and thereafter, (i) the
holders of the Class X Certificates will be entitled to any amounts subsequently
received in respect of any such released Mortgage Loans, (ii) the holder of the
majority of the Class X Certificates may designate any servicer to service any
such released Mortgage Loan and (iii) the holder of the majority of the Class X
Certificates may sell any such released Mortgage Loan to a third party.
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Notwithstanding the foregoing, the procedures described above relating
to the treatment of charged off loans may be modified at any time at the
discretion of the holder of the majority of the Class X Certificates, with the
reasonable consent of the Servicer.
CERTAIN MATTERS REGARDING THE CERTIFICATE INSURER
Pursuant to the terms of the Pooling Agreement, unless an Insurer
Default exists, the Certificate Insurer's consent will be required prior to,
among other things, (i) the appointment of any successor Trustee or Servicer or
(iii) any amendment to the Pooling Agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. Set
forth below are summaries of the specific terms and provisions pursuant to which
the Offered Certificates will be issued. The following summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Pooling Agreement. When particular
provisions or terms used in the Pooling Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
The Trust will issue (i) the Class A Certificates, (ii) the Class S-1
Certificates and the Class S-2 Certificates (together, the "Class S
Certificates"), (iii) the Class M-1 Certificates, the Class M-2 Certificates and
the Class M-3 Certificates (collectively, the "Mezzanine Certificates"), (iv)
the Class C Certificates (together with the Mezzanine Certificates, the
"Subordinate Certificates"), (v) the Class P Certificates, (vi) the Class R
Certificates (the "Residual Certificates") and (vii) the Class X Certificates.
The Class A Certificates, the Class S Certificates, the Mezzanine Certificates,
the Class C Certificates, the Class P Certificates, the Residual Certificates
and the Class X Certificates are collectively referred to herein as the
"Certificates." Only the Class A Certificates, the Class S-1 Certificates and
the Mezzanine Certificates are offered hereby (together, the "Offered
Certificates"). However, a description of the Class S-2 Certificates is included
in this prospectus supplement because their amount, structure, rights, risks and
other characteristics affect the amount, structure, rights, risks and other
characteristics of the Offered Certificates.
The Class A Certificates will be covered by an irrevocable and
unconditional certificate guaranty insurance policy issued by the Certificate
Insurer for the benefit of the holders of the Class A Certificates, pursuant to
which the Certificate Insurer will guarantee distributions to such
certificateholders as described herein.
The Class A Certificates and the Mezzanine Certificates will have the
Original Certificate Principal Balances specified on the cover hereof, subject
to a permitted variance of plus or minus five percent. The Class S Certificates
will not have Certificate Principal Balances, but will instead bear interest on
their Notional Amounts outstanding from time to time. The Class C Certificates
will have an Original Certificate Principal Balance equal to the excess of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date over
the Original Certificate Principal Balances of the Offered Certificates and the
Class P Certificates. The Class P Certificates will have an Original Certificate
Principal Balance of $100 and will not bear interest. The Class P Certificates
will be entitled to all prepayment charges received in respect of the Mortgage
Loans and such amounts will not be available for distribution to the holders of
the Offered Certificates. The Class R Certificates and the Class X Certificates
will not have Original Certificate Principal Balances and will not bear
interest.
The Offered Certificates will be issued in book-entry form as described
below. The Class A Certificates and the Mezzanine Certificates will be issued in
minimum dollar denominations of $50,000 and integral multiples of $1.00 in
excess thereof. The Class S Certificates will be issued in minimum Notional
Amounts of $50,000 and integral multiples of $1.00 in excess thereof. The
assumed final maturity date (the "Assumed Final Distribution Date") for the
Class A Certificates and the Mezzanine Certificates is the Distribution Date in
September 2032 and the Assumed Final Maturity Date for the Class S-1
Certificates is the Distribution Date in March 2005.
Distributions on the Offered Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in October 2002 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the Record Date. The
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"Record Date" for any Certificate issued in book-entry form, other than the
Class S Certificates, is the business day immediately preceding such
Distribution Date and the "Record Date" for the Class S Certificates, any
physical Certificate or any book-entry Certificate that becomes a Definitive
Certificate (as defined herein), will be the last business day of the month
immediately preceding the month in which the related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (for so long
as they are registered in the name of the applicable depository or its nominee,
the "Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Book-Entry Certificates ("Certificate Owners") will hold such
Certificates through The Depository Trust Company ("DTC") in the United States,
or upon request through Clearstream Banking Luxembourg, formerly known as
Cedelbank SA ("Clearstream"), or the Euroclear System ("Euroclear") (in Europe)
if they are participants of such systems, or indirectly through organizations
which are participants in such systems. The Book-Entry Certificates will be
issued in one or more certificates which equal the aggregate Certificate
Principal Balance of such Certificates and will initially be registered in the
name of Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Clearstream and The Chase Manhattan Bank will act as depositary
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $50,000.
Except as described below, no Certificate Owner acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling Agreement. Certificate Owners are only permitted to exercise
their rights indirectly through DTC and participants of DTC ("DTC
Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates. DTC
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not DTC
Participants may transfer ownership of Book-Entry Certificates only through DTC
Participants and indirect participants by instructing such DTC Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective DTC
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Book-Entry Certificates will be executed through DTC
and the accounts of the respective DTC Participants at DTC will be debited and
credited. Similarly, the DTC Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Certificate Owners.
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Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant (as
defined below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Federal Income Tax
Consequences--REMICS--Backup Withholding With Respect to REMIC Certificates" and
"--Foreign Investors in REMIC Certificates" in the prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream Participants and Euroclear Participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its DTC Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, a
Luxembourg limited liability company, was formed in January 2000 through the
merger of Cedel International and Deutsche Boerse Clearing, the shareholders of
which comprise 93 of the world's major financial institutions.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois, "IML," the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with the Euroclear Operator (as
defined below) in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment,
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thereby eliminating the need for physical movement of certificates and any risk
from lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 29 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Euroclear Bank S.A./N.V. (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co. DTC will be responsible for
crediting the amount of such distributions to the accounts of the applicable DTC
Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such distributions to the Certificate Owners
of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Consequences--REMICS--Backup Withholding With Respect to
REMIC Certificates" and "--Foreign Investors in REMIC Certificates" in the
prospectus. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a Certificate Owner to pledge Book-Entry Certificates to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to the
lack of physical certificates for such Book-Entry Certificates. In addition,
issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain potential
investors may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to Certificate Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Certificate Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Clearstream or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Certificateholder under the
Pooling Agreement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related DTC
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
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Definitive Certificates will be issued to Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor advises the Trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book- Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of a
Servicer Event of Termination (as defined in the Pooling Agreement), Certificate
Owners having percentage interests aggregating not less than 51% of the
Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer, the Seller or the Trustee will
have any responsibility for any aspect of the records relating to or payments
made on account of beneficial ownership interests of the Book-Entry Certificates
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Available Funds. With respect to any
Distribution Date, "Available Funds" will be equal to the sum of the following
amounts with respect to the Mortgage Loans, net of amounts reimbursable
therefrom to the Servicer or the Trustee (subject, in the case of amounts
reimbursable to the Trustee other than servicing transfer costs, to a limit of
$100,000 per calendar year): (i) the aggregate amount of monthly payments on the
Mortgage Loans due on the related Due Date and received by the Servicer by the
Determination Date, after deduction of the Trustee Fee for such Distribution
Date, the Servicing Fee for such Distribution Date and any accrued and unpaid
Trustee Fees and Servicing Fees in respect of any prior Distribution Dates, (ii)
certain unscheduled payments in respect of the Mortgage Loans, including
prepayments, Insurance Proceeds, Net Liquidation Proceeds and proceeds from
repurchases of and substitutions for such Mortgage Loans occurring during the
related Prepayment Period, excluding prepayment charges and (iii) payments from
the Servicer in connection with Advances and Prepayment Interest Shortfalls for
such Distribution Date. The holders of the Class P Certificates will be entitled
to all prepayment charges received on the Mortgage Loans and such amounts will
not be available for distribution to the holders of the Offered Certificates.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each Distribution Date the Trustee shall withdraw from the
Distribution Account that portion of Available Funds 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 Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium payable in
respect of the Class A Certificates;
(ii) concurrently, to the holders of the Class A Certificates and the
holders of the Class S Certificates, the Monthly Interest Distributable Amount
for such Certificates on a PRO RATA basis based on the entitlement of each such
class;
(iii) concurrently, to the Certificate Insurer (to the extent of the
amount owing to the Certificate Insurer under the Insurance Agreement for
reimbursement for prior draws made on the Policy in respect of any payment of
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interest by the Certificate Insurer to the holders of the Class A Certificates
on any prior Distribution Date, or in the case of an Insurer Default, to the
holders of the Class A Certificates) and the holders of the Class S
Certificates, the Unpaid Interest Shortfall Amount, if any, for the Class A
Certificates (calculated without regard to any payment of interest by the
Certificate Insurer to the holders of the Class A Certificates on any prior
Distribution Date) and the Class S Certificates, respectively, on a PRO RATA
basis based on their respective entitlements;
(iv) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws made on
the Policy (after taking into account any distributions made pursuant to clause
(iii) above) in respect of the Class A Certificates and any other amounts owing
to the Certificate Insurer under the Insurance Agreement with respect to the
Class A Certificates;
(v) to the Trustee, any unpaid amounts owing to the Trustee under the
Pooling Agreement;
(vi) to the holders of the Class M-1 Certificates, the related Monthly
Interest Distributable Amount;
(vii) to the holders of the Class M-2 Certificates, the related
Monthly Interest Distributable Amount; and
(viii) to the holders of the Class M-3 Certificates, the related
Monthly Interest Distributable Amount.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Servicer will be allocated, first,
to the interest distribution amount with respect to 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 AND SUCH INTEREST SHORTFALLS ARE NOT COVERED BY THE POLICY.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES AND THE MEZZANINE
CERTIFICATES
On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the Principal Distribution Amount shall be distributed in the
following amounts and order of priority:
(i) first, to the holders of the Class A Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) second, to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for reimbursement for prior
draws made on the Policy in respect of the Class A Certificates and any other
amounts owing to the Certificate Insurer under the Insurance Agreement with
respect to the Class A Certificates, to the extent not paid pursuant to clauses
(iii) and (iv) under "--INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES";
(iii) third, to the Trustee, any unpaid amounts owing to the Trustee
under the Pooling Agreement;
(iv) fourth, to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(v) fifth, to the holders of the Class M-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(vi) sixth, to the holders of the Class M-3 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, distributions in respect of principal to
the extent of the Principal Distribution Amount shall be distributed in the
following amounts and order of priority:
(i) first, to the holders of the Class A Certificates, the Class A
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero;
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(ii) second, to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for reimbursement for prior
draws made on the Policy in respect of the Class A Certificates and any other
amounts owing to the Certificate Insurer under the Insurance Agreement with
respect to the Class A Certificates, to the extent not paid pursuant to clauses
(iii) and (iv) under "--INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES";
(iii) third, to the Trustee, any unpaid amounts owing to the Trustee
under the Pooling Agreement;
(iv) fourth, 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;
(v) fifth, 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
(vi) sixth, to the holders of the Class M-3 Certificates, the Class M-3
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 Subordinate Certificates. Increasing the
respective percentage interest in the Trust of the Subordinate Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the
Class A Certificates and the Class S Certificates consists of subordination, as
described below, excess interest and overcollateralization, as described under
"--Overcollateralization Provisions" herein and additional credit enhancement
provided for the benefit of the holders of the Class A Certificates consists of
the Policy as described under "--The Policy" herein.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described herein, to the
rights of the holders of the Class A Certificates and the Class S Certificates.
This subordination is intended to enhance the likelihood of regular receipt by
the holders of the Class A Certificates of the full amount of their scheduled
monthly payments of interest and principal and to afford such holders protection
against Realized Losses and to enhance the likelihood of regular receipt by the
holders of the Class S Certificates of the full amount of their scheduled
monthly payments of interest.
The protection afforded to the holders of the Class A Certificates and
the Class S Certificates by means of the subordination of the Subordinate
Certificates will be accomplished by (i) the preferential right of the holders
of the Class A Certificates to receive on any Distribution Date, prior to
distribution on the Subordinate Certificates, distributions in respect of
interest and principal, subject to funds available for such distributions, (ii)
the preferential right of the holders of the Class S Certificates to receive on
any Distribution Date, prior to distribution on the Subordinate Certificates,
distributions in respect of interest, subject to funds available for such
distributions and (iii) if necessary, the right of the holders of the Class A
Certificates and the Class S Certificates to receive future distributions of
amounts that would otherwise be payable to the holders of the Subordinate
Certificates.
In addition, the rights of the holders of the Class M-1 Certificates to
receive distributions will be senior to the rights of holders of the Class M-2
Certificates, the rights of the holders of the Class M-2 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-3
Certificates, 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. This subordination is
intended to enhance the likelihood of regular receipt by the holders of more
senior Certificates of distributions in respect of interest and principal and to
afford such holders protection against Realized Losses.
ALLOCATION OF LOSSES; SUBORDINATION
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Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date, first, to Net Monthly Excess Cashflow, second, to the Class C
Certificates, third, to the Class M-3 Certificate, fourth, to the Class M-2
Certificates and fifth, to the Class M-1 Certificates.
The Pooling Agreement does not permit the allocation of Realized Losses
to the Class A Certificates, the Class S Certificates, the Class P Certificates
or the Class X Certificates.
Once Realized Losses have been allocated to the Mezzanine Certificates,
such amounts with respect to such Certificates will no longer accrue interest
nor will such amounts be reinstated thereafter. However, Allocated Realized Loss
Amounts may be paid to the holders of the Mezzanine Certificates from Net
Monthly Excess Cashflow, according to the priorities set forth under
"--Overcollateralization Provisions" below.
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.
OVERCOLLATERALIZATION PROVISIONS
The weighted average net Mortgage Rate for the Mortgage Loans is
generally expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates. As a result, interest collections on the
Mortgage Loans are expected to exceed the amount of interest distributable to
the holders of the Offered Certificates and the fees and expenses payable by the
Trust. The Pooling 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 hereafter described.
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 Certificates then
entitled to receive distributions in respect of principal, in an amount equal to
any Extra Principal Distribution Amount, distributable to such holders as part
of the Principal Distribution Amount as described under "--Allocation of
Available Funds--Principal Distributions on the Class A Certificates and the
Mezzanine Certificates" above;
(ii) to the holders of the Class M-1 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(iii) to the holders of the Class M-1 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to the Class M-1 Certificates;
(iv) to the holders of the Class M-2 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(v) to the holders of the Class M-2 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to the Class M-2 Certificates;
(vi) to the holders of the Class M-3 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(vii) to the holders of the Class M-3 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to the Class M-3 Certificates;
(viii) to the holders of the Class C Certificates as provided in the
Pooling Agreement;
(ix) if such Distribution Date follows the Prepayment Period during
which occurs the latest date on which a prepayment charge may be required to be
paid in respect of any Mortgage Loan, to the holders of the Class P
Certificates, in reduction of the Certificate Principal Balance thereof, until
the Certificate Principal Balance thereof is reduced to zero; and
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(x) any remaining amounts to the holders of the Residual Certificates
as provided in the Pooling Agreement.
On each Distribution Date, the Trustee will withdraw from the
Distribution Account all amounts representing prepayment charges, if any, in
respect of the Mortgage Loans received during the related Prepayment Period and
will distribute these amounts to the holders of the Class P Certificates.
DEFINITIONS
The "Accrual Period" (a) for the Class A Certificates and the Mezzanine
Certificates for a given Distribution Date will be the actual number of days
(based on a 360-day year) included in the period commencing on the immediately
preceding Distribution Date (or, in the case of the first such Accrual Period,
commencing on the Closing Date) and ending on the day immediately preceding such
Distribution Date and (b) for the Class S Certificates for a given Distribution
Date will be the calendar month preceding the month of such Distribution Date
based on a 360-day year consisting of twelve 30-day months.
An "Allocated Realized Loss Amount" with respect to any class of the
Mezzanine Certificates and any Distribution Date is an amount equal to the sum
of any Realized Loss allocated to that class of Certificates on the Distribution
Date and any Allocated Realized Loss Amount for that class remaining unpaid from
the previous Distribution Date.
The "Basic Principal Distribution Amount" means 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.
The "Certificate Principal Balance" of any Class A Certificate,
Mezzanine Certificate or Class P Certificate immediately prior to any
Distribution Date will be equal to the Certificate Principal Balance thereof on
the Closing Date (the "Original Certificate Principal Balance") reduced by the
sum of all amounts actually distributed in respect of principal of such Class
and, in the case of a Mezzanine Certificate, Realized Losses allocated thereto
on all prior Distribution Dates. The "Certificate Principal Balance" of the
Class C Certificates as of any date of determination is equal to the excess, if
any, of (a) the then aggregate Principal Balance of the Mortgage Loans over (b)
the then aggregate Certificate Principal Balances of the Class A Certificates,
the Mezzanine Certificates and the Class P Certificates.
The "Class A Principal Distribution Amount" is an amount equal to the
excess of (x) the Certificate Principal Balance of the Class A Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 53.50% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal received during the related Due Period and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal received during the related Due Period and unscheduled collections of
principal received during the related Prepayment Period) minus approximately
$1,434,494.
The "Class M-1 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the Certificate Principal Balance of the Class A
Certificates (after taking into account the payment of the Class A Principal
Distribution Amount on such Distribution Date) and (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) 68.50% and (ii)
the aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal
received during the related Due Period and unscheduled collections of principal
received during the related Prepayment Period) and (B) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal received during the
related Due Period and unscheduled collections of principal received during the
related Prepayment Period) minus approximately $1,434,494.
The "Class M-2 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the Certificate Principal Balance of the Class A
Certificates (after taking into account the payment of the Class A Principal
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Distribution Amount on such Distribution Date), (ii) the Certificate Principal
Balance of the Class M-1 Certificates (after taking into account the payment of
the Class M-1 Principal Distribution Amount on such Distribution Date) and (iii)
the Certificate Principal Balance of the Class M-2 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
79.50% and (ii) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal received during the related Due Period and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal received during
the related Due Period and unscheduled collections of principal received during
the related Prepayment Period) minus approximately $1,434,494.
The "Class M-3 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the Certificate Principal Balance of the Class A
Certificates (after taking into account the payment of the Class A Principal
Distribution Amount on such Distribution Date), (ii) the Certificate Principal
Balance of the Class M-1 Certificates (after taking into account the payment of
the Class M-1 Principal Distribution Amount on such Distribution Date), (iii)
the Certificate Principal Balance of the Class M-2 Certificates (after taking
into account the payment of the Class M-2 Principal Distribution Amount on such
Distribution Date) and (iv) the Certificate Principal Balance of the Class M-3
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 89.50% and (ii) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal received during the related Due Period and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal received during the related Due Period and unscheduled collections of
principal received during the related Prepayment Period) minus approximately
$1,434,494.
The "Credit Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the aggregate Certificate Principal Balance
of the Subordinate Certificates by (y) the aggregate principal balance of the
Mortgage Loans, calculated prior to taking into account distributions of
principal on the Mortgage Loans and distribution of the Principal Distribution
Amount to the holders of the Certificates then entitled to distributions of
principal on such Distribution Date.
A Mortgage Loan is "Delinquent" if any monthly payment due on a Due
Date is not made by the close of business on the next scheduled Due Date for
such Mortgage Loan. A Mortgage Loan is "30 days Delinquent" if such monthly
payment has not been received by the close of business on the corresponding day
of the month immediately succeeding the month in which such monthly payment was
due or, if there was no such corresponding day (e.g., as when a 30-day month
follows a 31-day month in which a payment was due on the 31st day of such
month), then on the last day of such immediately succeeding month; and similarly
for "60 days Delinquent" and "90 days Delinquent," etc.
The "Determination Date" with respect to any Distribution Date will be
the 15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day.
A "Due Period" with respect to any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
The "Extra Principal Distribution Amount" for any Distribution Date, is
the lesser of (x) the Net Monthly Excess Cashflow for such Distribution Date and
(y) the Overcollateralization Deficiency Amount for such Distribution Date.
"Insurance Proceeds" means the proceeds of any title policy, hazard
policy or other insurance policy covering a Mortgage Loan and received in or
prior to the month of charge off, to the extent such proceeds are not to be
applied to the restoration of the related Mortgaged Property or released to the
mortgagor in accordance with the procedures that the Servicer would follow in
servicing mortgage loans held for its own account, subject to the terms and
conditions of the related mortgage note and Mortgage.
An "Insurer Default" will occur in the event the Certificate Insurer
fails to make a payment under the Policy or if certain events of bankruptcy or
insolvency occur with respect to the Certificate Insurer.
S-43
The "Interest Remittance Amount" with respect to any Distribution Date
is that portion of the Available Funds for such Distribution Date attributable
to interest received or advanced with respect to the Mortgage Loans.
The "Monthly Interest Distributable Amount" for any Distribution Date
and each class of Offered Certificates equals the amount of interest accrued
during the related Accrual Period at the related Pass-Through Rate on the
Certificate Principal Balance or Notional Amount, as applicable, of such class
immediately prior to such Distribution Date, in each case, reduced by any
Prepayment Interest Shortfalls allocated to such class and shortfalls resulting
from the application of the Relief Act (allocated to each Certificate based on
its respective entitlements to interest irrespective of any Prepayment Interest
Shortfalls or shortfalls resulting from the application of the Relief Act for
such Distribution Date).
The "Net Monthly Excess Cashflow" for any Distribution Date is equal to
the sum of (a) any Overcollateralization Release Amount and (b) the excess of
(x) the Available Funds 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 the Class S Certificates, (C) the Principal Remittance Amount
and (D) any amounts paid to the Certificate Insurer and the Trustee from the
Interest Remittance Amount.
The "Notional Amount" of each class of Class S Certificates immediately
prior to any Distribution Date will be equal to the lesser of (i) $28,689,000
and (ii) the aggregate Principal Balance of the Mortgage Loans (prior to giving
effect to scheduled payments of principal received during the related Due Period
and unscheduled collections of principal received during the related Prepayment
Period).
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date equals 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).
An "Overcollateralization Release Amount" means, 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.
The "Overcollateralization Target Amount" means, with respect to any
Distribution Date, (i) prior to the Stepdown Date, an amount equal to
approximately 5.25% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date, (ii) on or after the Stepdown Date provided a Trigger Event
is not in effect, the greater of (x) the lesser of (i) 5.25% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date and (ii) 10.50%
of the then current aggregate outstanding principal balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal received during the related Due Period and
unscheduled collections of principal received during the related Prepayment
Period) and (y) approximately 0.50% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date or (iii) on or after the Stepdown Date and
if a Trigger Event is in effect, the Overcollateralization Target Amount for the
immediately preceding Distribution Date.
The "Overcollateralized Amount" for any Distribution Date is an amount
equal to (i) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal received during the related Due Period and unscheduled collections of
principal received during the related Prepayment Period) on the related
Determination Date minus (ii) the sum of the aggregate Certificate Principal
Balance of the Class A Certificates, the Mezzanine Certificates and the Class P
Certificates as of such Distribution Date (after giving effect to distributions
to be made on such Distribution Date).
The "Prepayment Period" for any Distribution Date is the period
commencing on the day after the Determination Date in the month preceding the
month in which such Distribution Date falls (or, in the case of the first
Distribution Date, from September 1, 2002) and ending on the Determination Date
of the calendar month in which such Distribution Date occurs.
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The "Principal Distribution Amount" with respect to any Distribution
Date is the sum of (i) the Basic Principal Distribution Amount for such
Distribution Date and (ii) the Extra Principal Distribution Amount for such
Distribution Date.
The "Principal Remittance Amount" means with respect to any
Distribution Date, the sum of (i) all scheduled payments of principal collected
on the Mortgage Loans by the Servicer that were due during the related Due
Period, (ii) the principal portion of all partial and full principal prepayments
of the Mortgage Loans applied by the Servicer during such Prepayment Period,
(iii) the principal portion of all related Net Liquidation Proceeds and
Insurance Proceeds received during such Prepayment Period, (iv) that portion of
the Purchase Price, representing principal of any repurchased Mortgage Loan,
deposited to the Collection Account during such Prepayment Period, (v) the
principal portion of any related Substitution Adjustments deposited in the
Collection Account during such Prepayment Period and (vi) on the Distribution
Date on which the Trust is to be terminated in accordance with the Pooling
Agreement, that portion of the Termination Price representing principal with
respect to the Mortgage Loans.
"Realized Loss" means, with respect to any defaulted Mortgage Loan that
is finally charged off (a "Liquidated Mortgage Loan"), the amount of loss
realized equal to the portion of the Principal Balance remaining unpaid after
application of all liquidation proceeds, insurance proceeds or condemnation
proceeds received in or prior to the month of charge off net of amounts
reimbursable to the Servicer for related Advances, Servicing Advances and
Servicing Fees (such amount, the "Net Liquidation Proceeds") in respect of such
Mortgage Loan.
The "Stepdown Date" means 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 October 2005 and (y) the first Distribution Date
on which the Credit Enhancement Percentage (calculated for this purpose only
after taking into account distributions of principal on the Mortgage Loans and
distribution of the Principal Distribution Amount to the holders of the
Certificates then entitled to distributions of principal on such Distribution
Date) is greater than or equal to 46.50%.
A "Trigger Event" is in effect with respect to any Distribution Date on
or after the Stepdown Date if:
(a) the percentage obtained by dividing (x) the principal amount of
Mortgage Loans Delinquent 60 days or more by (y) the aggregate principal balance
of the Mortgage Loans, in each case, as of the last day of the previous calendar
month, exceeds 37.50% of the Credit Enhancement Percentage or
(b) the aggregate amount of Realized Losses incurred since the Cut-off
Date through the last day of the related Due Period divided by the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date exceeds the
applicable percentages set forth below with respect to such Distribution Date:
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
- ---------------------------------------- -----------------------
October 2005 through September 2006 8.00%
October 2006 through September 2007 10.50%
October 2007 through September 2008 12.50%
October 2008 through September 2009 13.00%
October 2009 and thereafter 14.00%
The "Unpaid Interest Shortfall Amount" means (i) 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.
S-45
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date with respect to the
Class A Certificates and the Mezzanine Certificates will equal the lesser of (a)
the Formula Rate and (b) the Net WAC Rate for such Distribution Date. With
respect to the Class A Certificates and the Mezzanine Certificates, interest in
respect of any Distribution Date will accrue during the related Accrual Period
on the basis of a 360-day year and the actual number of days elapsed.
The "Formula Rate" for the Class A Certificates and the Mezzanine
Certificates is the sum of the interbank offered rate for one-month United
States dollar deposits in the London market (the "Certificate Index") as of the
related LIBOR Determination Date (as defined herein) plus a related margin (the
"Certificate Margin").
The Pass-Through Rate for the Class S-1 Certificates will be 2.00% per
annum for the 1st Distribution Date through the 30th Distribution Date. After
the 30th Distribution Date, the pass-through rate for the Class S-1 Certificates
will be 0.00% per annum, and such class will therefore then cease to accrue
interest. The Pass-Through Rate for the Class S-2 Certificates will be 2.00% per
annum for the 1st Distribution Date through the 8th Distribution Date. After the
8th Distribution Date, the pass-through rate for the Class S-2 Certificates will
be 0.00% per annum, and such class will therefore then cease to accrue interest.
With respect to each class of Class S Certificates, interest in respect of any
Distribution Date will accrue during the related Accrual Period on the basis of
a 360-day year consisting of twelve 30-day months.
The Certificate Margin with respect to the Class A Certificates on each
Distribution Date on or prior to the Optional Termination Date will equal 0.35%
and on each Distribution Date after the Optional Termination Date will equal
0.70%. The Certificate Margin with respect to the Class M-1 Certificates on each
Distribution Date on or prior to the Optional Termination Date will equal 1.00%
and on each Distribution Date after the Optional Termination Date will equal
1.50%. The Certificate Margin with respect to the Class M-2 Certificates on each
Distribution Date on or prior to the Optional Termination Date will equal 1.50%
and on each Distribution Date after the Optional Termination Date will equal
2.00%. The Certificate Margin with respect to the Class M-3 Certificates on each
Distribution Date on or prior to the Optional Termination Date will equal 2.30%
and on each Distribution Date after the Optional Termination Date will equal
2.80%.
The "Net WAC Rate" for any Distribution Date and the Class A
Certificates and the Mezzanine Certificates will be a per annum rate (subject to
adjustment based on the actual number of days elapsed in the related Accrual
Period) equal to the weighted average of the Adjusted Net Mortgage Rates of the
Mortgage Loans less (a) the Pass-Through Rate for the Class S-1 Certificates for
such Distribution Date multiplied by a fraction, the numerator of which is the
Notional Amount of the Class S-1 Certificates immediately prior to such
Distribution Date and the denominator of which is the aggregate outstanding
Principal Balance of the Mortgage Loans as of the first day of the month
preceding the month of such Distribution Date, (b) the Pass-Through Rate for the
Class S-2 Certificates for such Distribution Date multiplied by a fraction, the
numerator of which is the Notional Amount of the Class S-2 Certificates
immediately prior to such Distribution Date and the denominator of which is the
aggregate outstanding Principal Balance of the Mortgage Loans as of the first
day of the month preceding the month of such Distribution Date and (c) the rate
at which the premium payable to the Certificate Insurer is calculated multiplied
by a fraction the numerator of which is the Certificate Principal Balance of the
Class A Certificates immediately prior to such Distribution Date and the
denominator of which is the aggregate Principal Balance of the Mortgage Loans as
of the first day of the month preceding the month of such Distribution Date.
The "Adjusted Net Mortgage Rate" for any Mortgage Loan for any
Distribution Date will be a per annum rate equal to the applicable Mortgage Rate
for such Mortgage Loan as of the first day of the month preceding the month in
which such Distribution Date occurs minus the sum of (i) the Trustee Fee Rate
and (ii) the Servicing Fee Rate.
THE HOLDERS OF THE CLASS A CERTIFICATES AND THE MEZZANINE CERTIFICATES
WILL NOT BE ENTITLED TO RECOVER ANY AMOUNT OF BASIS RISK SHORTFALL TO THE EXTENT
THAT THE PASS-THROUGH RATES FOR SUCH CERTIFICATES ARE LIMITED BY THE NET WAC
RATE.
S-46
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Class A Certificates and the
Mezzanine Certificates (each such date, a "LIBOR Determination Date"), the
Trustee will determine the Certificate Index for such Accrual Period for the
Class A Certificates and the Mezzanine Certificates on the basis of the London
interbank offered rate for one-month United States dollar deposits, as such
rates appear on the Telerate Page 3750, as of 11:00 a.m. (London time) on such
LIBOR Determination Date. If such rate does not appear on Telerate Page 3750,
the rate for that day will be determined on the basis of the offered rates of
the Reference Banks (as defined herein) for one-month United States dollar
deposits, as of 11:00 a.m. (London time) on such LIBOR Determination Date. The
Trustee will request the principal London office of each of the Reference Banks
to provide a quotation of its rate. If on such LIBOR Determination Date two or
more Reference Banks provide such offered quotations, the Certificate Index for
the related Accrual Period will be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole multiple of
0.0625%). If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, the Certificate Index for the related Accrual
Period shall be the higher of (x) the Certificate Index as determined on the
previous LIBOR Determination Date and (y) the Reserve Interest Rate (as defined
herein).
As used in this section, "LIBOR Business Day" means a day on which
banks are open for dealing in foreign currency and exchange in London and New
York City; "Telerate Page 3750" means the display page currently so designated
on the Dow Jones Telerate Capital Markets Report (or such other page as may
replace that page on that service for the purpose of displaying comparable rates
or prices); "Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) which have been
designated as such by the Trustee and (iii) not controlling, controlled by or
under common control with, the Servicer or any successor Servicer or the
Originator; and "Reserve Interest Rate" shall be 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.
The establishment of the Certificate Index on each LIBOR Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Offered Certificates for the related Accrual Period will (in
the absence of manifest error) be final and binding.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will provide or make available
to each holder of a Certificate, the Certificate Insurer and the rating agencies
a statement (based on information received from the Servicer) setting forth,
among other things, the information set forth in the prospectus under
"Description of the Securities--Reports to Securityholders." The Trustee will
make the statement (and, at its option, any additional files containing the same
information in an alternative format) available each month via the Trustee's
internet website. The Trustee's internet website shall initially be located at
"www.ctslink.com". Assistance in using the website can be obtained by calling
the Trustee's customer service desk at (301) 815-6600. Parties that are unable
to use the above distribution options are entitled to have a paper copy mailed
to them via first class mail by calling the customer service desk and indicating
such. The Trustee shall have the right to change the way statements are
distributed in order to make such distribution more convenient and/or more
accessible to the above parties and the Trustee shall provide timely and
adequate notification to all above parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
THE POLICY
S-47
The Certificate Insurer will issue a certificate guaranty insurance
policy (the "Policy") for the benefit of the Class A Certificates. The following
summary of the provisions of the Policy does not purport to be complete and is
qualified in its entirety by reference to the Policy.
Simultaneously with the issuance of the Class A Certificates, the
Depositor will deliver the Policy to the Trustee for the benefit of each holder
of the Class A Certificates. Under the Policy, the Certificate Insurer
unconditionally and irrevocably guarantees to the Trustee for the benefit of
each holder of the Class A Certificates the full and complete payment of (i) the
Deficiency Amount on each Distribution Date and (ii) the amount of any
distribution of principal or interest to any holder of a Class A Certificate
which distribution subsequently is avoided in whole or in part as a Preference
Amount under applicable law.
As provided by the Policy, the Certificate Insurer will pay any
Deficiency Amount payable thereunder no later than 12:00 noon New York City
time, on the later of the Distribution Date on which the related Insured Amount
is due or the business day following receipt in New York, New York on a business
day by the Certificate Insurer of a Notice; provided that, if the Notice is
received after 12:00 noon, New York City time, on that business day, it will be
deemed to be received on the following business day. If any such Notice is not
in proper form or is otherwise insufficient for the purpose of making a claim
under the Policy, it shall be deemed not to have been received for purposes of
this paragraph, and the Certificate Insurer shall promptly so advise the Trustee
and the Trustee may submit an amended or corrected Notice.
The Certificate Insurer will pay any Preference Amount when due to be
paid pursuant to the Order referred to below, but in any event on the
Distribution Date next following receipt on a business day by the Certificate
Insurer of (i) a certified copy of a final, non-appealable order of a court or
other body exercising jurisdiction in such insolvency proceeding (the "Order")
to the effect that the Trustee or the holder of a Class A Certificate, as
applicable, is required to return such Preference Amount paid during the term of
the Policy because such payments were avoided as a preferential transfer or
otherwise rescinded or required to be restored by the Trustee or the holder of a
Class A Certificate, (ii) a certificate by or on behalf of the Trustee that the
Order has been entered and is not subject to any stay, (iii) an assignment, in
form and substance satisfactory to the Certificate Insurer, duly executed and
delivered by the Trustee or the holder of a Class A Certificate, as applicable,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Trustee or the holder of a Class A Certificate, as applicable, relating to or
arising under the Pooling Agreement against the estate of the Trustee or
otherwise with respect to such Preference Amount and (iv) a Notice of nonpayment
appropriately completed and executed by the Trustee. Such payment shall be
disbursed to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order and not to the Trustee or the holder of a Class A
Certificate, as applicable, directly, unless the Trustee or the holder of a
Class A Certificate, as applicable, has made a payment of the Preference Amount
to the court or such receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order, in which case the Certificate Insurer will pay
the Trustee on behalf of the holder of the Class A Certificate, subject to the
delivery of (a) the items referred to in clauses (i), (ii), (iii) and (iv) above
to the Certificate Insurer and (b) evidence satisfactory to the Certificate
Insurer that payment has been made to such court or receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order.
Notwithstanding the foregoing two sentences, the Certificate Insurer will not be
obligated to pay any Preference Amount in respect of principal (other than
principal paid in connection with Class A Overcollateralization Deficiency
Amounts) except on the Final Stated Maturity Date or earlier termination of the
Trust pursuant to the terms of the Pooling Agreement.
The Certificate Insurer only insures the timely receipt of the Monthly
Interest Distributable Amount (subject to the Net WAC Rate) on the Class A
Certificates, the amount of any Class A Overcollateralization Deficiency Amount
(as defined herein) with respect to the Class A Certificates on any Distribution
Date and the Certificate Principal Balance of the Class A Certificates to the
extent unpaid on the Final Stated Maturity Date (as defined herein). The Policy
will not cover Prepayment Interest Shortfalls or any shortfalls resulting from
the application of the Relief Act on the Class A Certificates, nor does the
Policy guaranty to the holders of the Class A Certificates any particular rate
of principal payment. In addition, the Policy does not cover shortfalls, if any,
attributable to the liability of the Trust, any REMIC or the Trustee for
withholding taxes, if any, (including interest and penalties in respect of any
liability for withholding taxes) or any risk other than Nonpayment (as defined
herein), including the failure of the Trustee to make any payment required under
the Pooling Agreement to the holders of the Class A Certificates.
In the absence of payments under the Policy, holders of Class A
Certificates will directly bear the credit risks associated with their
certificates.
S-48
The Policy is issued under and shall be construed under, the laws of
the State of New York, without giving effect to the conflict of laws principles
of the State of New York.
The following terms shall have the following meanings:
"Class A Overcollateralization Deficiency Amount" means, with respect
to any Distribution Date, the excess of (i) the aggregate Certificate Principal
Balance of the Class A Certificates after giving effect to distributions of
principal to be made on such Distribution Date (without regard to any payments
of principal under the Policy) over (ii) the Pool Balance as of such
Distribution Date.
"Deficiency Amount" means, with respect to the Class A Certificates,
the sum of (x) for any Distribution Date (including the Distribution Date
occurring on the Final Stated Maturity Date) any shortfall in amounts available
in the Distribution Account to pay the Monthly Interest Distributable Amount
allocable to the Class A Certificates, net of any Prepayment Interest Shortfalls
and any shortfalls resulting from the application of the Relief Act, (y) for any
Distribution Date prior to the Final Stated Maturity Date, any Class A
Overcollateralization Deficiency Amount and (z) for the Distribution Date
occurring on the Final Stated Maturity Date, the Certificate Principal Balance
of the Class A Certificates outstanding on such Distribution Date (after giving
effect to all distributions to be made thereon on such Distribution Date other
than pursuant to the Policy).
"Due for Payment" means with respect to any Insured Payment, such
amount is due and payable pursuant to the terms of the Agreement.
"Final Stated Maturity Date" means the Distribution Date occurring in
September 2032.
"Insured Amount" means as of any Distribution Date, any Deficiency
Amounts for such Distribution Date plus any Preference Amount for such
Distribution Date.
"Nonpayment" means, with respect to any Distribution Date, an Insured
Amount is Due for Payment but has not been paid pursuant to the Pooling
Agreement.
"Notice" as used in this section means the telephone or telegraphic
notice, promptly confirmed in writing by telecopy substantially in the form
required pursuant to the Policy, the original of which is subsequently delivered
by registered or certified mail, from the Trustee specifying the Insured Amount
which will be due and owing on the applicable Distribution Date.
"Preference Amount" means with respect to the Class A Certificates, any
distribution that is made to a holder of a Class A Certificate that is
recoverable and sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code in accordance with a
final, nonappealable order of a court of competent jurisdiction.
The Certificate Insurer shall be subrogated to the rights of each
holder of a Class A Certificate to the extent of any payment by the Certificate
Insurer under the Policy.
The Policy is not cancelable. The premium on the Policy is not
refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A Certificates.
THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement. None of the Depositor, the
Servicer, the Seller, the Trustee or the Underwriter make any representation as
to the accuracy and completeness of this information.
Ambac Assurance Corporation is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. Ambac
Assurance Corporation primarily insures newly-issued municipal and structured
finance obligations. Ambac Assurance Corporation is a wholly-owned
S-49
subsidiary of Ambac Financial Group, Inc. (formerly, AMBAC, Inc.), a 100%
publicly-held company. Moody's, S&P and Fitch have each assigned a triple-A
financial strength rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and
subsidiaries as of December 31, 2001 and December 31, 2000 and for each of the
years in the three year period ended December 31, 2001, prepared in accordance
with accounting principles generally accepted in the United States of America,
included in the Annual Report on Form 10K of Ambac Financial Group, Inc. (which
was filed with the Securities and Exchange Commission (the "Commission") on
March 26, 2002; Commission File No. 1 10777), the unaudited financial statements
of the Certificate Insurer and subsidiaries as of March 31, 2002 and for the
periods ending March 31, 2002 and March 31, 2001 included in the Quarterly
Report on Form 10-Q of Ambac Financial Group, Inc. for the period ended March
31, 2002 (which was filed with the Commission on May 13, 2002), the unaudited
financial statements of the Certificate Insurer and subsidiaries as of June 30,
2002 and for the periods ending June 30, 2002 and June 30, 2001 included in the
Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for the period
ended June 30, 2002 (filed with the Commission on August 14, 2002) and the
Current Reports on Form 8-K filed with the Commission on January 25, 2002, April
18, 2002, July 19, 2002 and August 14, 2002, as they relate to the Certificate
Insurer are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated herein by reference shall be modified or superseded for the
purposes of this Prospectus Supplement to the extent that a statement contained
herein by reference herein also modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by Ambac Financial Group, Inc. with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Class A
Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such financial statements.
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 2000, December 31, 2001, and June 30, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
JUNE 30,
DECEMBER 31, DECEMBER 31, 2002
2000 2001 (UNAUDITED)
---- ----
Unearned premiums....................................... $1,556 $1,790 $1,880
Other liabilities....................................... 581 888 1,138
--- --- -----
Total liabilities.............................. 2,137 2,678 3,018
----- ----- -----
Stockholder's equity:
Common stock................................... 82 82 82
Additional paid-in capital..................... 760 928 922
Accumulated other comprehensive
income............................... 82 81 142
Retained earnings.............................. 2,002 2,386 2,592
----- ----- -----
Total stockholder's equity..................... 2,926 3,477 3,738
----- ----- -----
Total liabilities and stockholder's equity..... $5,063 $6,155 $6,756
====== ====== ======
For additional financial information concerning the Certificate
Insurer, see the audited financial statements of the Certificate Insurer
incorporated by reference herein. Copies of the financial statements of the
Certificate Insurer incorporated by reference and copies of the Certificate
Insurer's annual statement for the year ended December 31, 2001 prepared in
accordance with statutory accounting standards are available, without charge,
from the Certificate Insurer. The address of the Certificate Insurer's
administrative offices and its telephone number are One State Street Plaza, 19th
Floor, New York, New York 10004 and (212) 668-0340.
S-50
The Certificate Insurer makes no representation regarding the Class A
Certificates or the advisability of investing in the Class A Certificates and
makes no representation regarding, nor has it participated in the preparation
of, this Prospectus Supplement other than the information supplied by the
Certificate Insurer and presented under the headings "Description of the
Certificates--The Policy" and "The Certificate Insurer" and in the financial
statements incorporated herein by reference.
S-51
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans. 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 may 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 Class A Certificates and the Mezzanine
Certificates will be affected by the rate and timing of payments of principal on
the Mortgage Loans. Furthermore, since mortgage loans secured by second liens
are not generally viewed by mortgagors as permanent financing and generally
carry a high rate of interest, the Mortgage Loans may experience a higher rate
of prepayment than traditional 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
Servicer). Because certain of the Mortgage Loans contain prepayment charges, the
rate of principal payments may be less than the rate of principal payments for
mortgage loans that did not have prepayment charges. The Mortgage Loans are
subject to the "due-on-sale" provisions included therein which provide that the
Mortgage Loan is assumable by a creditworthy purchaser of the related Mortgaged
Property. See "The Mortgage Pool" herein.
Prepayments, liquidations (occurring on or prior to the charge off
date) and purchases of the Mortgage Loans (including any optional purchase) will
result in distributions on the Class A Certificates and the Mezzanine
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 Class A
Certificates and the Mezzanine 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 Class A Certificate or
Mezzanine Certificate 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 Class A Certificate or Mezzanine Certificate 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 to "lock in" a lower interest rate. No assurances can be
given as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments.
Approximately 79.85% of the Mortgage Loans (by aggregate principal
balance of the Mortgage Loans as of the Cut-off Date) provide for payment by the
mortgagor 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 such amounts will not be
available for distribution on the other classes of Certificates. Under certain
circumstances, as described in the Pooling Agreement, the Servicer may waive the
payment of any otherwise applicable prepayment charge. Investors should conduct
their own analysis of the effect, if any, that the prepayment charges, and
S-52
decisions by the Servicer with respect to the waiver thereof, may have on the
prepayment performance of the Mortgage Loans. The Depositor makes no
representations as to the effect that the prepayment charges, and decisions by
the Servicer with respect to the waiver thereof, may have on the prepayment
performance of the Mortgage Loans.
To the extent the Net WAC Rate is distributed on the Class A
Certificates or the Mezzanine Certificates, a shortfall in interest will occur.
The Net WAC Rate for the Class A Certificates and the Mezzanine Certificates
will be lower for Accrual Periods that are longer than 30 days, and the
Pass-Through Rates on the Class A Certificates and the Mezzanine Certificates
are more likely to be capped at the Net WAC Rate than they would if all Accrual
Periods were 30 days long. For a discussion of other factors that could cause
the Pass-Through Rate on the Class A Certificates and the Mezzanine Certificates
to be capped at the Net WAC Rate, see "Risk Factors--Effect of Mortgage Rates on
the Offered Certificates" in this prospectus supplement.
THE HOLDERS OF THE CLASS A CERTIFICATES AND THE MEZZANINE CERTIFICATES
WILL NOT BE ENTITLED TO RECOVER ANY AMOUNT OF BASIS RISK SHORTFALL TO THE EXTENT
THAT THE PASS-THROUGH RATES FOR SUCH CERTIFICATES ARE LIMITED BY THE NET WAC
RATE.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to the Offered Certificates with the Securities and
Exchange Commission (the "Commission") in a report on Form 8-K and may file
certain additional yield tables and other computational materials with respect
to the Offered Certificates with the Commission in a report on Form 8-K. Such
tables and materials were prepared by the Underwriters at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such prospective investors. Such tables and assumptions
may be based on assumptions that differ from the Structuring Assumptions (as
defined herein). Accordingly, such tables and other materials may not be
relevant to or appropriate for investors other than those specifically
requesting them.
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 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."
The Assumed Final Distribution Date for the Offered Certificates is as
set forth herein under "Description of the Certificates--General." The final
Distribution Date with respect to the Offered Certificates could occur
significantly earlier than the related Assumed Final Distribution Date because
(i) prepayments are likely to occur, (ii) excess cashflow, if any, will be
applied as principal of the Offered Certificates as described herein and (iii)
the Servicer may cause a termination of the Trust as provided herein.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the Mortgage Loans of
120% of the Prepayment Vector. A "Prepayment Vector" assumes a constant
prepayment rate ("CPR") of 4% per annum of the then unpaid principal balance of
such mortgage loans in the first month of the life of such mortgage loans and an
additional approximately 1.4545% (precisely 16/11%) per annum in each month
thereafter until the 12th month. Beginning in the 12th month and in each month
thereafter during the life of such mortgage loans, such prepayment vector
assumes a CPR of 20%. CPR is a prepayment assumption that represents a constant
assumed rate of prepayment each
S-53
month relative to the then outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. The model 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.
Each of the Prepayment Scenarios in the table below assumes the
respective percentages of the Prepayment Vector described thereunder.
The tables entitled "Percent of Original Certificate Principal Balance
Outstanding" 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
average lives of the Class A 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 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 Original Certificate Principal Balance Outstanding" were determined
assuming that (the "Structuring Assumptions"): (i) the Mortgage Loans have the
characteristics set forth in the table below entitled "Assumed Mortgage Loan
Characteristics," (ii) the closing date for the Offered Certificates occurs on
September 26, 2002 and the Offered Certificates were 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 October 2002, in accordance with the allocation of Available Funds
set forth above under "Description of the Certificates--Allocation of Available
Funds," (iv) the prepayment rates are the percentages of the Prepayment Vector
set forth in the "Percent of Original Certificate Principal Balance Outstanding"
tables below, (v) prepayments include thirty days' interest thereon, (vi) the
Seller is not required to substitute or repurchase any of the Mortgage Loans
pursuant to the Mortgage Loan Purchase Agreement and no optional termination is
exercised, except with respect to the entries identified by the row captioned
"Weighted Average Life (years) to Optional Termination" in the tables below,
(vii) the Overcollateralization Target Amount is as described herein, (viii)
scheduled payments for all Mortgage Loans are received on the first day of each
month commencing in October 2002, the principal portion of such payments is
computed prior to giving effect to prepayments received in the previous month
and there are no losses or delinquencies with respect to such Mortgage Loans,
(ix) all related Mortgage Loans prepay at the same rate and all such payments
are treated as prepayments in full of individual Mortgage Loans, with no
shortfalls in collection of interest, (x) such prepayments are received on the
last day of each month commencing in the month of the Closing Date, (xi) the
Certificate Index is at all times equal to 1.812%, (xii) the Pass-Through Rates
for the Offered Certificates are as set forth herein, (xiii) the Trustee Fee
Rate is equal to 0.01% per annum and the Servicing Fee Rate for each Mortgage
Loan is equal to 0.50% per annum. Nothing contained in the foregoing assumptions
should be construed as a representation that the Mortgage Loans will not
experience delinquencies or losses.
PREPAYMENT SCENARIOS
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
0% 50% 85% 120% 150% 175% 200%
S-54
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL TERM TO REMAINING TERM TO
PRINCIPAL BALANCE ($) MORTGAGE RATE (%) MATURITY (MONTHS) MATURITY (MONTHS)
- ----------------------------- ------------------------- -------------------------- ----------------------
635,025.84 12.36338 180 175
79,869.65 11.50000 120(1) 115
1,548,053.19 12.18557 180(1) 177
338,098.04 12.07017 240 235
117,168.99 12.39337 240(1) 239
112,356.32 13.03396 360 355
1,829,101.44 11.55749 177 173
2,692,041.28 12.05626 120(1) 115
204,475,609.15 11.70524 180(1) 176
4,277,605.94 12.04565 240 236
11,915,784.70 11.46173 240(1) 239
652,000.07 11.90439 360 357
384,739.45 11.96610 180(1) 175
21,176.68 12.25000 360 356
1,245,448.70 12.49050 180 175
2,736,606.25 9.14737 120(1) 116
49,713,794.63 12.14832 180(1) 176
2,293,740.55 12.59538 240 236
1,519,207.09 12.25282 240(1) 239
311,403.11 11.85201 360 357
___________________
(1) Balloon Mortgage Loans with original amortization terms of 360 months.
Based on the foregoing assumptions, the following tables set forth the
percentages of the Original Certificate Principal Balance of the Class A
Certificates and the Mezzanine Certificates that would be outstanding after each
of the dates shown, at various Prepayment Scenarios and the corresponding
weighted average lives.
S-55
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS A
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
September 25, 2003...... 93 83 76 69 63 58 53
September 25, 2004...... 92 71 58 45 35 27 20
September 25, 2005...... 92 61 43 27 16 8 0
September 25, 2006...... 91 51 31 22 16 8 0
September 25, 2007...... 90 43 26 17 11 8 0
September 25, 2008...... 89 35 21 13 8 5 0
September 25, 2009...... 88 30 17 10 6 3 0
September 25, 2010...... 87 27 14 7 4 2 0
September 25, 2011...... 85 24 12 5 3 1 0
September 25, 2012...... 82 21 9 4 2 1 0
September 25, 2013...... 80 19 8 3 1 0 0
September 25, 2014...... 78 16 6 2 1 0 0
September 25, 2015...... 76 14 5 2 0 0 0
September 25, 2016...... 73 13 4 1 0 0 0
September 25, 2017...... 4 1 0 0 0 0 0
September 25, 2018...... 3 1 0 0 0 0 0
September 25, 2019...... 3 0 0 0 0 0 0
September 25, 2020...... 3 0 0 0 0 0 0
September 25, 2021...... 3 0 0 0 0 0 0
September 25, 2022...... 0 0 0 0 0 0 0
September 25, 2023...... 0 0 0 0 0 0 0
September 25, 2024...... 0 0 0 0 0 0 0
September 25, 2025...... 0 0 0 0 0 0 0
September 25, 2026...... 0 0 0 0 0 0 0
September 25, 2027...... 0 0 0 0 0 0 0
September 25, 2028...... 0 0 0 0 0 0 0
September 25, 2029...... 0 0 0 0 0 0 0
September 25, 2030...... 0 0 0 0 0 0 0
September 25, 2031...... 0 0 0 0 0 0 0
September 25, 2032...... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 12.73 5.65 3.84 2.81 2.18 1.74 1.28
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 12.57 5.63 3.70 2.63 2.02 1.60 1.26
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-56
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-1
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
September 25, 2003...... 100 100 100 100 100 100 100
September 25, 2004...... 100 100 100 100 100 100 100
September 25, 2005...... 100 100 100 100 100 100 100
September 25, 2006...... 100 100 96 69 57 91 100
September 25, 2007...... 100 100 79 52 35 29 71
September 25, 2008...... 100 100 65 39 24 16 40
September 25, 2009...... 100 93 54 29 17 10 22
September 25, 2010...... 100 83 44 22 12 7 11
September 25, 2011...... 100 74 36 17 8 4 2
September 25, 2012...... 100 64 29 12 5 2 0
September 25, 2013...... 100 57 24 9 4 0 0
September 25, 2014...... 100 50 19 7 1 0 0
September 25, 2015...... 100 44 16 5 0 0 0
September 25, 2016...... 100 39 13 4 0 0 0
September 25, 2017...... 11 1 0 0 0 0 0
September 25, 2018...... 10 0 0 0 0 0 0
September 25, 2019...... 10 0 0 0 0 0 0
September 25, 2020...... 9 0 0 0 0 0 0
September 25, 2021...... 8 0 0 0 0 0 0
September 25, 2022...... 0 0 0 0 0 0 0
September 25, 2023...... 0 0 0 0 0 0 0
September 25, 2024...... 0 0 0 0 0 0 0
September 25, 2025...... 0 0 0 0 0 0 0
September 25, 2026...... 0 0 0 0 0 0 0
September 25, 2027...... 0 0 0 0 0 0 0
September 25, 2028...... 0 0 0 0 0 0 0
September 25, 2029...... 0 0 0 0 0 0 0
September 25, 2030...... 0 0 0 0 0 0 0
September 25, 2031...... 0 0 0 0 0 0 0
September 25, 2032...... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 15.16 11.63 8.30 6.16 5.24 5.11 6.02
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 14.66 11.62 7.87 5.59 4.77 4.71 4.65
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-57
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-2
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
September 25, 2003...... 100 100 100 100 100 100 100
September 25, 2004...... 100 100 100 100 100 100 100
September 25, 2005...... 100 100 100 100 100 100 100
September 25, 2006...... 100 100 96 69 50 38 60
September 25, 2007...... 100 100 79 52 35 25 17
September 25, 2008...... 100 100 65 39 24 16 10
September 25, 2009...... 100 93 54 29 17 10 6
September 25, 2010...... 100 83 44 22 12 7 1
September 25, 2011...... 100 74 36 17 8 3 0
September 25, 2012...... 100 64 29 12 5 0 0
September 25, 2013...... 100 57 24 9 2 0 0
September 25, 2014...... 100 50 19 7 0 0 0
September 25, 2015...... 100 44 16 5 0 0 0
September 25, 2016...... 100 39 13 2 0 0 0
September 25, 2017...... 11 0 0 0 0 0 0
September 25, 2018...... 10 0 0 0 0 0 0
September 25, 2019...... 10 0 0 0 0 0 0
September 25, 2020...... 9 0 0 0 0 0 0
September 25, 2021...... 8 0 0 0 0 0 0
September 25, 2022...... 0 0 0 0 0 0 0
September 25, 2023...... 0 0 0 0 0 0 0
September 25, 2024...... 0 0 0 0 0 0 0
September 25, 2025...... 0 0 0 0 0 0 0
September 25, 2026...... 0 0 0 0 0 0 0
September 25, 2027...... 0 0 0 0 0 0 0
September 25, 2028...... 0 0 0 0 0 0 0
September 25, 2029...... 0 0 0 0 0 0 0
September 25, 2030...... 0 0 0 0 0 0 0
September 25, 2031...... 0 0 0 0 0 0 0
September 25, 2032...... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 15.16 11.62 8.30 6.12 5.04 4.61 4.50
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 14.66 11.62 7.87 5.57 4.61 4.24 4.18
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-58
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-3
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
September 25, 2003...... 100 100 100 100 100 100 100
September 25, 2004...... 100 100 100 100 100 100 100
September 25, 2005...... 100 100 100 100 100 100 100
September 25, 2006...... 100 100 96 69 50 38 28
September 25, 2007...... 100 100 79 52 35 25 17
September 25, 2008...... 100 100 65 39 24 16 10
September 25, 2009...... 100 93 54 29 17 10 2
September 25, 2010...... 100 83 44 22 12 3 0
September 25, 2011...... 100 74 36 17 7 0 0
September 25, 2012...... 100 64 29 12 1 0 0
September 25, 2013...... 100 57 24 9 0 0 0
September 25, 2014...... 100 50 19 4 0 0 0
September 25, 2015...... 100 44 16 0 0 0 0
September 25, 2016...... 100 39 13 0 0 0 0
September 25, 2017...... 11 0 0 0 0 0 0
September 25, 2018...... 10 0 0 0 0 0 0
September 25, 2019...... 10 0 0 0 0 0 0
September 25, 2020...... 8 0 0 0 0 0 0
September 25, 2021...... 6 0 0 0 0 0 0
September 25, 2022...... 0 0 0 0 0 0 0
September 25, 2023...... 0 0 0 0 0 0 0
September 25, 2024...... 0 0 0 0 0 0 0
September 25, 2025...... 0 0 0 0 0 0 0
September 25, 2026...... 0 0 0 0 0 0 0
September 25, 2027...... 0 0 0 0 0 0 0
September 25, 2028...... 0 0 0 0 0 0 0
September 25, 2029...... 0 0 0 0 0 0 0
September 25, 2030...... 0 0 0 0 0 0 0
September 25, 2031...... 0 0 0 0 0 0 0
September 25, 2032...... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 15.12 11.62 8.30 6.01 4.90 4.37 4.08
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 14.66 11.62 7.87 5.57 4.54 4.07 3.82
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-59
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class C Certificates and
each class of Mezzanine Certificates with a lower payment priority have been
reduced to zero, the yield to maturity on remaining class of Mezzanine
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 those Certificates. The initial undivided
interests in the Trust evidenced by the Class M-1 Certificates, the Class M-2
Certificates, the Class M-3 Certificates and the Class C Certificates are
approximately 7.50%, approximately 5.50%, approximately 5.00% and approximately
0.00%, respectively. Investors in the Mezzanine Certificates should fully
consider the risk that Realized Losses on the Mortgage Loans could result in the
failure of 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 Realized Loss Amounts may be paid to
the holders of the Mezzanine Certificates from Net Monthly Excess Cashflow in
the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
Unless the Certificate Principal Balance of the Class A Certificates
has been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until the Stepdown Date or during any period in which a
Trigger Event is in effect. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a PRO RATA basis among the Class A
Certificates and the 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 may be based on delinquencies, it is possible for the Mezzanine
Certificates to receive no principal distributions (unless the Certificate
Principal Balance of the Class A Certificates has been reduced to zero) on and
after the Stepdown Date even if no losses have occurred on the Mortgage Pool.
For additional considerations relating to the yield on the Mezzanine
Certificates, see "Yield and Prepayment Considerations" in the prospectus.
SPECIAL YIELD CONSIDERATIONS RELATING TO THE CLASS S-1 CERTIFICATES
Investors should note that the Class S-1 Certificates are entitled to
distributions only through the 30th Distribution Date. In addition, if, at any
time on or prior to the Determination Date in the month preceding the 30th
Distribution Date, the aggregate Principal Balance of the Mortgage Loans is
reduced to or below $28,689,000, the yield to investors in the Class S-1
Certificates will be 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
Optional Termination Date occurs prior to the 30th Distribution Date and the
Servicer effects an optional termination, then the Class S-1 Certificates will
receive no further distributions. Investors in the Class S-1 Certificates should
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.
Based on the Structuring Assumptions, and further assuming prepayments
at a CPR of approximately 71% and an Assumed Purchase Price of $1,330,851, the
pre-tax yield to maturity of the Class S-1 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 S-1 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 S-1
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 S-1 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 S-1
Certificates may be reinvested and consequently does not purport to reflect the
return on any investment in the Class S-1 Certificates when such reinvestment
rates are considered.
S-60
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Mortgage Loans transferred to the Trust.
FEDERAL INCOME TAX CONSEQUENCES
One or more elections will be made to treat designated portions of the
Trust as a real estate mortgage investment conduit (a "REMIC") for federal
income tax purposes. Upon the issuance of the Offered Certificates, Thacher
Proffitt & Wood, counsel to the Depositor, will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the Pooling
Agreement, for federal income tax purposes, each REMIC elected by the Trust will
qualify as a REMIC under Sections 860A through 860G of the Internal Revenue Code
of 1986 (the "Code").
For federal income tax purposes, (i) the Residual Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the Trust and (ii) the Offered Certificates,
the Class C Certificates and the Class P Certificates will represent the
"regular interests" in, and which generally will be treated as debt instruments
of, a REMIC. See "Certain Material Federal Income Tax Considerations--General"
in the prospectus.
For federal income tax reporting purposes, the Class A Certificates and
the Mezzanine Certificates will not, and the Class S-1 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 the Prepayment Assumption. No
representation is made that the Mortgage Loans will prepay at such rate or at
any other rate. See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Securities" in the prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"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. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the Class A Certificates and the Mezzanine Certificates. Because of the
uncertainty concerning the application of Section 1272(a)(6) of the Code to such
Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Offered Certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other method not yet set forth in
regulations. Prospective purchasers of the Offered Certificates are advised to
consult their tax advisors concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Class A Certificates and the Mezzanine
Certificates, if such Certificates are required to be treated as issued with
original issue discount, generally would be to report all income with respect to
such Certificates as original issue discount for each period, computing such
original issue discount (i) by assuming that the value of the applicable index
will remain constant for purposes of determining the original yield to maturity
of, and projecting future distributions on such Certificates, thereby treating
such Certificates as fixed rate instruments to which the original issue discount
computation rules described in the prospectus can be applied, and (ii) by
accounting for any positive or negative variation in the actual value of the
applicable index in any period from its assumed value as a current adjustment to
original issue discount with respect to such period. See "Certain Federal Income
Tax Considerations--Taxation of Debt Securities" in the prospectus.
If the method for computing original issue discount described above
results in a negative amount for any period with respect to a Certificateholder,
the amount of original issue discount allocable to that period would be zero and
the Certificateholder will be permitted to offset that negative amount only
against future original issue discount, if any, attributable to those
Certificates.
S-61
Certain of the Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a Certificate
will be treated as holding such Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of such Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Certain Material Federal Income Tax Considerations--Taxation of
Debt Securities" in the prospectus.
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 Trust would
be so treated. In addition, interest on the Offered Certificates will be treated
as "interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code, generally to the extent that the Offered Certificates
are treated as "real estate assets" under Section 856(c)(4)(A) of the Code. The
Offered Certificates will also be treated as "qualified mortgages" under Section
860G(a)(3) of the Code. See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans" in
the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on such Certificates in accordance with the accrual method of
accounting.
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 REMIC elected by the Trust, such tax will be borne (i) by
the Trustee, if the Trustee has breached its obligations with respect to REMIC
compliance under the Pooling Agreement, (ii) by the Servicer, if the Servicer
has breached its obligations with respect to REMIC compliance under the Pooling
Agreement and (iii) otherwise by the Trust, with a resulting reduction in
amounts otherwise distributable to the holders of the Offered Certificates.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee or the Servicer.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Material Federal Income
Tax Considerations" in the prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates by or on behalf
of, or with Plan assets of, a Plan may qualify for exemptive relief under the
Underwriters' Exemption, as currently in effect and as described under "ERISA
Considerations" in the prospectus. The Underwriters' Exemption relevant to the
Offered Certificates was granted by the Department of Labor on September 6, 1990
as Prohibited Transaction Exemption ("PTE") 90-59 at 55 F.R. 36724, and amended
on July 21, 1997 at PTE 97-34 at 62 F.R. 39021 and further amended on November
13, 2000 by PTE 2000-58 at 65 F.R. 67765. The Department of Labor issued a final
administrative exemption, PTE 2002-41, at 67 Fed. Reg. 54487 (August 22, 2002 ),
which amended the Underwriters' Exemption and similar exemptions issued to other
underwriters. This amendment allows the Trustee to be affiliated with the
Underwriter despite the restriction in PTE 2000-58 to the contrary. However, the
Underwriters' Exemption contains a number of conditions which must be met for
the exemption to apply, including the requirements that the Offered Certificates
be rated at least "BBB-" (or its equivalent) by Fitch Ratings ("Fitch"), Moody's
or S&P at the time of the Plan's purchase and that the investing Plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act. A fiduciary of a
Plan contemplating purchasing an Offered Certificate must make its own
determination that the conditions set forth in the Underwriters' Exemption will
be satisfied with respect to the those Certificates.
S-62
Each beneficial owner of a Mezzanine Certificate or any interest
therein shall be deemed to have represented, by virtue of its acquisition or
holding of that certificate or interest therein, that either (i) it is not a
plan investor, (ii) it has acquired and is holding such Mezzanine Certificates
in reliance on the Underwriters' Exemption, and that it understands that there
are certain conditions to the availability of the Underwriters' Exemption,
including that the Mezzanine Certificates must be rated, at the time of
purchase, not lower than "BBB-" (or its equivalent) by Fitch, Moody's or S&P or
(iii) (1) it is an insurance company, (2) the source of funds used to acquire or
hold the certificate or interest therein is an "insurance company general
account," as such term is defined in PTCE 95-60, and (3) the conditions in
Sections I and III of PTCE 95-60 have been satisfied.
If any Mezzanine Certificate or any interest therein is acquired or
held in violation of the conditions described in the preceding paragraph, the
next preceding permitted beneficial owner will be treated as the beneficial
owner of that Mezzanine Certificate, retroactive to the date of transfer to the
purported beneficial owner. Any purported beneficial owner whose acquisition or
holding of any such certificate or interest therein was effected in violation of
the conditions described in the preceding paragraph shall indemnify and hold
harmless the Depositor, the Trustee, the Servicer, any subservicer, the Seller
and the Trust from and against any and all liabilities, claims, costs or
expenses incurred by those parties as a result of that acquisition or holding.
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Offered Certificates on behalf of or with Plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Offered Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. See "Considerations for
Benefit Plan Investors" in the prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the Depositor or the Underwriter that an investment in the
Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
The Depositor makes no representation that the sale of any of the
Offered Certificates to a Plan or other purchaser acting on its behalf meets any
relevant legal requirement for investments by Plans generally or any particular
Plan, or that the investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT CONSIDERATIONS
The Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions. See "Legal Investment" in the prospectus.
S-63
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated September 23, 2002 (the "Underwriting Agreement"), between the
Underwriter and the Depositor, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, the
principal amount of the Offered Certificates.
Distribution of the Class S-1 Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. Proceeds to the Depositor from the
sale of the Class S-1 Certificates are expected to be approximately $1,316,252
plus accrued interest, before deducting a portion of the total expenses payable
to the Depositor which total is estimated to be $589,000.
The Depositor has been advised by the Underwriter that it proposes
initially to offer the Offered Certificates of each class to the public in
Europe and the United States at the offering price set forth herein and to
certain dealers at such price less a selling concession, not in excess of the
percentage set forth in the table below of the Certificate Principal Balance of
the related class of Offered Certificates. The Underwriter may allow and such
dealers may reallow a reallowance discount, not in excess of the percentage set
forth in the table below of the Certificate Principal Balance of the related
class of Offered Certificates, to certain other dealers. After the initial
public offering, the public offering price, such concessions and such discounts
may be changed.
CLASS OF CERTIFICATES SELLING CONCESSION REALLOWANCE DISCOUNT
- ------------------------------- ------------------ --------------------
Class A........................ 0.1500% 0.1000%
Class M-1...................... 0.1500% 0.1000%
Class M-2...................... 0.1500% 0.1000%
Class M-3...................... 0.1500% 0.1000%
Until the distributionfered Certificates is completed, rules
of the SEC may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Offered Certificates. As an exception to
these rules, the Underwriter is permitted to engage in certain transactions that
stabilize the price of the Offered Certificates. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
the Offered Certificates.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Offered Certificates. In addition,
neither the Depositor nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates purchased by it but the Underwriter
has no obligation to do so. 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 Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor and the Underwriters by Thacher Proffitt & Wood,
New York, New York.
S-64
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A Certificates and the Class S-1 Certificates be rated "AAA" by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and Aaa by Moody's
Investors Service, Inc. ("Moody's," and together with S&P, the "Rating
Agencies"), that the Class M-1 Certificates be rated "AA" by S&P and "Aa2" by
Moody's, that the Class M-2 Certificates be rated "A" by S&P and "A2" by Moody's
and that the Class M-3 Certificates be rated "BBB" by S&P and "Baa2" by Moody's.
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans or the possibility
that a holder of an Offered Certificate might realize a lower than anticipated
yield.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries as of December 31, 2001 and 2000 and for each of the years in
the three year period ended December 31, 2001, are incorporated by reference in
this prospectus supplement, in reliance on the report of KPMG LLP, independent
certified public accountants, incorporated by reference in this prospectus
supplement, and upon the authority of that firm as experts in accounting and
auditing.
S-65
INDEX OF DEFINED TERMS
Accrual Period ..........................................................S-42
Adjusted Net Mortgage Rate..................................................S-46
Advance ..........................................................S-31
Advancing Person ..........................................................S-31
Allocated Realized Loss Amount..............................................S-42
Assumed Final Distribution Date.............................................S-34
Available Funds ..........................................................S-38
Basic Principal Distribution Amount.........................................S-42
Book-Entry Certificates.....................................................S-35
Certificate Index ..........................................................S-45
Certificate Margin..........................................................S-45
Certificate Owners..........................................................S-35
Certificate Principal Balance...............................................S-42
Certificates. ..........................................................S-34
Class A Overcollateralization Deficiency
Amount ..........................................................S-48
Class A Principal Distribution Amount.......................................S-42
Class M-1 Principal Distribution Amount.....................................S-42
Class M-2 Principal Distribution Amount.....................................S-42
Class M-3 Principal Distribution Amount.....................................S-43
Class S Certificates........................................................S-34
Clearstream ..........................................................S-35
Clearstream Participants....................................................S-36
Code .....................................................S-8, S-60
Collection Account..........................................................S-28
Commission ..........................................................S-49
Compensating Interest.......................................................S-31
Cooperative ..........................................................S-36
CPR ..........................................................S-52
Credit Bureau Risk Score....................................................S-24
Credit Enhancement Percentage...............................................S-43
Cut-off Date Principal Balance..............................................S-15
Debt Ratio ..........................................................S-24
Deficiency Amount ..........................................................S-48
Definitive Certificate......................................................S-35
Deleted Mortgage Loans......................................................S-28
Delinquent ..........................................................S-43
Determination Date..........................................................S-43
Distribution Account........................................................S-29
Distribution Date .....................................................S-5, S-34
DTC ..........................................................S-35
DTC Participants ..........................................................S-35
Due Date ..........................................................S-17
Due for Payment ..........................................................S-49
Due Period ..........................................................S-43
Equity Refinance ..........................................................S-26
Euroclear ..........................................................S-35
Euroclear Operator..........................................................S-36
Euroclear Participants......................................................S-36
European Depositaries.......................................................S-35
Extra Principal Distribution Amount.........................................S-43
Fair, Isaac ..........................................................S-24
Fairbanks ..........................................................S-29
Final Stated Maturity Date..................................................S-49
Financial Intermediary......................................................S-35
Fitch ..........................................................S-61
Formula Rate ..........................................................S-45
Global Securities ...........................................................I-1
IML ..........................................................S-36
Insurance Proceeds..........................................................S-43
Insured Amount ..........................................................S-49
Insurer Default ..........................................................S-43
Interest Remittance Amount..................................................S-43
IRS ..........................................................S-60
LIBOR Business Day..........................................................S-46
LIBOR Determination Date....................................................S-46
Liquidated Mortgage Loan....................................................S-45
LIV ..........................................................S-24
Mezzanine Certificates......................................................S-34
Monthly Interest Distributable Amount.......................................S-43
Moody's .....................................................S-7, S-64
Mortgage ..........................................................S-16
Mortgage Loan Purchase Agreement............................................S-16
Mortgage Loan Schedule......................................................S-27
Mortgage Loans .....................................................S-4, S-16
Mortgage Pool ..........................................................S-16
Mortgage Rate ..........................................................S-16
Mortgaged Property..........................................................S-16
NCBA ..........................................................S-23
Net Liquidation Proceeds....................................................S-45
Net Monthly Excess Cashflow.................................................S-44
Net WAC Rate ..........................................................S-46
NIV ..........................................................S-24
No Doc ..........................................................S-24
Nonpayment ..........................................................S-49
Notice ..........................................................S-49
Notional Amount .....................................................S-5, S-44
Offered Certificates........................................................S-34
OID Regulations ..........................................................S-60
Optional Termination Date...................................................S-32
Order ..........................................................S-48
Original Certificate Principal Balance......................................S-42
Originator ..........................................................S-23
Overcollateralization Deficiency Amount.....................................S-44
Overcollateralization Release Amount........................................S-44
Overcollateralization Target Amount.........................................S-44
Overcollateralized Amount...................................................S-44
Pass-Through Rate ..........................................................S-45
Plan ..........................................................S-61
Policy ..........................................................S-47
Pool Balance ..........................................................S-15
Pooling Agreement ..........................................................S-16
Preference Amount ..........................................................S-49
Prepayment Assumption.......................................................S-52
Prepayment Interest Shortfall...............................................S-32
Prepayment Period ..........................................................S-44
Prepayment Vector ..........................................................S-52
Principal Balance ..........................................................S-15
Principal Distribution Amount...............................................S-44
Principal Remittance Amount.................................................S-44
PTE ..........................................................S-61
Purchase Price ..........................................................S-28
Qualified Substitute Mortgage Loan..........................................S-28
Rating Agencies ..........................................................S-64
Realized Loss ..........................................................S-45
Record Date ..........................................................S-34
Reference Banks ..........................................................S-47
Related Documents ..........................................................S-27
S-66
Relevant Depositary.........................................................S-35
Relief Act ..........................................................S-10
REMIC ..........................................................S-60
Reserve Interest Rate.......................................................S-47
Residual Certificates.......................................................S-34
Rules ..........................................................S-35
S&P .....................................................S-7, S-64
Servicing Advance...........................................................S-31
Servicing Fee ..........................................................S-31
Servicing Fee Rate..........................................................S-31
SMMEA .....................................................S-8, S-62
Stepdown Date ..........................................................S-45
Structuring Assumptions.....................................................S-53
Subordinate Certificates....................................................S-34
Substitution Adjustment.....................................................S-28
Telerate Page 3750..........................................................S-46
Termination Price ..........................................................S-32
Terms and Conditions........................................................S-37
Trigger Event ..........................................................S-45
Trust ..........................................................S-16
Trustee Fee ..........................................................S-32
Trustee Fee Rate ..........................................................S-32
Underwriter ..........................................................S-14
Underwriting Agreement......................................................S-63
Unpaid Interest Shortfall Amount............................................S-45
S-67
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will
be offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC and upon request through Clearstream or Euroclear.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-
day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
I-1
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
the actual number of days in such accrual period and a year assumed to consist
of 360 days or a 360-day year consisting of twelve 30 day months, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Clearstream
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Clearstream or Euroclear cash debt will be valued instead as of the actual
settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days or a 360-day year consisting of twelve 30 day
months, as applicable. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem: (a) through Clearstream or Euroclear for one day (until the purchase
side of the day trade is
I-2
reflected in their Clearstream or Euroclear accounts) in accordance with the
clearing system's customary procedures; (b) the Global Securities in the U.S.
from a DTC Participant no later than one day prior to settlement, which would
give the Global Securities sufficient time to be reflected in their Clearstream
or Euroclear account in order to settle the sale side of the trade; or (c)
staggering the value dates for the buy and sell sides of the trade so that the
value date for the purchase from the DTC Participant is at least one day prior
to the value date for the sale to the Clearstream Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner who is an individual or corporation holding the
Global Securities on its own behalf through Clearstream or Euroclear (or through
DTC if the holder has an address outside the U.S.) will be subject to the 30%
U.S. withholding tax that generally applies to payments of interest (including
original issue discount) on registered debt issued by U.S. Persons, unless (i)
each clearing system, bank or other institution that holds customers' securities
in the ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner or a foreign partnership or trust and the U.S.
entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W-8BEN (Certificate
of Foreign Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form W-8BEN may be filed by the Certificate Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are generally
effective until the third succeeding calendar year from the date such form is
signed. However, a Form W-8BEN or Form W-8ECI with a taxpayer identification
number will remain effective until a change in circumstances makes any
information on such form incorrect, provided that the withholding agent reports
at least annually to the beneficial owner of Form 1042-S.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-3
PROSPECTUS
MORTGAGE-BACKED/ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
GREENWICH CAPITAL ACCEPTANCE, INC. OR FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
THE SECURITIES
Each issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust or debt obligations secured
by trust assets. o Each series of securities will consist of one or more
classes.
o Each class of securities will represent the entitlement to a
specified portion of interest payments and a specified portion of
principal payments on the trust assets.
o A series may include classes of securities that are senior in
right of payment to other classes. Classes of securities may be
entitled to receive principal, interest or both prior to other
classes or before or after specified events.
o No market will exist for the securities of any series before they
are issued. In addition, even after the securities of a series
have been issued and sold, there can be no assurance that a resale
market for them will develop.
THE TRUST AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a trust will
include one or more of the following:
o mortgage loans secured generally by senior liens on one- to four-family
residential properties,
o closed-end and/or revolving home equity loans generally secured by junior
liens on one-to four-family residential properties,
o mortgage loans secured by senior liens on multifamily residential
properties,
o conditional sales contracts, installment sales agreements or loan
agreements secured by manufactured housing, o home improvement installment
sales contracts and loan agreements that are either unsecured or secured
generally by junior liens on one- to four-family residential properties or
by purchase money security interests in the related home improvements,
o mortgage pass-through securities issued or guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac, or o private label mortgage-backed or asset-backed
securities.
OFFERS OF THE SECURITIES Offers of the securities may be made
through one or more different methods. All securities will be distributed by, or
sold through underwriters managed by, Greenwich Capital Markets, Inc.
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 2 OF THIS
PROSPECTUS.
The securities represent obligations of the trust only and do not
represent an interest in or obligation of the applicable depositor,
seller, master servicer or any of their affiliates. This prospectus may
be used to offer and sell the securities only if accompanied by a
prospectus supplement.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
September 20, 2002
TABLE OF CONTENTS
PAGE
----
Important Notice About Information in This Prospectus and Each Accompanying Prospectus Supplement.................1
Risk Factors......................................................................................................2
The Trust Fund...................................................................................................12
The Mortgage Loans--General........................................................................13
Single Family Loans................................................................................17
Home Equity Loans..................................................................................18
Multifamily Loans..................................................................................18
Manufactured Housing Contracts.....................................................................19
Home Improvement Contracts.........................................................................20
Agency Securities..................................................................................20
Private Label Securities...........................................................................26
Incorporation of Certain Information by Reference..................................................29
Use of Proceeds..................................................................................................29
The Depositors...................................................................................................29
Loan Program.....................................................................................................30
Underwriting Standards.............................................................................30
Qualifications of Sellers..........................................................................32
Representations by Sellers; Repurchases or Substitutions...........................................32
Description of the Securities....................................................................................34
General............................................................................................35
Distributions on Securities........................................................................37
Advances...........................................................................................41
Reports to Securityholders.........................................................................42
Credit Enhancement...............................................................................................44
General............................................................................................44
Subordination......................................................................................44
Pool Insurance Policies............................................................................46
FHA Insurance; VA Guarantees.......................................................................48
Special Hazard Insurance Policies..................................................................50
Bankruptcy Bonds...................................................................................51
FHA Insurance on Multifamily Loans.................................................................52
Reserve Accounts...................................................................................52
Cross Support......................................................................................53
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar Instruments or Agreements.53
Financial Instruments..............................................................................54
Yield and Prepayment Considerations..............................................................................54
Operative Agreements.............................................................................................58
Assignment of Trust Fund Assets....................................................................58
Payments on Loans; Deposits to Security Account....................................................60
Pre-Funding Account................................................................................63
Sub-Servicing of Loans.............................................................................63
Collection Procedures..............................................................................65
Hazard Insurance...................................................................................66
Realization upon Defaulted Mortgage Loans..........................................................68
Servicing and Other Compensation and Payment of Expenses...........................................70
Evidence as to Compliance..........................................................................71
Certain Matters Regarding the Master Servicer and the Depositors...................................72
Events of Default; Rights upon Event of Default....................................................73
Amendment..........................................................................................76
Termination; Optional Termination; Calls...........................................................77
The Trustee........................................................................................78
Material Legal Aspects of the Loans..............................................................................78
General............................................................................................78
Foreclosure........................................................................................82
Repossession of Manufactured Homes.................................................................84
Rights of Redemption...............................................................................86
Equitable Limitations on Remedies..................................................................86
Anti-Deficiency Legislation and Other Limitations on Lenders.......................................87
Due-on-Sale Clauses................................................................................89
Prepayment Charges; Late Fees......................................................................89
Applicability of Usury Laws........................................................................90
Soldiers' and Sailors' Civil Relief Act............................................................90
Environmental Risks................................................................................91
The Home Improvement Contracts.....................................................................93
Installment Contracts..............................................................................94
Junior Mortgages; Rights of Senior Mortgagees......................................................95
The Title I Program................................................................................96
Material Federal Income Tax Consequences........................................................................100
General...........................................................................................101
Taxation of Debt Securities.......................................................................101
Non-REMIC Certificates............................................................................108
REMIC Certificates................................................................................120
State Tax Considerations........................................................................................145
ERISA Considerations............................................................................................145
Legal Investment Considerations.................................................................................152
Method of Distribution..........................................................................................155
Legal Matters...................................................................................................156
Financial Information...........................................................................................156
Available Information...........................................................................................156
Ratings.........................................................................................................156
Glossary of Terms...............................................................................................158
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
Although the accompanying prospectus supplement for a particular series of
securities cannot contradict the information contained in this prospectus,
insofar as the prospectus supplement contains specific information about the
series that differs from the more general information contained in this
prospectus, you should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
We include cross-references in this prospectus and each accompanying prospectus
supplement to captions in these materials where you can find further related
discussions. There is a Glossary of Terms beginning on page 160 where you will
find definitions of certain capitalized terms used in this prospectus. The
preceding Table of Contents and the Table of Contents included in each
accompanying prospectus supplement provide the pages on which these captions are
located.
_____________________
If you require additional information, the mailing address of the depositor's
principal executive offices is either Greenwich Capital Acceptance, Inc. or
Financial Acceptance Securities Corp., at 600 Steamboat Road, Greenwich,
Connecticut 06830 and the telephone number is (203) 625-2700. For other means of
acquiring additional information about us or a series of securities, see "The
Trust Fund -- Incorporation of Certain Information by Reference" on page 34 of
this prospectus.
____________________
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION, TOGETHER WITH
THE INFORMATION SET FORTH UNDER "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT, SINCE IT IDENTIFIES THE PRINCIPAL RISK FACTORS ASSOCIATED WITH AN
INVESTMENT IN THE SECURITIES.
PRINCIPAL PREPAYMENTS
ON THE LOANS MAY
ADVERSELY AFFECT
THE AVERAGE LIFE OF,
AND RATE OF RETURN ON,
YOUR SECURITIES.....You may be unable to reinvest the principal payments on your
securities at a rate of return at least equal to the rate on
your securities. The timing of principal payments on the
securities of a series will be affected by a number of
factors, including the following:
o the extent of prepayments on the loans in the trust
or, if the trust is comprised of underlying securities,
on the loans backing the underlying securities;
o how payments of principal are allocated among the
classes of securities of the series as specified in the
related prospectus supplement;
o if any party has an option to terminate the related
trust early or to call your securities, the effect of
the exercise of the option;
o the rate and timing of defaults and losses on the
assets in the related trust; and
o repurchases of assets in the related trust as a result
of material breaches of representations and warranties
made by the depositor or master servicer.
The rate of prepayment of the loans included in, or
underlying the assets held in, each trust may affect the
average life of the securities.
ONLY THE ASSETS OF THE RELATED TRUST ARE
AVAILABLE TO PAY YOUR
SECURITIES..........Unless the applicable prospectus supplement provides
otherwise, the securities of each series will be payable
solely from the assets of the related trust, including any
applicable credit enhancement, and will not have a claim
against the assets of any other trust. If the assets of the
related trust are not sufficient, you may suffer a loss on
your securities. Moreover, at the times specified in the
related prospectus
2
supplement, assets of the trust may be released to the
applicable depositor, master servicer, any servicer, credit
enhancement provider or other specified person, if all
payments then due on the securities have been made and
adequate provision for future payments on the remaining
securities has been made. Once released, these assets will
no longer be available to make payments on your securities
There will be no recourse against the depositor, the master
servicer, any servicer or any of their affiliates if a
required distribution on the securities is not made. The
securities will not represent an interest in, or an
obligation of, the depositor, the master servicer, any
servicer or any of their affiliates.
The depositor's obligations are limited to its
representations and warranties concerning the trust assets.
Because the depositor has no significant assets, if it is
required to repurchase trust assets due to the breach of a
representation or warranty, the depositor's source of funds
for the repurchase would be limited to:
o moneys obtained from enforcing any similar obligation
of the seller or originator of the asset, or
o funds from a reserve account or other credit
enhancement established to pay for asset repurchases.
CREDIT ENHANCEMENT MAY
NOT BE ADEQUATE TO
PREVENT LOSSES ON
YOUR SECURITIES.....Credit enhancement is intended to reduce the effect of
delinquent payments or loan losses on those classes of
securities that have the benefit of the credit enhancement.
Nevertheless, the amount of any credit enhancement is
subject to the limits described in the related prospectus
supplement. Moreover, the amount of credit enhancement may
decline or be depleted under certain circumstances before
the securities are paid in full. As a result,
securityholders may suffer losses. In addition, credit
enhancement may not cover all potential sources of risk of
loss, such as fraud or negligence by a loan originator or
other parties.
THE INTEREST ACCRUAL
PERIOD MAY REDUCE
THE EFFECTIVE YIELD
ON YOUR SECURITIES..Interest payable on the securities on any distribution date
will include all interest accrued during the related
interest accrual period. The interest accrual period for the
securities
3
of each series will be specified in the applicable
prospectus supplement. If the interest accrual period ends
two or more days before the related distribution date, your
effective yield will be less than it would be if the
interest accrual period ended the day before the
distribution date. As a result, your effective yield at par
would be less than the indicated coupon rate.
ECONOMIC, LEGAL AND
OTHER FACTORS COULD
REDUCE THE AMOUNT
AND DELAY THE TIMING
OF RECOVERIES ON
DEFAULTED LOANS.....The following factors, among others, could adversely affect
property values in such a way that the outstanding balance
of the related loans would equal or exceed those values:
o an overall decline in the residential real estate
markets where the properties are located,
o failure of borrowers to maintain their properties
adequately, and
o natural disasters that are not necessarily covered by
hazard insurance, such as earthquakes and floods.
If property values decline, actual rates of delinquencies,
foreclosures and losses on the loans could be higher than
those currently experienced by the mortgage lending industry
in general.
Even if you assume that the mortgaged properties provide
adequate security for the loans, substantial delays could
occur before defaulted loans are liquidated and the proceeds
forwarded to investors. Property foreclosure actions are
regulated by state statutes and rules and are subject to
many of the delays and expenses that characterize other
types of lawsuits if defenses or counterclaims are made. As
a result, foreclosure actions can sometimes take several
years to complete. Moreover, some states prohibit a mortgage
lender from obtaining a judgment against the borrower for
amounts not covered by property proceeds if the property is
sold outside of a judicial proceeding. As a result, if a
borrower defaults, these restrictions may impede the
servicer's ability to dispose of the borrower's property and
obtain sufficient proceeds to repay the loan in full. In
addition, the servicer is entitled to deduct from
liquidation proceeds all the expenses
4
it reasonably incurs in trying to recover on the defaulted
loan, including legal fees and costs, real estate taxes, and
property preservation and maintenance expenses. State laws
generally regulate interest rates and other loan charges,
require certain disclosures, and often require licensing of
loan originators and servicers. In addition, most states
have other laws and public policies for the protection of
consumers that prohibit unfair and deceptive practices in
the origination, servicing and collection of loans.
Depending on the provisions of the particular law or policy
and the specific facts and circumstances involved,
violations may limit the ability of the servicer to collect
interest or principal on the loans. Also, the borrower may
be entitled to a refund of amounts previously paid and the
servicer may be subject to damage claims and administrative
sanctions.
LOANS SECURED BY
JUNIOR LIENS ARE
SUBJECT TO
ADDITIONAL RISKS....If a loan is in a junior lien position, a decline in
property values could extinguish the value of the junior
lien loan before having any effect on the related senior
lien loan or loans.
In general, the expenses of liquidating defaulted loans do
not vary directly with the unpaid amount. So, assuming that
a servicer would take the same steps to recover a defaulted
loan with a small unpaid balance as it would a loan with a
large unpaid balance, the net amount realized after paying
liquidation expenses would be a smaller percentage of the
balance of the small loan than of the large loan. Since the
mortgages securing home equity loans typically will be in a
junior lien position, the proceeds from any liquidation will
be applied first to the claims of the related senior
mortgageholders, including foreclosure costs. In addition, a
junior mortgage lender may only foreclose subject to any
related senior mortgage. As a result, the junior mortgage
lender generally must either pay each related senior
mortgage lender in full at or before the foreclosure sale or
agree to make the regular payments on each senior mortgage.
Since the trust will not have any source of funds to satisfy
any senior mortgages or to continue making payments on them,
the trust's ability as a practical matter to foreclose on
any junior lien will be limited.
5
LOANS TO LOWER CREDIT
QUALITY BORROWERS ARE
MORE LIKELY TO EXPERIENCE
LATE PAYMENTS AND
DEFAULTS AND INCREASE
YOUR RISK OF LOSS...Trust assets may have been made to lower credit quality
borrowers who fall into one of two categories:
o customers with moderate income, limited assets and
other income characteristics that cause difficulty in
borrowing from banks and other traditional lenders; or
o customers with a history of irregular employment,
previous bankruptcy filings, repossession of property,
charged-off loans or garnishment of wages.
The average interest rate charged on loans made to these
types of borrowers is generally higher than that charged by
lenders that typically impose more stringent credit
requirements. There is a greater likelihood of late payments
on loans made to these types of borrowers than on loans to
borrowers with a higher credit quality. In particular,
payments from borrowers with a lower credit quality are more
likely to be sensitive to changes in the economic climate in
the areas in which they reside.
As much as 20% (by principal balance) of the trust assets
for any particular series of securities may be contractually
delinquent as of the related cut-off date.
FAILURE TO PERFECT
SECURITY INTERESTS
IN MANUFACTURED
HOMES MAY RESULT IN
LOSSES ON YOUR
SECURITIES..........Each manufactured housing conditional sales contract or
installment loan agreement that is included in a trust fund
will be secured by a security interest in the related
manufactured home. The steps necessary to perfect the
security interest in a manufactured home will vary from
state-to-state. If, as a result of clerical error or
otherwise, the master servicer fails to take the appropriate
steps to perfect the security interest in a manufactured
home that secures a conditional sales contract or
installment loan agreement included in the trust, the
trustee may not have a first priority security interest in
that manufactured home. Moreover, the master servicer will
not amend the certificate of title to a manufactured home to
name the trustee as lienholder, note the trustee's interest
on the certificate of title or deliver the
6
certificate of title to the trustee. As a result, in some
states the assignment of the security interest in the
manufactured home to the trustee may not be perfected or may
not be effective against creditors of the master servicer or
a bankruptcy trustee in the event of a bankruptcy of the
master servicer.
In addition, courts in many states have held that
manufactured homes may, in certain circumstances, become
subject to real estate title and recording laws. As a
result, the security interest in each manufactured home
could be rendered subordinate to the interests of other
parties claiming an interest in that manufactured home under
applicable state real estate law.
The failure to properly perfect a valid, first priority
security interest in a manufactured home that secures a
conditional sales contract or installment loan agreement
included in the trust could lead to losses that, to the
extent not covered by any credit enhancement, could
adversely affect the yield to maturity of the related
securities.
MULTIFAMILY LOANS
GENERALLY ARE RISKIER
THAN SINGLE FAMILY
LOANS...............Loans that are secured by first liens on rental apartment
buildings or projects containing five or more residential
units, together with loans that are secured by first liens
on mixed-use properties, shall not in the aggregate
constitute 10% or more of any pool by principal balance.
Multifamily loans are generally considered riskier than
single-family loans for the following reasons:
o Multifamily loans typically are much larger in amount,
which increases the risk represented by the default of
a single borrower.
o Repayment of a multifamily loan usually depends upon
successful management of the related mortgaged
property.
o Changing economic conditions in particular markets can
affect the supply and demand of rental units and the
rents that those markets will bear.
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o Government regulations, including rental control laws,
may adversely affect future income from mortgaged
properties that are subject to those regulations.
In addition, because individual multifamily loans often are
relatively large in amount, principal prepayments resulting
from defaults, casualties, condemnations or breaches of
representations and warranties may adversely affect your
yield.
LOANS WITH BALLOON
PAYMENTS MAY INCREASE
YOUR RISK OF LOSS...Certain loans may not be fully amortizing and may require a
substantial principal payment (a "balloon" payment) at their
stated maturity. Loans of this type involve greater risk
than fully amortizing loans since the borrower must
generally be able to refinance the loan or sell the related
property prior to the loan's maturity date. The borrower's
ability to do so will depend on such factors as the level of
available mortgage rates at the time of sale or refinancing,
the relative strength of the local housing market, the
borrower's equity in the property, the borrower's general
financial condition and tax laws.
IF AMOUNTS IN ANY
PRE-FUNDING ACCOUNT
ARE NOT USED TO
PURCHASE TRUST ASSETS,
YOU WILL RECEIVE A
PREPAYMENT ON THE
RELATED SECURITIES..The related prospectus supplement may provide that the
depositor transfer a specified amount into a pre-funding
account on the date the securities are issued. In this case,
the transferred funds may be used only to acquire additional
assets for the trust during a set period after the issuance.
Any amounts remaining in the account at the end of the
period will be distributed as a prepayment of principal to
the holders of the related securities. The resulting
prepayment could adversely affect the yield on those
securities.
VIOLATIONS OF APPLICABLE
FEDERAL LAWS MAY REDUCE
OR DELAY MORTGAGE LOAN
COLLECTIONS........
The loans may also be subject to federal laws relating to
the origination and underwriting. These laws
o require certain disclosures to the borrowers regarding
the terms of the loans;
8
o prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any
right under the consumer credit protection act, in the
extension of credit;
o regulate the use and reporting of information related
to the borrower's credit experience; and
o require additional application disclosures, limit
changes that may be made to the loan documents without
the borrower's consent and restrict a lender's ability
to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events.
Loans may also be subject to federal laws that impose
additional disclosure requirements on creditors for
non-purchase money loans with high interest rates or high
up-front fees and charges. These laws can impose specific
statutory liabilities upon creditors that fail to comply and
may affect the enforceability of the related loans. In
addition, any assignee of the creditor (including the trust)
would generally be subject to all claims and defenses that
the borrower could assert against the creditor, including
the right to rescind the loan.
Loans relating to home improvement contracts may be subject
to federal laws that protect the borrower from defective or
incomplete work by a contractor. These laws permit the
borrower to withhold payment if the work does not meet the
quality and durability standards agreed to between the
borrower and the contractor. These laws have the effect of
subjecting any assignee of the seller (including the trust)
to all claims and defenses which the borrower in a sale
transaction could assert against the seller of defective
goods.
If certain provisions of these federal laws are violated,
the master servicer may be unable to collect all or part of
the principal or interest on the loans. The trust also could
be subject to damages and administrative enforcement.
PROCEEDS OF LIQUIDATED
LOANS GENERALLY ARE
PAID FIRST TO PROVIDERS
OF TRUST SERVICES...
There is no assurance that the value of the trust assets for
any series of securities at any time will equal or exceed
the principal amount of the outstanding securities of that
series.
9
If trust assets have to be sold because of an event of
default or otherwise, providers of services to the trust
(including the trustee, the master servicer and the credit
enhancer, if any) generally will be entitled to receive the
proceeds of the sale to the extent of their unpaid fees and
other amounts due them before any proceeds are paid to
investors. As a result, the proceeds of such a sale may be
insufficient to pay the full amount of interest and
principal of the related securities.
MORTGAGED PROPERTIES
MAY BE SUBJECT TO
ENVIRONMENTAL RISKS
THAT COULD RESULT IN
LOSSES..............Federal, state and local laws and regulations impose a wide
range of requirements on activities that may affect the
environment, health and safety. In certain circumstances,
these laws and regulations impose obligations on owners or
operators of residential properties such as those that
secure the loans included in a trust. Failure to comply with
these laws and regulations can result in fines and penalties
that could be assessed against the trust as owner of the
related property.
In some states, a lien on the property due to contamination
has priority over the lien of an existing mortgage. Further,
a mortgage lender may be held liable as an "owner" or
"operator" for costs associated with the release of
petroleum from an underground storage tank under certain
circumstances. If the trust is considered the owner or
operator of a property, it will suffer losses as a result of
any liability imposed for environmental hazards on the
property.
YOU MAY HAVE DIFFICULTY
SELLING YOUR SECURITIES
OR OBTAINING YOUR
DESIRED PRICE.......No market will exist for the securities before they are
issued. In addition, there can be no assurance that a
secondary market will develop following the issuance and
sale of the securities. Even if a secondary market does
develop, you may not be able to sell your securities when
you wish to or at the price you want.
RATINGS OF THE SECURITIES
DO NOT ADDRESS ALL
INVESTMENT RISKS AND
MUST BE VIEWED WITH
CAUTION.............Any class of securities issued under this prospectus and the
accompanying prospectus supplement will be rated in one of
the four highest generic rating categories of a nationally
recognized rating agency. A rating is based on the adequacy
of the value of the trust assets and any credit enhancement
for that class and reflects the rating agency's assessment
10
of how likely it is that holders of the class of securities
will receive the payments to which they are entitled. A
rating does not constitute an assessment of how likely it is
that principal prepayments on the loans will be made, the
degree to which the rate of prepayments might differ from
that originally anticipated or the likelihood of early,
optional termination of the securities. You must not view a
rating as a recommendation to purchase, hold or sell
securities because it does not address the market price or
suitability of the securities for any particular investor.
There is no assurance that any rating will remain in effect
for any given period of time or that the rating agency will
not lower or withdraw it entirely in the future. The rating
agency could lower or withdraw its rating due to:
o any decrease in the adequacy of the value of the trust
assets or any related credit enhancement,
o an adverse change in the financial or other condition
of a credit enhancement provider, or
o a change in the rating of the credit enhancement
provider's long-term debt.
BOOK-ENTRY REGISTRATION
MAY LIMIT YOUR ABILITY
TO SELL SECURITIES AND
DELAY YOUR RECEIPT OF
PAYMENTS............LIMIT ON LIQUIDITY OF SECURITIES. Securities issued in
book-entry form may have only limited liquidity in the
resale market, since investors may be unwilling to purchase
securities for which they cannot obtain physical
instruments.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Transactions in
book-entry securities can be effected only through The
Depository Trust Company, its participating organizations,
its indirect participants and certain banks. As a result,
your ability to transfer or pledge securities issued in
book-entry form may be limited.
DELAYS IN DISTRIBUTIONS. You may experience some delay in
the receipt of distributions on book-entry securities since
the distributions will be forwarded by the trustee to DTC
for DTC to credit the accounts of its participants. In turn,
these participants will thereafter credit the distributions
to your account either directly or indirectly through
indirect participants.
There is a Glossary of Terms beginning on page 160 of this prospectus
where you will find definitions of the capitalized terms used in this
prospectus.
11
THE TRUST FUND
The trust fund for each series of certificates will be held by the
trustee named in the related prospectus supplement for the benefit of the
related securityholders. Each trust fund will consist of one or more pools of
the following asset types:
o Single Family Loans,
o Home Equity Loans,
o Multifamily Loans,
o Manufactured Housing Contracts,
o Home Improvement Contracts,
o Agency Securities or
o Private Label Securities,
in each case as specified in the related prospectus supplement, as well as
payments relating to the assets and other accounts, obligations or agreements,
as specified in the related prospectus supplement.
Whenever the terms "pool," "certificates" and "notes" are used in this
prospectus, these terms are intended to apply, unless the context indicates
otherwise, to a discrete asset pool and the certificates representing undivided
interests in, or the notes secured by the assets of, a particular trust fund
consisting primarily of the loans in that pool. Similarly, the term
"pass-through rate" refers to the pass-through rate borne by the certificates of
a particular series, the term "interest rate" refers to the coupon borne by
notes of a particular series and the term "trust fund" refers to the related
trust fund.
Unless the context indicates otherwise, the term "loan" includes Single
Family Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing
Contracts and Home Improvement Contracts. Unless the context indicates
otherwise, the term "underlying loan" refers to the Single Family Loans, Home
Equity Loans, Multifamily Loans, Manufactured Housing Contracts or Home
Improvement Contracts backing or securing Agency Securities or Private Label
Securities.
The securities will be entitled to payment from the assets of the
related trust fund or other assets pledged for the benefit of the
securityholders as specified in the related prospectus supplement. The
securities will not be entitled to payments from the assets of any other trust
fund established by the depositor.
The loans, Agency Securities and Private Label Securities will be
acquired by the applicable depositor, either directly or through affiliates,
from sellers and conveyed by that depositor to the trustee named in the related
prospectus supplement for the benefit of the holders of the securities of the
related series. Sellers may have originated or purchased the assets. Loans
12
acquired by the applicable depositor will have been originated principally in
accordance with the general underwriting criteria specified in this prospectus
under the heading "Loan Program--Underwriting Standards" and as more
specifically provided in a related prospectus supplement.
Because the securities issued by a trust will be secured by assets
transferred to that trust by one of the depositors you should construe all
references in this prospectus to the "depositor" as referring to the applicable
depositor that transfers assets to your trust under the applicable operative
documents.
The master servicer named in the related prospectus supplement will
service the trust fund assets, either directly or through sub-servicers, under a
servicing agreement for the related series of securities. If the securities are
certificates, the servicing agreement will be in the form of a pooling and
servicing agreement among the depositor, the master servicer and the trustee. If
the securities are notes, the servicing agreement generally will be between the
trustee and the master servicer.
The following sections contain a brief description of the assets
expected to be included in the trust funds. If specific information respecting
the assets is not known at the time the related series of securities initially
is offered, more general information of the nature described below will be
provided in the related prospectus supplement, and specific information will be
set forth in a report on Form 8-K to be filed with the SEC within 15 days after
the initial issuance of the securities. A copy of the operative agreements with
respect to the related series of securities will be attached to the Form 8-K and
will be available for inspection at the corporate trust office of the trustee
specified in the related prospectus supplement. A schedule of the assets
relating to the series will be attached to the related servicing agreement
delivered to the trustee upon issuance of the securities.
THE MORTGAGE LOANS--GENERAL
The loans in each trust fund are secured by the related mortgaged
properties. Except in the case of Multifamily Loans, the related mortgaged
properties generally consist of detached or semi-detached one- to four-family
dwellings, town houses, rowhouses, individual units in condominiums, individual
units in planned unit developments and certain other dwelling units. In
addition, if the related prospectus supplement so provides, the mortgaged
properties may include mixed-use properties. Mixed-use properties consist of
structures principally containing residential units but also including other
space used for retail, professional and other commercial uses. Loans that are
secured by multifamily and mixed-use properties shall not in the aggregate
constitute 10% or more of any pool by principal balance.
The mortgaged properties may include vacation and second homes,
investment properties and leasehold interests as specified in the related
prospectus supplement. The mortgaged properties may be located in any one of the
fifty states, the District of Columbia, Guam, Puerto Rico or any other territory
of the United States. If a loan has a loan-to-value ratio or principal balance
in excess of a particular benchmark, it may be covered in whole or in part by a
primary mortgage insurance policy. If the loans in a pool are covered by this
type of policy, the related prospectus supplement will describe the existence,
extent and duration of the coverage.
13
Unless otherwise specified in the related prospectus supplement, all of
the loans in a pool will have monthly payments due on the first day of each
month. The payment terms of the mortgage loans to be included in a trust fund
will be described in the related prospectus supplement and may include one or
more of the following features or other features described in the related
prospectus supplement:
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to an
index that will be specified in the related prospectus
supplement,
- a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to a
fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations.
Accrued interest may be deferred and added to the principal of a loan
for the periods and under the circumstances specified in the related
prospectus supplement. A mortgage loan may provide for the payment of
interest at a rate lower than the specified interest rate borne by the
loan for a period of time or for the life of the loan, and the amount
of any difference may be contributed from funds supplied by the seller
of the related mortgaged property or another source.
o Principal may be
- payable on a level debt service basis to fully amortize the
loan over its term,
- calculated on the basis of an assumed amortization schedule
that is significantly longer than the original term to
maturity or on an interest rate that is different from the
loan rate, or
- nonamortizing during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a "balloon" payment. Principal may include
interest that has been deferred and added to the principal balance of
the loan.
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time, or
14
- change from period to period.
Loans may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or minimum amounts
of monthly payments.
o Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over
time, and may be prohibited for the life of the loan or during
any lockout periods. Some loans may permit prepayments after
expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any subsequent
prepayment. Other loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified time periods.
The loans may include "due-on-sale" clauses which permit the
lender to demand payment of the entire loan in connection with
the sale or certain transfers of the related mortgaged property.
Other loans may be assumable by persons meeting the then
applicable underwriting standards of the related seller.
Each prospectus supplement will contain information, as of the date of
the prospectus supplement and to the extent then specifically known to the
depositor, with respect to the loans contained in the related pool, including
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the applicable
cut-off date,
o the type of mortgaged property securing each loan,
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal balance
of the loans,
o the earliest origination date and latest maturity date of the
loans,
o the aggregate principal balance of loans having loan-to-value
ratios at origination exceeding 80%,
o the loan rates or fixed percentage rates (APRs) or range of loan
rates or APRs borne by the loans, and
o the geographical location of the related mortgaged properties on
a state-by-state basis.
If specific information respecting the loans is not known to the depositor at
the time the related securities are initially offered, more general information
of the nature described in the immediately preceding sentence will be provided
in the related prospectus supplement, and specific information will be set forth
in the Form 8-K to be filed with the SEC within 15 days after issuance.
The loan-to-value ratio of a loan at any given time is the ratio,
expressed as a percentage, of the then outstanding principal balance of the loan
to the collateral value of the related mortgaged property. Unless otherwise
specified in the related prospectus supplement, the
15
collateral value of a mortgaged property, other than with respect to loans used
to refinance an existing loan, is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of the loan
and (b) the sales price for the property. In the case of refinance loans, the
collateral value of the related mortgaged property is the appraised value of the
property determined in an appraisal obtained at the time of refinancing. Unless
otherwise specified in the related prospectus supplement, for purposes of
calculating the loan-to-value ratio of a Manufactured Housing Contract relating
to a new manufactured home, the collateral value is no greater than the sum of
o a fixed percentage of the list price of the unit actually billed
by the manufacturer to the dealer, net of freight to the dealer
site but including any accessories identified in the invoice
(I.E., the "manufacturer invoice price"),
o the actual cost of any accessories depending on the size of the
unit, and
o the cost of state and local taxes, filing fees and up to three
years' prepaid hazard insurance premiums.
Unless otherwise specified in the related prospectus supplement, the collateral
value of a used manufactured home is the least of the sales price, appraised
value, and National Automobile Dealers' 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.
The loan-to-value ratio of a Home Improvement Contract will be computed
in the manner described in the related prospectus supplement.
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding principal balances
of the loans in a particular pool, 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
addition, adverse economic conditions and other factors which may or may not
affect real property values may affect the timely payment by borrowers of
scheduled payments of principal and interest on the loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any pool.
In the case of Multifamily Loans, these other factors could include
o excessive building resulting in an oversupply of rental housing
stock,
o a decrease in employment reducing the demand for rental units in
an area,
o federal, state or local regulations and controls affecting rents,
prices of goods and energy,
16
o environmental restrictions,
o increasing labor and material costs, and
o the relative attractiveness to tenants of the mortgaged
properties.
To the extent that losses are not covered by subordination provisions or
alternative arrangements, losses will be borne, at least in part, by the
securityholders of the securities of the related series.
Unless otherwise specified in the related prospectus supplement, the
only obligations of the depositor with respect to a series of certificates will
be to obtain certain representations and warranties from the related seller and
to assign to the trustee for that series of certificates the depositor's rights
with respect to those representations and warranties. SEE "Operative
Agreements--Assignment of Trust Fund Assets" in this prospectus.
The obligations of the master servicer with respect to the mortgage
loans will consist principally of:
o its contractual servicing obligations under the related servicing
agreement, including its obligation to enforce the obligations of
the sub-servicers or sellers, or both, as more fully described in
this prospectus under the headings "Mortgage Loan
Program--Representations by Sellers; Repurchases" and "Operative
Agreements--Sub-Servicing by Sellers" and "--Assignment of Trust
Fund Assets"; and
o its obligation to make certain cash advances in the event of
delinquencies in payments with respect to the mortgage loans in
the amounts described in this prospectus under the heading
"Description of the Certificates--Advances".
The obligations of the master servicer to make advances may be subject to
limitations, to the extent provided in this prospectus and in the related
prospectus supplement.
SINGLE FAMILY LOANS
Unless otherwise specified in the related prospectus supplement, Single
Family Loans will consist of loans or participations or other beneficial
interests in loans secured by mortgages or deeds of trust that create first
liens on one- to four-family residential properties. If specified in the related
prospectus supplement, Single Family Loans may include cooperative loans secured
by security interests in shares issued by private, non-profit, cooperative
housing corporations and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
cooperatives' buildings. If specified in the related prospectus supplement, the
assets of the related trust fund may include mortgage participation certificates
evidencing interests in Single Family Loans. Single Family Loans may be
conventional loans (loans that are not insured or guaranteed by any governmental
agency), loans insured by the Federal Housing Administration (FHA) or partially
guaranteed by the Veterans Administration (VA), as specified in the related
prospectus supplement. Unless otherwise specified in the related prospectus
supplement, Single Family Loans will have individual principal balances at
17
origination of not less than $25,000 and not more than $1,000,000, and original
terms to stated maturity of from ten to 40 years.
If specified in the related prospectus supplement, the mortgaged
properties securing Single Family Loans may include five- to eight-family
residential properties and small mixed-use properties. In the case of leasehold
interests, the term of the leasehold will exceed the scheduled maturity of the
related mortgage loan by at least five years, unless otherwise specified in the
related prospectus supplement.
HOME EQUITY LOANS
Unless otherwise specified in the related prospectus supplement, Home
Equity Loans will consist of closed-end and/or revolving home equity loans
generally secured by junior liens on one- to four-family residential properties.
As more fully described in the related prospectus supplement, interest
on each revolving credit line loan, excluding introductory rates offered from
time to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of the loan. Principal amounts on a
revolving credit line loan may be drawn down (up to the maximum amount specified
in the related prospectus supplement) or repaid from time to time, but may be
subject to a minimum periodic payment. Except to the extent provided in the
related prospectus supplement, the trust fund will not include any amounts
borrowed under a revolving credit line loan after the cut-off date. The full
amount of a closed-end loan is advanced at the inception of the loan and
generally is repayable in equal (or substantially equal) installments in an
amount necessary to fully amortize such loan at its stated maturity. Except to
the extent provided in the related prospectus supplement, the original terms to
stated maturity of closed-end loans will not exceed 360 months. Under certain
circumstances, under either a revolving credit line loan or a closed-end loan, a
borrower may choose an interest only payment option, in which event the borrower
is obligated to pay only the amount of interest which accrued on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
MULTIFAMILY LOANS
Multifamily Loans will consist of loans or participations or other
beneficial interests in loans secured by mortgages that create first liens on
rental apartment buildings or projects containing five or more residential
units. If specified in the related prospectus supplement, the mortgage assets of
a trust fund may include mortgage participation certificates evidencing
interests in Multifamily Loans. Multifamily Loans may be conventional loans or
FHA-insured loans, as specified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, all Multifamily Loans
will have original terms to stated maturity of not more than 40 years.
Multifamily Loans shall not constitute 10% or more of any pool by
principal balance.
Mortgaged properties securing Multifamily Loans may include high-rise,
mid-rise and garden apartments. Multifamily Loans may be secured by apartment
buildings owned by
18
cooperatives. A cooperative owns all the apartment units in its building and all
common areas and is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a cooperative must make
a monthly payment to the cooperative representing such tenant-stockholder's pro
rata share of the cooperative's payments for the cooperative's mortgage loan,
real property taxes, maintenance expenses and other capital or ordinary
expenses. Those payments are in addition to any payments of principal and
interest the tenant-stockholder must make on any loans to the tenant-stockholder
secured by his shares in the cooperative. The cooperative will be directly
responsible for building management and, in most cases, payment of real estate
taxes and hazard and liability insurance. A cooperative's ability to meet debt
service obligations on a Multifamily Loan, as well as all other operating
expenses, will be dependent in large part on the receipt of maintenance payments
from the tenant-stockholders, as well as any rental income from units or
commercial areas the cooperative might control. Unanticipated expenditures may
in some cases have to be paid by special assessments on the tenant-stockholders.
MANUFACTURED HOUSING CONTRACTS
Manufactured Housing Contracts will consist of manufactured housing
conditional sales contracts and installment sales or loan agreements, each
secured by a manufactured home. Manufactured Housing Contracts may be
conventional, insured by the FHA or partially guaranteed by the VA, as specified
in the related prospectus supplement. Unless otherwise specified in the related
prospectus supplement, each Manufactured Housing Contract will be fully
amortizing and will bear interest at a fixed percentage rate or APR. Unless
otherwise specified in the related prospectus supplement, Manufactured Housing
Contracts will all have individual principal balances at origination of not less
than $10,000 and not more than $1,000,000 and original terms to stated maturity
of from five to 30 years.
When we use the term "manufactured home" in this prospectus, we mean,
as stated in 42 U.S.C. ss. 5402(6), "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 such 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."
Each prospectus supplement will specify for the Manufactured Housing
Contracts contained in the related trust fund, among other things, the dates of
origination of the Manufactured Housing Contracts, the APRs on the Manufactured
Housing Contracts, the loan-to-value ratios of the Manufactured Housing
Contracts, the minimum and maximum outstanding principal balances as of the
cut-off date and the average outstanding principal balance, the outstanding
principal balances of the Manufactured Housing Contracts included in the related
19
trust fund, and the original maturities of the Manufactured Housing Contracts
and the last maturity date of any Manufactured Housing Contract.
HOME IMPROVEMENT CONTRACTS
Home Improvement Contracts are originated by home improvement
contractors, thrifts or commercial mortgage bankers in the ordinary course of
business. As specified in the related prospectus supplement, the Home
Improvement Contracts will either be unsecured or secured by mortgages or deeds
of trust generally creating a junior lien on the related mortgaged properties,
or secured by purchase money security interests in the financed home
improvements. Unless otherwise specified in the related prospectus supplement,
the Home Improvement Contracts will be fully amortizing and may have fixed
interest rates or adjustable interest rates and may provide for other payment
characteristics as described in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
home improvements securing the Home Improvement Contracts will include, but are
not limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OR GINNIE MAE. The Government
National Mortgage Association (Ginnie Mae) is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. Section 306(g) of Title II of the National Housing Act of 1934, as
amended, authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates which represent an interest in a pool of FHA
loans, which are mortgage loans insured by the FHA under the National Housing
Act or under Title V of the Housing Act of 1949, or VA loans, which are mortgage
loans partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or Chapter 37 of Title 38 of the United States Code.
Section 306(g) of the National Housing Act provides that "the full
faith and credit of the United States is pledged to the payment of all amounts
which may be required to be paid under any guaranty under this subsection." In
order to meet its obligations under any such guarantee, Ginnie Mae may, under
Section 306(d) of the National Housing Act, borrow from the United States
Treasury in an unlimited amount which is at any time sufficient to enable Ginnie
Mae to perform its obligations under its guarantee.
GINNIE MAE CERTIFICATES. Each Ginnie Mae Certificate held in a trust
fund will be a "fully modified pass-through" mortgage-backed certificate issued
and serviced by a Ginnie Mae issuer that is a mortgage banking company or other
financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. The Ginnie Mae Certificates may be
either Ginnie Mae I Certificates issued under the Ginnie Mae I program or Ginnie
Mae II Certificates issued under the Ginnie Mae II program. The mortgage loans
underlying the Ginnie Mae Certificates will consist of FHA loans and/or VA
loans. Each such mortgage loan is secured by a one- to four-family or
multifamily residential property. Ginnie Mae will approve the issuance of each
Ginnie Mae Certificate in accordance with a guaranty
20
agreement between Ginnie Mae and the Ginnie Mae issuer. Pursuant to its guaranty
agreement, a Ginnie Mae issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each Ginnie Mae Certificate,
even if the payments received by the Ginnie Mae issuer on the underlying FHA
loans or VA loans are less than the amounts due on the related Ginnie Mae
Certificate.
The full and timely payment of principal of and interest on each Ginnie
Mae Certificate will be guaranteed by Ginnie Mae, which obligation is backed by
the full faith and credit of the United States. Each Ginnie Mae Certificate will
have an original maturity of not more than 30 years, but may have original
maturities of substantially less than 30 years. Each Ginnie Mae Certificate will
be based on and backed by a pool of FHA loans or VA loans secured by one- to
four-family residential properties and will provide for the payment by or on
behalf of the Ginnie Mae issuer to the registered holder of the Ginnie Mae
Certificate scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
the Ginnie Mae Certificate, less the applicable servicing and guarantee fee
which together equal the difference between the interest on the FHA Loan or VA
Loan and the pass-through rate on the Ginnie Mae Certificate. In addition, each
payment will include proportionate pass-through payments of any prepayments of
principal on the FHA loans or VA loans underlying the Ginnie Mae Certificate and
liquidation proceeds in the event of a foreclosure or other disposition of any
such FHA loans or VA loans.
If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae
Certificate as they become due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of the Ginnie Mae Certificate.
In the event no payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer
fails to notify and request Ginnie Mae to make the payment, the holder of the
Ginnie Mae Certificate will have recourse only against Ginnie Mae to obtain
payment. The trustee or its nominee, as registered holder of the Ginnie Mae
Certificates held in a trust fund, will have the right to proceed directly
against Ginnie Mae under the terms of the guaranty agreements relating to those
Ginnie Mae Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular Ginnie Mae I Certificate
must have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on a Ginnie Mae
I Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the Ginnie Mae I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular Ginnie Mae II Certificate may
have per annum interest rates that vary from one another by up to one percentage
point. The interest rate on each Ginnie Mae II Certificate will be between
one-half percentage point and one and one-half percentage points lower than the
highest interest rate on the mortgage loans included in the pool of mortgage
loans underlying the Ginnie Mae II Certificate (except for pools of mortgage
loans secured by manufactured homes).
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Regular monthly installment payments on each Ginnie Mae Certificate
held in a trust fund will be comprised of interest due as specified on the
Ginnie Mae Certificate plus the scheduled principal payments on the FHA loans or
VA loans underlying the Ginnie Mae Certificate due on the first day of the month
in which the scheduled monthly installments on the Ginnie Mae Certificate are
due. Regular monthly installments on each Ginnie Mae Certificate are required to
be paid to the trustee as registered holder by the 15th day of each month in the
case of a Ginnie Mae I Certificate, and are required to be mailed to the trustee
by the 20th day of each month in the case of a Ginnie Mae II Certificate. Any
principal prepayments on any FHA loans or VA loans underlying a Ginnie Mae
Certificate held in a trust fund or any other early recovery of principal on
such loan will be passed through to the trustee as the registered holder of the
Ginnie Mae Certificate.
Ginnie Mae Certificates may be backed by graduated payment mortgage
loans or by "buydown" mortgage loans for which funds will have been provided
(and deposited into escrow accounts) for application to the payment of a portion
of the borrowers' monthly payments during the early years of such mortgage
loans. Payments due the registered holders of Ginnie Mae Certificates backed by
pools containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae Certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of the graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae Issuer will be the same irrespective of whether
the Ginnie Mae Certificates are backed by graduated payment mortgage loans or
"buydown" mortgage loans. No statistics comparable to the FHA's prepayment
experience on level payment, non-"buydown" mortgage loans are available in
respect of graduated payment or "buydown" mortgages. Ginnie Mae Certificates
related to a series of certificates may be held in book-entry form.
If specified in a prospectus supplement, Ginnie Mae Certificates may be
backed by multifamily mortgage loans having the characteristics specified in the
prospectus supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION OR FREDDIE MAC. The Federal Home
Loan Mortgage Corporation (Freddie Mac) is a shareholder-owned, government
sponsored enterprise created pursuant to Title III of the Emergency Home Finance
Act of 1970, as amended. Freddie Mac was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of Freddie
Mac currently consists of the purchase of first lien conventional mortgage
loans, or participation interests in the mortgage loans, and the sale of the
mortgage loans or participations so purchased in the form of mortgage
securities, primarily Freddie Mac Certificates. Freddie Mac is confined to
purchasing, so far as practicable, mortgage loans that it deems to be of such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
FREDDIE MAC CERTIFICATES. Each Freddie Mac Certificate represents an
undivided interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA loans or VA
22
loans. Freddie Mac Certificates are sold under the terms of a mortgage
participation certificate agreement. A Freddie Mac Certificate may be issued
under either Freddie Mac's Cash Program or its Guarantor Program.
Mortgage loans underlying the Freddie Mac Certificates held by a trust
fund will consist of mortgage loans with original terms to maturity of from ten
to 40 years. Each such mortgage loan must meet the applicable standards set
forth in the legislation that established Freddie Mac. The pool of loans backing
a Freddie Mac Certificate may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac pool. Under the Guarantor Program, however, the
pool of loans backing a Freddie Mac Certificate may include only whole loans or
participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans represented by that Freddie Mac Certificate, whether or not
received. Freddie Mac also guarantees to each registered holder of a Freddie Mac
Certificate that the holder will collect all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related prospectus supplement for a series of certificates, guarantee the
timely payment of scheduled principal. Under Freddie Mac's Gold PC Program,
Freddie Mac guarantees the timely payment of principal based on the difference
between the pool factor, published in the month preceding the month of
distribution, and the pool factor published in such month of distribution.
Pursuant to its guarantees, Freddie Mac indemnifies holders of Freddie Mac
Certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. Freddie Mac may remit the amount
due on account of its guaranty of collection of principal at any time after
default on an underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any mortgage
insurer or (iii) 30 days following the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the mortgagor for accelerated payment of principal. In taking
actions regarding the collection of principal after default on the mortgage
loans underlying Freddie Mac Certificates, including the timing of demand for
acceleration, Freddie Mac reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for Freddie Mac to
determine that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and Freddie Mac has not adopted standards which
require that the demand be made within any specified period.
Freddie Mac Certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
or entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy such obligations, distributions to holders of Freddie Mac
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac Certificates would be affected by delinquent payments and defaults
on such mortgage loans.
23
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac Certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac pass-through rate and any other sums such as prepayment fees,
within 60 days of the date on which those payments are deemed to have been
received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount
by which interest rates on the mortgage loans underlying a Freddie Mac
Certificate may exceed the pass-through rate on the Freddie Mac Certificate.
Under this program, Freddie Mac purchases groups of whole mortgage loans from
sellers at specified percentages of their unpaid principal balances, adjusted
for accrued or prepaid interest, which, when applied to the interest rate of the
mortgage loans and participations purchased, results in the yield (expressed as
a percentage) required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a particular Freddie Mac pool under the Cash Program will
vary since mortgage loans and participations are purchased and assigned to a
Freddie Mac pool based upon their yield to Freddie Mac rather than on the
interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor
Program, the pass-through rate on a Freddie Mac Certificate is established based
upon the lowest interest rate on the underlying mortgage loans, minus a minimum
servicing fee and the amount of Freddie Mac's management and guaranty income as
agreed upon between the related seller and Freddie Mac.
Freddie Mac Certificates duly presented for registration of ownership
on or before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a Freddie
Mac Certificate will be distributed so as to be received normally by the 15th
day of the second month following the month in which the purchaser becomes a
registered holder of the Freddie Mac Certificates. Thereafter, such remittance
will be distributed monthly to the registered holder so as to be received
normally by the 15th day of each month. The Federal Reserve Bank of New York
maintains book-entry accounts with respect to Freddie Mac Certificates sold by
Freddie Mac, and makes payments of principal and interest each month to the
registered Freddie Mac Certificateholders in accordance with the holders'
instructions.
FEDERAL NATIONAL MORTGAGE ASSOCIATION OR FANNIE MAE. The Federal
National Mortgage Association (Fannie Mae) is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately-managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase mortgage loans from
many capital market investors that may not ordinarily
24
invest in mortgages, thereby expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
FANNIE MAE CERTIFICATES. Fannie Mae Certificates are Guaranteed
Mortgage Pass-Through Certificates representing fractional undivided interests
in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet
the applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held by a trust fund
will consist of conventional mortgage loans, FHA loans or VA loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be from eight to 15
years or from 20 to 40 years. The original maturities of substantially all of
the fixed rate level payment FHA loans or VA loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae Certificate may have annual
interest rates that vary by as much as two percentage points from one another.
The rate of interest payable on a Fannie Mae Certificate is equal to the lowest
interest rate of any mortgage loan in the related pool, less a specified minimum
annual percentage representing servicing compensation and Fannie Mae's guaranty
fee. Under a regular servicing option pursuant to which the mortgagee or each
other servicer assumes the entire risk of foreclosure losses, the annual
interest rates on the mortgage loans underlying a Fannie Mae Certificate will be
between 25 basis points and 250 basis points greater than is its annual
pass-through rate. Under a special servicing option pursuant to which Fannie Mae
assumes the entire risk for foreclosure losses, the annual interest rates on the
mortgage loans underlying a Fannie Mae Certificate will generally be between 30
basis points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the related prospectus supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae
Certificate that it will distribute amounts representing the holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae Certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of Fannie Mae under its guarantees are
obligations solely of Fannie Mae and are not backed by, or entitled to, the full
faith and credit of the United States. Although the Secretary of the Treasury of
the United States has discretionary authority to lend Fannie Mae up to $2.25
billion outstanding at any time, neither the United States nor any of its
agencies or instrumentalities is obligated to finance Fannie Mae's operations or
to assist Fannie Mae in any other manner. If Fannie Mae were unable to satisfy
its obligations, distributions to holders of Fannie Mae Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of Fannie Mae Certificates
would be affected by delinquent payments and defaults on such mortgage loans.
25
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae Certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
Certificate is entered in the books of the Federal Reserve Banks (or registered
on the Fannie Mae Certificate register in the case of fully registered Fannie
Mae Certificates) as of the close of business on the last day of the preceding
month. With respect to Fannie Mae Certificates issued in book-entry form,
distributions will be made by wire and, with respect to fully registered Fannie
Mae Certificates, distributions will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of
one or more stripped mortgage-backed securities as described in this prospectus
and in the related prospectus supplement. Each Agency Security of this type will
represent an undivided interest in all or part of the principal distributions -
but not the interest distributions, or the interest distributions - but not the
principal distributions, or in some specified portion of the principal and
interest distributions on certain Freddie Mac, Fannie Mae or Ginnie Mae
Certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae or Ginnie Mae, each as trustee, or by another trustee
named in the related prospectus supplement. Freddie Mac, Fannie Mae or Ginnie
Mae will guaranty each stripped Agency Security to the same extent as such
entity guarantees the underlying securities backing the stripped Agency
Security, unless otherwise specified in the related prospectus supplement.
OTHER AGENCY SECURITIES. If specified in the related prospectus
supplement, a trust fund may include other mortgage pass-through certificates
issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. The
characteristics of any such mortgage pass-through certificates will be described
in the related prospectus supplement. If specified in the related prospectus
supplement, a combination of different types of Agency Securities may be held in
a trust fund.
PRIVATE LABEL SECURITIES
GENERAL. Private Label Securities or PLS (I.E., private
mortgage-backed or asset-backed securities) may consist of
o pass-through certificates or participation certificates
evidencing an undivided interest in a pool of Single Family
Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing
Contracts or Home Improvement Contracts,
o collateralized mortgage obligations secured by Single Family
Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing
Contracts or Home Improvement Contracts, or
o other Private Label Securities.
Private Label Securities may include stripped mortgage-backed securities
representing an undivided interest in all or a part of the principal
distributions - but not the interest distributions, or the interest
distributions - but not the principal distributions, or in some specified
portion
26
of the principal and interest distributions on certain mortgage loans. The
Private Label Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement. Unless otherwise
specified in the related prospectus supplement, the seller/servicer of the
underlying loans will have entered into a PLS Agreement with a trustee under
that agreement. The PLS trustee or its agent, or a custodian, will possess the
mortgage loans underlying the Private Label Securities. The loans underlying the
Private Label Securities will be serviced by a PLS servicer directly or by one
or more subservicers which may be subject to the supervision of the PLS
servicer. Unless otherwise specified in the related prospectus supplement, the
PLS servicer will be a Fannie Mae- or Freddie Mac-approved servicer and, if FHA
loans underlie the Private Label Securities, approved by HUD as an FHA
mortgagee.
The PLS issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending, a public agency or
instrumentality of a state, local or federal government, or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling housing loans to trusts and selling beneficial
interests in trusts. If specified in the related prospectus supplement, the PLS
issuer may be an affiliate of the depositor. The obligations of the PLS issuer
will generally be limited to certain representations and warranties with respect
to the assets it conveys to the related trust. Unless otherwise specified in the
related prospectus supplement, the PLS issuer will not have guaranteed any of
the assets conveyed to the related trust or any of the Private Label Securities
issued under the PLS agreement. Additionally, although the loans underlying the
Private Label Securities may be guaranteed by an agency or instrumentality of
the United States, the Private Label Securities themselves will not be so
guaranteed, unless the related prospectus supplement specifies otherwise.
Distributions of principal and interest will be made on the Private
Label Securities on the dates specified in the related prospectus supplement.
The Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase assets underlying the Private Label Securities after a particular
date or under other circumstances specified in the related prospectus
supplement.
UNDERLYING LOANS. The loans underlying the PMBS may consist of fixed
rate, level payment, fully amortizing loans or graduated payment mortgage loans,
buydown loans, adjustable rate mortgage loans, or loans having balloon or other
special payment features. The loans may be secured by one- to four-family
residential property, small mixed-use property, five- to eight-family
residential property, multifamily property, manufactured homes or by an
assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a cooperative and the related shares issued by the
cooperative. Except as otherwise specified in the related prospectus supplement,
the loans will have the following characteristics:
o no loan will have had a loan-to-value ratio at origination in
excess of 95%;
o each Single Family Loan secured by a mortgaged property having a
loan-to-value ratio in excess of 80% at origination will be
covered by a primary mortgage insurance policy;
27
o each loan will have had an original term to stated maturity of
not less than five years and not more than 40 years;
o no loan that was more than 89 days delinquent as to the payment
of principal or interest will have been eligible for inclusion in
the assets under the related PLS agreement;
o each loan (other than a cooperative loan) will be required to be
covered by a standard hazard insurance policy (which may be a
blanket policy); and
o each loan (other than a cooperative loan or a Manufactured
Housing Contract) will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE LABEL SECURITIES. Credit support in
the form of reserve funds, subordination of other private label securities
issued under the PLS agreement, letters of credit, surety bonds, insurance
policies or other types of credit support may be provided with respect to the
loans underlying the Private Label Securities or with respect to the Private
Label Securities themselves.
ADDITIONAL INFORMATION. If the trust fund for a series of securities
includes Private Label Securities, the related prospectus supplement will
specify
o the aggregate approximate principal amount and type of Private
Label Securities to be included in the trust fund,
o the maximum original term-to-stated maturity of the PLS,
o the weighted average term-to-stated maturity of the PLS,
o the pass-through or certificate rate of the PLS,
o the weighted average pass-through or interest rate of the PLS,
o the PLS issuer, the PLS servicer (if other than the PLS issuer)
and the PLS trustee,
o certain characteristics of any credit support such as reserve
funds, insurance policies, surety bonds, letters of credit or
guaranties relating to the loans underlying the Private Label
Securities themselves,
o the terms on which the loans underlying the PLS may, or are
required to, be purchased prior to their stated maturity or the
stated maturity of the PLS and
o the terms on which mortgage loans may be substituted for those
originally underlying the PLS.
In addition, the related prospectus supplement will provide information
about the loans which comprise the underlying assets of the Private Label
Securities, including
28
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
loans, and
o the minimum and maximum stated maturities of the underlying loans
at origination.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We incorporate in this prospectus by reference all documents and
reports filed by the applicable depositor, Greenwich Capital Acceptance, Inc.
(GCA) or Financial Acceptance Securities Corp. (FASCO), with respect to a trust
fund pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, prior to the termination of the offering of certificates
evidencing interests in that trust fund. Upon request by any person to whom this
prospectus is delivered in connection with the offering of one or more classes
of certificates, the applicable depositor will provide without charge a copy of
any such documents and/or reports incorporated herein by reference, in each case
to the extent that the documents or reports relate to those classes of
certificates, other than the exhibits to the documents (unless the exhibits are
specifically incorporated by reference in such documents). Requests to the
depositors should be directed in writing to: Paul D. Stevelman, Greenwich
Capital Acceptance, Inc. or Financial Acceptance Securities Corp. as applicable,
600 Steamboat Road, Greenwich, Connecticut 06830, telephone number (203)
625-2700. Each depositor has determined that its financial statements are not
material to the offering of any of the securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, DC 20549. Investors may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a website at http:\\www.sec.gov
containing reports, proxy and information statements and other information
regarding issuers, including each trust fund, that file electronically with the
SEC.
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the applicable depositor to the purchase of trust fund assets or will
be used by the depositor for general corporate purposes. The depositors expect
to sell securities in series from time to time, but the timing and amount of
offerings of securities will depend on a number of factors, including the volume
of assets acquired by the depositors, prevailing interest rates, availability of
funds and general market conditions.
THE DEPOSITORS
Greenwich Capital Acceptance, Inc. is a Delaware corporation organized
on April 23, 1987, and Financial Asset Securities Corp. is a Delaware
corporation organized on August 2, 1995, in each case for the limited purpose of
acquiring, owning and transferring mortgage assets
29
and selling interests in those assets or bonds secured by those assets. Each of
the depositors is an indirect, limited purpose finance subsidiary of Royal Bank
of Scotland Plc and an affiliate of Greenwich Capital Markets, Inc. Greenwich
Capital Markets, Inc. is a registered broker-dealer engaged in the U.S.
government securities market and related capital markets business. Each of the
depositors maintains its principal office at 600 Steamboat Road, Greenwich,
Connecticut 06830 and the telephone number is (203) 625-2700.
Neither the depositors nor any of their affiliates will ensure or
guarantee distributions on the securities of any series.
LOAN PROGRAM
The depositor will have purchased the loans, either directly or through
affiliates, from sellers. Unless otherwise specified in the related prospectus
supplement, the loans acquired by the depositor will have been originated in
accordance with the underwriting criteria specified under the heading
"--Underwriting Standards" below.
UNDERWRITING STANDARDS
Unless otherwise specified in the related prospectus supplement, each
seller will represent and warrant that all the loans that it originated and/or
sold to the depositor or one of the depositor's affiliates will have been
underwritten in accordance with standards consistent with those utilized by
institutional lenders generally during the period of origination for similar
types of loans. As to any loan insured by the FHA or partially guaranteed by the
VA, the related seller will represent that it has complied with the underwriting
policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate a prospective borrower's credit standing and repayment ability, and the
value and adequacy of the mortgaged property as collateral. In general, a
prospective borrower applying for a loan is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information, including the principal balance and payment history of any senior
lien loan on the related mortgaged property. As part of the description of the
borrower's financial condition, the borrower generally is required to provide a
current list of assets and liabilities and a statement of income and expenses,
as well as an authorization to apply for a credit report which summarizes the
borrower's credit history with local merchants and lenders and any record of
bankruptcy. Generally, an employment verification is obtained from an
independent source, which is typically the borrower's employer. The verification
reports the borrower's length of employment with its employer, current salary,
and expectations of continued employment. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related prospectus
supplement.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and
30
verify that it is in good repair and that construction, if new, has been
completed. The appraisal generally is based on the market value of comparable
homes, the estimated rental income (if considered applicable by the appraiser)
and the cost of replacing the subject home. In connection with a Manufactured
Housing Contract, the appraisal is based on recent sales of comparable
manufactured homes and, when deemed applicable, a replacement cost analysis
based on the cost of a comparable manufactured home. In connection with a
Multifamily Loan, 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 analyzes a multifamily project's cashflow, expenses,
capitalization and other operational information in determining the property's
value. The market approach to value focuses its analysis on the prices paid for
the purchase of similar properties in the multifamily project's area, with
adjustments made for variations between these other properties and the
multifamily project being appraised. The cost approach calls for the appraiser
to make an estimate of land value and then determine the current cost of
reproducing the building less any accrued depreciation. In any case, the value
of the property being financed, as indicated by the appraisal, must be such that
it currently supports, and is anticipated to support in the future, the
outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available
o to meet the borrower's monthly obligations on the proposed loan,
generally determined on the basis of the monthly payments due in
the year of origination, and other expenses related to the
mortgaged property such as property taxes and hazard insurance,
and
o to meet monthly housing expenses and other financial obligations
and monthly living expenses.
The underwriting standards applied by sellers, particularly with respect to the
level of loan documentation and the borrower's income and credit history, may be
varied in appropriate cases where factors such as low loan-to-value ratios or
other favorable credit exist.
In the case of a loan secured by a leasehold interest in real property,
the title to which is held by a third-party lessor, the related seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term of the
related mortgage note.
Some types of loans which may be included in the pools may involve
additional uncertainties not present in traditional types of loans. For example,
loans may provide for escalating or variable payments by the borrower. These
types of loans are generally underwritten on the basis of a judgment that
borrowers will have the ability to make the monthly payments required initially.
In some instances, however, their incomes may not be sufficient to permit
continued loan payments as payments increase. These types of loans may also be
underwritten primarily upon the basis of loan-to-value ratios or other favorable
credit factors.
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QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related prospectus supplement, each
seller will be required to satisfy the qualifications set forth in the following
sentence. Each seller must
o be an institution experienced in originating and servicing loans
of the type contained in the related pool in accordance with
accepted practices and prudent guidelines,
o maintain satisfactory facilities to originate and service the
loans,
o be a seller/servicer approved by either Fannie Mae or Freddie
Mac, and
o be a mortgagee approved by the FHA or an institution the deposit
accounts in which are insured by the Federal Deposit Insurance
Corporation (FDIC).
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each seller will have made representations and warranties in respect of
the loans sold by that seller and evidenced by a series of securities. These
representations and warranties, unless otherwise provided in the related
prospectus supplement, generally include the following:
o Except in the case of a cooperative loan, each Single Family
Loan, Home Equity Loan or Multifamily Loan has a title insurance
policy, required hazard insurance policy and any required primary
mortgage insurance policy, each of which was in effect at the
origination of the loan and remained in effect on the date that
the loan was purchased from the seller by or on behalf of the
depositor. If the related mortgaged property is located in an
area where title insurance policies are generally not available,
an attorney's certificate of title may be substituted.
o The seller had good title to each loan and no loan was subject to
offsets, defenses, counterclaims or rights of rescission except
to the extent that any specified buydown agreement may forgive
certain indebtedness of a borrower.
o Each loan constituted a valid lien on, or a perfected security
interest with respect to, the related mortgaged property, subject
only to permissible title insurance exceptions, if applicable,
and certain other exceptions described in the related servicing
agreement.
o The mortgaged property was free from damage and was in acceptable
condition.
o There were no delinquent tax or assessment liens against the
mortgaged property.
o No required payment on a loan was delinquent more than 30 days.
o Each loan was made in compliance with, and is enforceable under,
all applicable local, state and federal laws and regulations, in
all material respects.
32
If specified in the related prospectus supplement, the representations
and warranties of a seller in respect of a loan will be made not as of the
related cut-off date but as of the date on which the seller sold the loan to the
depositor or one of its affiliates. Under these circumstances, a substantial
period of time may have elapsed between that date and the date of initial
issuance of the series of securities evidencing an interest in, or secured by,
the loan. Since the representations and warranties of a seller do not address
events that may occur following the sale of the loan by that seller, the
repurchase obligation described in the following paragraph will not arise if the
relevant event that would otherwise have given rise to the obligation occurs
after the date when the seller sold the loan to the depositor or one of its
affiliates. However, the depositor will not include any loan in a trust fund if
anything has come to the depositor's attention that would cause it to believe
that the representations and warranties of the related seller regarding that
loan will not be accurate and complete in all material respects as of the date
when the related series of securities is issued. If the master servicer is also
a seller of loans for a particular series, these representations will be in
addition to the representations and warranties made by the master servicer in
its capacity as master servicer.
Unless otherwise specified in the related prospectus supplement, the
seller will make certain representations and warranties in connection with
Manufactured Housing Contracts included in the trust with respect to the
enforceability of coverage under any related insurance policy or hazard
insurance policy. The seller, if required by the rating agencies rating the
related issue of securities, will obtain a surety bond, guaranty, letter of
credit or other acceptable instrument to support its repurchase or substitution
obligation specified in the immediately following paragraph.
The master servicer, or the trustee if the master servicer is the
seller, will promptly notify the relevant seller of any breach of any
representation or warranty made by that seller in respect of a loan which
materially and adversely affects the interests of the securityholders in the
loan. Unless otherwise specified in the related prospectus supplement, if the
seller cannot cure the breach within 90 days after notice from the master
servicer or the trustee, as the case may be, then the seller will be obligated
EITHER
o to repurchase that loan from the trust fund at a purchase price
equal to 100% of the loan's unpaid principal balance as of the
date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the related
loan rate, less any advances made by the seller or amount payable
as related servicing compensation if the seller is the master
servicer, OR
o substitute for that loan a replacement loan that satisfies the
requirements set forth in the related prospectus supplement.
This repurchase or substitution obligation will constitute the sole remedy
available to the securityholders or the trustee for a breach of representation
or warranty by the seller.
Except in those cases in which the master servicer is the seller, the
master servicer will be required under the applicable servicing agreement to
enforce this obligation for the benefit of the trustee and the related
securityholders, following the practices it would employ in its good faith
business judgment were it the owner of the loan.
33
If a REMIC election is to be made with respect to a trust fund, unless
otherwise provided in the related prospectus supplement, the master servicer or
a holder of the related residual certificate will be obligated to pay any
prohibited transaction tax which may arise in connection with a repurchase or
substitution. Unless otherwise specified in the related prospectus supplement,
the master servicer will be entitled to reimbursement for any such payment from
the assets of the related trust fund or from any holder of the related residual
certificate. SEE "Description of the Securities--General" in this prospectus.
Neither the depositor nor the master servicer - unless the master
servicer is the seller - will be obligated to purchase a loan if the seller
defaults on its obligation to do so. No assurance can be given that sellers will
carry out their respective repurchase or substitution obligations with respect
to the loans. However, to the extent that a breach of a representation and
warranty of a seller may also constitute a breach of a representation made by
the master servicer, the master servicer may have a repurchase or substitution
obligation as described under the heading "Operative Agreements--Assignment of
Trust Fund Assets" in this prospectus.
DESCRIPTION OF THE SECURITIES
Either Greenwich Capital Acceptance, Inc. or Financial Asset Securities
Corp., as depositor, will establish a trust fund for each series of securities.
A particular series of securities will consist of mortgage-backed or
asset-backed certificates or notes or both certificates and notes.
Each series of certificates will be issued pursuant to a pooling and
servicing agreement or a trust agreement, dated as of the related cut-off date,
among the depositor, the trustee and, if the trust includes loans, the related
master servicer. The provisions of each pooling and servicing agreement or trust
agreement will vary depending upon the nature of the related certificates and
the related trust fund. Forms of pooling and servicing and trust agreements are
exhibits to the Registration Statement of which this prospectus forms a part.
Each series of notes will be issued under an indenture between the
related trust fund and the trustee named in the prospectus supplement for that
series. If the trust fund includes loans, the trust fund and the servicer of the
loans will also enter into a servicing agreement. Forms of indenture and
servicing agreement have been filed as an exhibit to the registration statement
of which this prospectus forms a part.
The following summaries describe the material provisions which may
appear in each pooling and servicing agreement or trust agreement, in the case
of a series of certificates, and in each indenture and servicing agreement, in
the case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the operative agreements relating to
that series which materially differs from the description contained in this
prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
related agreements and prospectus supplement. The applicable depositor will
provide a copy of the operative agreements (without exhibits) relating to any
series without charge, upon written request of a holder of record of a
certificate or note of the series, addressed to Greenwich Capital Acceptance,
Inc. or Financial
34
Asset Securities Corp., as applicable, 600 Steamboat Road, Greenwich,
Connecticut 06830, Attention: Asset Backed Finance Group.
GENERAL
Unless otherwise specified in the related prospectus supplement, the
securities of each series will
o be issued in fully registered form only, in the authorized
denominations specified in the prospectus supplement,
o evidence specified beneficial ownership interests in the trust
fund assets, in the case of a series of certificates, or be
secured by the pledge of the trust fund assets, in the case of a
series of notes, and
o not be entitled to payments in respect of the assets included in
any other trust fund established by the depositor.
The securities will not represent obligations of the depositor or any of its
affiliates. The loans will not be insured or guaranteed by any governmental
entity or other person, unless otherwise specified in the related prospectus
supplement.
To the extent provided in the related operative agreements, each trust
fund will consist of the following:
o the assets as from time to time are subject to the related
agreement, exclusive of any amounts specified in the related
prospectus supplement as "retained interest";
o those assets as from time to time are required to be deposited in
the related security account as defined under the heading
"Operative Agreements--Payments on Loans; Deposits to Security
Account" in this prospectus;
o property which secured a loan and which is acquired on behalf of
the securityholders by foreclosure or deed in lieu of
foreclosure; and
o primary mortgage insurance policies, FHA insurance and VA
guarantees, if any, and any other insurance policies or other
forms of credit enhancement required to be maintained pursuant to
the related agreement.
If specified in the related prospectus supplement, a trust fund may also include
one or more of the following:
o reinvestment income on payments received on the trust fund
assets,
o a reserve fund,
o a pool insurance policy,
35
o a special hazard insurance policy,
o a bankruptcy bond,
o one or more letters of credit,
o a surety bond,
o guaranties, or
o similar instruments or other agreements.
Each series of securities will be issued in one or more classes. Each
class of securities of a series will evidence beneficial ownership of a
specified portion or percentage - which may be 0% - of future interest payments
and a specified portion or percentage - which may be 0% - of future principal
payments on the assets in the related trust fund. A series of securities may
include one or more classes that are senior in right to payment to one or more
other classes of securities of the series. A series or classes of securities may
be covered by insurance policies, surety bonds or other forms of credit
enhancement, in each case as described in this prospectus and in the related
prospectus supplement. Distributions on one or more classes of a series of
securities may be made prior to being made on one or more other classes, after
the occurrence of specified events, in accordance with a schedule or formula, on
the basis of collections from designated portions of the trust fund assets or on
a different basis, in each case as specified in the related prospectus
supplement. The timing and amounts of distributions may vary among classes or
over time as specified in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement,
distributions of principal and interest, or, where applicable, of principal only
or interest only, on the related securities will be made by the trustee on each
distribution date. Distributions will be made monthly, quarterly, semi-annually,
or at such other intervals and on the dates as are specified in the related
prospectus supplement, in proportion to the percentages specified in the
prospectus supplement. Distributions will be made to the persons in whose names
the securities are registered at the close of business on the applicable record
date specified in the related prospectus supplement. Distributions will be made
in the manner specified in the related prospectus supplement to the persons
entitled to them at the address appearing in the register maintained for the
securityholders. In the case of the final distribution in retirement of the
securities, payment will be made only upon presentation and surrender of the
securities at the office or agency of the trustee or other person specified in
the notice to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee named in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of securities of any series but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law, the purchase and holding of certain classes of
certificates by or on behalf of an employee benefit plan or other retirement
arrangement subject to the provisions of ERISA or the Internal Revenue Code may
result in "prohibited transactions" within the meaning of
36
ERISA and the Code. SEE "ERISA Considerations" in this prospectus. Retirement
arrangements subject to these provisions include individual retirement accounts
and annuities, Keogh plans and collective investment funds in which the plans,
accounts or arrangements are invested. The applicable prospectus supplement may
specify other conditions under which transfers of this type would be permitted,
but if it does not, transfer of the certificates will not be registered unless
the transferee represents that it is not, and is not purchasing on behalf of, a
plan, account or other retirement arrangement or provides an opinion of counsel
or a certification satisfactory to the trustee and the depositor that the
purchase of the certificates by or on behalf of a plan, account or other
retirement arrangement is permissible under applicable law, will not give rise
to a non-exempt prohibited transaction and will not subject the trustee, the
master servicer or the depositor to any obligation or liability in addition to
those undertaken in the operative agreements.
As to each series of securities, an election may be made to treat the
related trust fund, or designated portion of the trust fund, as a "real estate
mortgage investment conduit" (REMIC) as defined in the Internal Revenue Code.
The related prospectus supplement will specify whether a REMIC election is to be
made. Alternatively, the operative agreement for a series may provide that a
REMIC election may be made at the discretion of the depositor or the master
servicer and may only be made if certain conditions are satisfied. As to any
series of securities for which a REMIC election will be made, the terms and
provisions applicable to the making of the REMIC election, as well as any
material federal income tax consequences to securityholders not otherwise
described in this prospectus, will be set forth in the related prospectus
supplement. If a REMIC election is made with respect to a series, one of the
classes will be designated as evidencing the sole class of "residual interests"
in the related REMIC, as defined in the Code. All other classes of securities in
that series will constitute "regular interests" in the related REMIC, as defined
in the Code. As to each series with respect to which a REMIC election is to be
made, the master servicer or a holder of the related residual certificate will
be obligated to take all actions required in order to comply with applicable
laws and regulations and will be obligated to pay any prohibited transaction
taxes. Unless otherwise specified in the related prospectus supplement, the
master servicer will be entitled to reimbursement for any such payment from the
assets of the trust fund or from any holder of the related residual certificate.
DISTRIBUTIONS ON SECURITIES
GENERAL. In general, the method of determining the amount of
distributions on a particular series of securities will depend on the type of
credit support, if any, that is used with respect to that series. SEE "Credit
Enhancement" in this prospectus. Set forth below are descriptions of various
methods that may be used to determine the amount of distributions on the
securities of a particular series. The prospectus supplement for each series of
securities will describe the method to be used in determining the amount of
distributions on the securities of that series.
The trustee will make distributions allocable to principal and interest
on the securities out of, and only to the extent of, funds in the related
security account, including any funds transferred from any reserve account. As
between securities of different classes and as between distributions of
principal (and, if applicable, between distributions of principal prepayments
and scheduled payments of principal) and interest, distributions made on any
distribution date will be applied as specified in the related prospectus
supplement. Unless otherwise specified in the
37
related prospectus supplement, distributions to any class of securities will be
made pro rata to all securityholders of that class.
AVAILABLE FUNDS. All distributions on the securities of each series on
each distribution date will be made from Available Funds in accordance with the
terms described in the related prospectus supplement and specified in the
related operative agreement. Unless otherwise provided in the related prospectus
supplement, the term "Available Funds" for each distribution date will equal the
sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal, including principal prepayments, if any, and
prepayment penalties, if so provided in the related prospectus
supplement, and interest on the mortgage loans in the related
trust fund (including Liquidation Proceeds and Insurance Proceeds
and amounts drawn under letters of credit or other credit
enhancement instruments as permitted thereunder and as specified
in the related operative agreement) received by the master
servicer after the cut-off date and on or prior to the related
determination date specified in the prospectus supplement except:
o all payments which were due on or before the cut-off date;
o all Liquidation Proceeds and all Insurance Proceeds, all
principal prepayments and all other proceeds of any loan
purchased by the depositor, the master servicer, any
sub-servicer or any seller pursuant to the related operative
agreement that were received after the prepayment period
specified in the prospectus supplement and all related
payments of interest representing interest for any period
after the related collection period;
o all scheduled payments of principal and interest due on a
date or dates subsequent to the first day of the month of
distribution;
o amounts received on particular loans as late payments of
principal or interest or other amounts required to be paid
by borrowers, but only to the extent of any unreimbursed
advance in respect of those loans made by the master
servicer, the related sub-servicers, support servicers or
the trustee;
o amounts representing reimbursement, to the extent permitted
by the related operative agreement and as described under
the heading "--Advances" immediately below, for advances
made by the master servicer, sub-servicers, support
servicers or the trustee that were deposited into the
security account, and amounts representing reimbursement for
certain other losses and expenses incurred by the master
servicer or the depositor and described below; and
o that portion of each collection of interest on a particular
loan in the trust fund which represents servicing
compensation payable to the master servicer or retained
interest which is to be retained from such collection or is
permitted to be retained from related Insurance Proceeds,
Liquidation Proceeds or proceeds of loans purchased pursuant
to the related operative agreement;
38
(ii) the amount of any advance made by the master servicer,
sub-servicer, support servicer or the trustee as described under
"--Advances" immediately below and deposited by it in the
security account;
(iii) if applicable, amounts withdrawn from a reserve account;
(iv) any applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party credit
enhancement; and
(v) if applicable, the amount of any prepayment interest shortfall.
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the related
prospectus supplement, interest will accrue on the aggregate principal balance
of each class of securities or the aggregate notional principal balance of each
class of securities entitled to distributions of interest only at the
pass-through rate (or interest rate) and for the periods specified in the
prospectus supplement. Except in the case of a class of accrual securities that
provides for interest that accrues but is not currently payable, the
pass-through rate may be a fixed rate or an adjustable rate that adjusts as
specified in the prospectus supplement. Interest accrued during each specified
period on each class of securities entitled to interest will be distributable on
the distribution dates specified in the related prospectus supplement, to the
extent that funds are available, until the aggregate principal balance of the
securities of that class has been distributed in full or, in the case of a class
of securities entitled only to distributions allocable to interest, until the
aggregate notional principal balance of that class is reduced to zero or for the
period of time designated in the related prospectus supplement. The original
principal balance of each security will equal the aggregate distributions
allocable to principal to which that security is entitled. Unless otherwise
specified in the related prospectus supplement, distributions allocable to
interest on each security that is not entitled to distributions allocable to
principal will be calculated based on the notional principal balance of that
security. The notional principal balance of a security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
With respect to any class of accrual securities, if specified in the
related prospectus supplement, any interest that has accrued but is not paid on
any distribution date will be added to the aggregate principal balance of that
class on that distribution date. Unless otherwise specified in the related
prospectus supplement, distributions of interest on each class of accrual
securities will commence only after the occurrence of the events specified in
the prospectus supplement. Unless otherwise specified in the related prospectus
supplement, the beneficial ownership interest of a class of accrual securities
in the trust fund will increase on each distribution date, as reflected in the
aggregate principal balance of that class, by the amount of interest that
accrued on that class during the preceding interest accrual period but was not
required to be distributed to the class on the distribution date. Each class of
accrual securities will thereafter accrue interest on the outstanding aggregate
principal balance of that class as so increased.
DISTRIBUTIONS OF PRINCIPAL. Unless otherwise specified in the related
prospectus supplement, the aggregate principal balance of any class of
securities entitled to distributions of principal will equal
39
o the original aggregate principal balance of that class as
specified in the related prospectus supplement
REDUCED BY
o all distributions reported to securityholders of that class as
allocable to principal
INCREASED BY
o in the case of a class of accrual securities, all interest
accrued but not then distributable on that class and
SUBJECT TO
o in the case of adjustable rate certificates, the effect of any
negative amortization.
The related prospectus supplement will specify the method by which the amount of
principal to be distributed on the securities on each distribution date will be
calculated and the manner in which the amount will be allocated among the
classes of securities entitled to distributions of principal.
If so provided in the related prospectus supplement, one or more
classes of senior securities will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received from
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of such payments in
the percentages and under the circumstances or for the periods specified in the
prospectus supplement. Any allocation of principal prepayments to a class or
classes of senior securities will have the effect of accelerating the
amortization of the senior securities while increasing the interests evidenced
by the subordinated securities in the related trust fund. Increasing the
interests of the subordinated securities relative to that of the senior
securities is intended to preserve the availability of the subordination
provided by the subordinated securities. SEE "Credit Enhancement--Subordination"
in this prospectus.
UNSCHEDULED DISTRIBUTIONS. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described in this paragraph and the following paragraph and in the prospectus
supplement. The trustee will be required to make such unscheduled distributions
on the day and in the amount specified in the related prospectus supplement if,
due to substantial payments of principal - including principal prepayments - on
the trust fund assets, the trustee or the master servicer determines that the
funds available or anticipated to be available from the security account and, if
applicable, from any reserve account may be insufficient to make required
distributions on the securities on that distribution date. Unless otherwise
specified in the related prospectus supplement, the amount of any unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
securities on the next distribution date. Unless otherwise specified in the
related prospectus supplement, all unscheduled distributions will include
interest at the applicable pass-through rate, if any, on the amount of the
unscheduled
40
distribution allocable to principal for the period and to the date specified in
the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
securities would have been made on the next distribution date, and with respect
to securities of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the trustee prior to the date of distribution.
ADVANCES
Unless otherwise provided in the related prospectus supplement, the
master servicer will be required to make advances, from its own funds, from
funds advanced by sub-servicers or support servicers or from funds held in the
security account for future distributions to the securityholders. On each
distribution date, the amount of any advances will be equal to the aggregate of
payments of principal and interest that were delinquent on the related
determination date and were not advanced by any sub-servicer, subject to the
master servicer's determination that these advances will be recoverable from
late payments by borrowers, Liquidation Proceeds, Insurance Proceeds or
otherwise. In the case of cooperative loans, the master servicer also will be
required to advance any unpaid maintenance fees and other charges under the
related proprietary leases as specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to the securityholders
rather than to guarantee or insure against losses. If advances are made by the
master servicer from cash being held for future distribution to securityholders,
the master servicer will replace those funds on or before any future
distribution date to the extent that funds in the applicable security account on
a distribution date would be less than the amount required to be available for
distributions to securityholders on that date. Any funds advanced by the master
servicer will be reimbursable to the master servicer out of recoveries on the
specific loans with respect to which the advances were made (E.G., late payments
made by the related borrower, any related Insurance Proceeds, Liquidation
Proceeds or proceeds of any loan purchased by a sub-servicer or a seller under
the circumstances described in this prospectus). Advances by the master servicer
and any advances by a sub-servicer or a support servicer also will be
reimbursable to the master servicer or sub-servicer or support servicer, as
applicable, from cash otherwise distributable to securityholders, including the
holders of senior securities, to the extent that the master servicer determines
that any advances previously made are not ultimately recoverable as described in
this paragraph. The master servicer also will be obligated to make advances, to
the extent recoverable out of Insurance Proceeds, Liquidation Proceeds or
otherwise, in respect of certain taxes and insurance premiums not paid by
borrowers on a timely basis. Funds so advanced are reimbursable to the master
servicer to the extent permitted by the related operative agreement. If
specified in the related prospectus supplement, the obligations of the master
servicer to make advances may be supported by a cash advance reserve fund, a
surety bond or other arrangement, in each case as described in the related
prospectus supplement.
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The master servicer or sub-servicer may enter into a support agreement
with a support servicer pursuant to which the support servicer agrees to provide
funds on behalf of the master servicer or sub-servicer in connection with the
obligation of the master servicer or sub-servicer, as the case may be, to make
advances. The support agreement will be delivered to the trustee and the trustee
will be authorized to accept a substitute support agreement in exchange for an
original support agreement, provided that the substitution of the support
agreement will not adversely affect the rating or ratings assigned to the
securities by each rating agency named in the related prospectus supplement.
Unless otherwise provided in the prospectus supplement, in the event
the master servicer, a sub-servicer or a support servicer fails to make an
advance, the trustee will be obligated to make the advance in its capacity as
successor servicer. If the trustee makes an advance, it will be entitled to be
reimbursed for that advance to the same extent and degree as the master
servicer, a sub-servicer or a support servicer is entitled to be reimbursed for
advances. SEE "--Distributions on Securities" above.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a distribution date
and except as otherwise set forth in the related prospectus supplement, the
master servicer or the trustee will furnish to each securityholder of record of
the related series a statement setting forth, to the extent applicable to that
series of securities, among other things:
o the amount of the distribution that is allocable to principal,
separately identifying the aggregate amount of any principal
prepayments and, if specified in the prospectus supplement, any
prepayment penalties included in the distribution;
o the amount of the distribution allocable to interest;
o the amount of any advances;
o the aggregate amount (a) otherwise allocable to the subordinated
securityholders on that distribution date and (b) withdrawn from
the reserve fund, if any, that is included in the amounts
distributed to the senior securityholders;
o the outstanding aggregate principal balance or notional principal
balance of each class after giving effect to the distribution of
principal on that distribution date;
o the percentage of principal payments on the loans (excluding
prepayments), if any, which each class will be entitled to
receive on the following distribution date;
o the percentage of principal prepayments on the mortgage loans, if
any, which each class will be entitled to receive on the
following distribution date;
o the amount of the servicing compensation retained or withdrawn
from the security account by the master servicer and the amount
of additional servicing compensation
42
received by the master servicer attributable to penalties, fees,
excess Liquidation Proceeds and other similar charges and items;
o the number and aggregate principal balance of mortgage loans
delinquent, but not in foreclosure, (i) from 30 to 59 days, (ii)
from 60 to 89 days and (iii) 90 days or more, as of the close of
business on the last day of the calendar month preceding that
distribution date;
o the number and aggregate principal balance of mortgage loans
delinquent and in foreclosure (i) from 30 to 59 days, (ii) from
60 to 89 days and (iii) 90 days or more, as of the close of
business on the last day of the calendar month preceding that
distribution date;
o the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure and, if the real estate
secured a Multifamily Loan, any additional information specified
in the prospectus supplement;
o if a class is entitled only to a specified portion of interest
payments on the loans in the related pool, the pass-through rate,
if adjusted from the date of the last statement, of the loans
expected to be applicable to the next distribution to that class;
o if applicable, the amount remaining in any reserve account at the
close of business on that distribution date;
o the pass-through rate as of the day prior to the immediately
preceding distribution date; and
o the amounts remaining under any letters of credit, pool policies
or other forms of credit enhancement applicable to the
certificates.
Where applicable, any amount set forth in the above list may be
expressed as a dollar amount per single security of the relevant class having
the percentage interest specified in the prospectus supplement. The report to
securityholders for any series of securities may include additional or other
information of a similar nature to that specified in the above list.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail, to each
securityholder of record at any time during such calendar year, a report setting
forth:
o the aggregate of the amounts for that calendar year reported
pursuant to the first two bullet points in the immediately
preceding list or, in the event that the recipient was a
securityholder of record only during a portion of the calendar
year, for the applicable portion of the year; and
o other customary information as may be deemed necessary or
desirable for securityholders to have in order to prepare their
tax returns.
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CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a series of securities or with respect to the assets in the related trust
fund. Credit enhancement may take the form of one or more of the following:
o a limited financial guaranty policy issued by an entity named in
the related prospectus supplement,
o the subordination of one or more classes of the securities of
that series,
o the establishment of one or more reserve accounts,
o the use of a cross-support feature,
o a pool insurance policy, bankruptcy bond, special hazard
insurance policy, surety bond, letter of credit, guaranteed
investment contract, or
o any other method of credit enhancement described in the related
prospectus supplement.
Unless otherwise specified in the related prospectus supplement, any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the securities and
interest. If losses occur which exceed the amount covered by the credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of deficiencies.
SUBORDINATION
If specified in the related prospectus supplement, protection afforded
to holders of one or more classes of the senior securities of a series by means
of the subordination feature will be accomplished by the holders of one or more
other classes of that series having a preferential right to distributions in
respect of scheduled principal, principal prepayments, interest or any
combination thereof that otherwise would have been payable to the holders of one
or more other subordinated classes of securities of that series under the
circumstances and to the extent specified in the prospectus supplement. If
specified in the related prospectus supplement, protection may also be afforded
to the holders of the senior securities of a series by:
o reducing the ownership interest of the holders of the related
subordinated securities,
o a combination of the subordination feature and reducing the
ownership interest of the subordinated securityholders, or
o as otherwise described in the related prospectus supplement.
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If specified in the related prospectus supplement, delays in receipt of
scheduled payments on the loans and losses on defaulted loans will be borne
first by the various classes of subordinated securities and thereafter by the
various classes of senior securities, in each case under the circumstances and
subject to the limitations specified in that prospectus supplement.
The related prospectus supplement may also limit the following:
o the aggregate distributions in respect of delinquent payments on
the loans over the lives of the securities or at any time,
o the aggregate losses in respect of defaulted loans which must be
borne by the subordinated securities by virtue of their
subordination, and
o the amount of the distributions otherwise distributable to the
subordinated securityholders that will be distributable to senior
securityholders on any distribution date.
If aggregate distributions in respect of delinquent payments on the loans or
aggregate losses in respect of the loans were to exceed the amount specified in
the related prospectus supplement, holders of the senior securities would
experience losses on their securities.
In addition to or in lieu of the foregoing, if specified in the related
prospectus supplement, all or any portion of distributions otherwise payable to
holders of the subordinated securities on any distribution date may instead be
deposited into one or more reserve accounts established with the trustee. The
related prospectus supplement may specify that deposits in any reserve account
may be made
o on each distribution date,
o for specified periods, or
o until the balance in the reserve account has reached a specified
amount and, following payments from the reserve account to
holders of the senior securities or otherwise, thereafter to the
extent necessary to restore the balance in the reserve account to
the specified level.
If specified in the related prospectus supplement, amounts on deposit in the
reserve account may be released to the holders of the class or classes of
securities specified in the prospectus supplement at the times and under the
circumstances specified in the prospectus supplement.
If specified in the related prospectus supplement, various classes of
senior securities and subordinated securities may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated securities, respectively, through a cross-support mechanism or
otherwise.
As among classes of senior securities and as among classes of
subordinated securities, distributions may be allocated among these classes as
follows:
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o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events or otherwise,
in each case as specified in the related prospectus supplement. As among classes
of subordinated securities, the related prospectus supplement will specify the
allocation of payments to holders of the related senior securities on account of
delinquencies or losses and the allocation payments to any reserve account.
POOL INSURANCE POLICIES
The related prospectus supplement may specify that a separate pool
insurance policy will be obtained for the pool. This policy will be issued by
the pool insurer named in the prospectus supplement. Subject to the limits
described in this section, each pool insurance policy will cover loss by reason
of default in payment on loans in the related pool in an amount equal to a
percentage, which is specified in the related prospectus supplement, of the
aggregate principal balances of the loans on the cut-off date which are not
covered as to their entire outstanding principal balances by primary mortgage
insurance policies. As more fully described in the following paragraph, the
master servicer will present claims to the pool insurer on behalf of itself, the
trustee and the securityholders. However, the pool insurance policies are not
blanket policies against loss, since claims under the policies may only be made
respecting particular defaulted loans and only upon satisfaction of the
conditions precedent described in the following paragraph. Unless otherwise
specified in the related prospectus supplement, no pool insurance policy will
cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy.
Unless otherwise specified in the related prospectus supplement, the
pool insurance policy will provide that no claims may be validly presented
unless the following conditions are satisfied:
o any required primary mortgage insurance policy is in effect for
the defaulted loan and a claim under that policy has been
submitted and settled;
o hazard insurance on the related mortgaged property has been kept
in force and real estate taxes and other protection and
preservation expenses have been paid;
o if there has been physical loss or damage to the mortgaged
property, the property has been restored to its physical
condition, reasonable wear and tear excepted, at the time of
issuance of the policy; and
o the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens except certain
permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the option
EITHER
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o to purchase the property securing the defaulted loan at a price
equal to the loan's principal balance plus accrued and unpaid
interest at the loan rate to the date of purchase plus certain
expenses incurred by the master servicer on behalf of the trustee
and securityholders, OR
o to pay the amount by which the sum of the principal balance of
the defaulted loan plus accrued and unpaid interest at the loan
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 the
related primary mortgage insurance policy.
If any property securing a defaulted 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 the pool insurance policy, the master
servicer will not be required to expend its own funds to restore the damaged
property unless it determines that
o the restoration will increase the proceeds to securityholders on
liquidation of the related loan after reimbursement to the master
servicer of its expenses, and
o the master servicer will be able to recover its expenses from
proceeds of the sale of the property or proceeds of the related
pool insurance policy or any related primary mortgage insurance
policy.
Unless otherwise specified in the related prospectus supplement, no
pool insurance policy will insure against losses sustained by reason of a
default arising, among other things, from
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or
persons involved in the origination of the loan, or
o failure to construct a mortgaged property in accordance with
plans and specifications.
Many primary mortgage insurance policies also do not insure against these types
of losses. Nevertheless, a failure of coverage attributable to one of the
foregoing events might result in a breach of the related seller's
representations and, in that event, might give rise to an obligation on the part
of the seller to purchase the defaulted loan if the breach cannot be cured. No
pool insurance policy will cover a claim in respect of a defaulted loan that
occurs when the loan's servicer, at the time of default or thereafter, was not
approved by the insurer. Many primary mortgage insurance policies also do not
cover claims in this case.
Unless otherwise specified in the related prospectus supplement, the
original amount of coverage under the pool insurance policy will be reduced over
the life of the related 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 will
47
include certain expenses incurred by the master servicer as well as accrued
interest on delinquent loans to the date of payment of the claim, unless
otherwise specified in the related prospectus supplement. Accordingly, if
aggregate net claims paid under any pool insurance policy reach the original
policy limit, coverage under that pool insurance policy will be exhausted and
any further losses will be borne by the securityholders.
The terms of any pool insurance policy relating to a pool of
Manufactured Housing Contracts or Home Improvement Contracts will be described
in the related prospectus supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related prospectus supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. These mortgage loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured by
the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time the loan was originated.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by the Department of Housing and Urban Development
(HUD), or by the master servicer or any sub-servicer, and are paid to the FHA.
The regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged property to HUD or
upon assignment of the defaulted mortgage loan to HUD. With respect to a
defaulted FHA-insured Single Family Loan, the master servicer or any
sub-servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined by the master servicer or sub-servicer or HUD that the default
was caused by circumstances beyond the mortgagor's control, the master servicer
or such sub-servicer is expected to make an effort to avoid foreclosure by
entering, if feasible, into one of a number of available forms of forbearance
plans with the mortgagor. These plans may involve the reduction or suspension of
regular mortgage payments for a specified period, with such payments to be made
up on or before the maturity date of the mortgage, or the recasting of payments
due under the mortgage up to or beyond the maturity date. In addition, when this
type of default is accompanied by certain other criteria, HUD may provide relief
by making payments to the master servicer or sub-servicer in partial or full
satisfaction of amounts due under the mortgage loan or by accepting assignment
of the loan from the master servicer or sub-servicer. Any payments made by HUD
are to be repaid by the mortgagor to HUD. With certain exceptions, at least
three full monthly installments must be due and unpaid under the mortgage loan,
and HUD must have rejected any request for relief from the mortgagor, before the
master servicer or sub-servicer may initiate foreclosure proceedings.
In most cases, HUD has the option to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash. Claims have
not been paid in
48
debentures since 1965. HUD debentures issued in satisfaction of FHA insurance
claims bear interest at the applicable HUD debentures' interest rate. The master
servicer or sub-servicer of each FHA-insured Single Family Loan will be
obligated to purchase any HUD debenture issued in satisfaction of a mortgage
loan upon default for an amount equal to the debenture's principal amount.
The amount of insurance benefits paid by the FHA generally is equal to
the entire unpaid principal amount of the defaulted mortgage loan adjusted to
reimburse the master servicer or sub-servicer for certain costs and expenses and
to deduct certain amounts received or retained by the master servicer or
sub-servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
property to HUD, the master servicer or sub-servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to the conveyance date generally only to the extent
allowed pursuant to the related forbearance plan approved by HUD. When
entitlement to insurance benefits results from assignment of the mortgage loan
to HUD, the insurance payment includes full compensation for interest accrued
and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA-insured Single Family Loan, bears interest from the date
which is 30 days after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the mortgage loan and, upon assignment,
from the date of assignment to the date of payment of the claim, in each case at
the same interest rate as the applicable HUD debenture interest rate.
Single Family Loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended, which permits a veteran, the
spouse of a veteran in certain cases, to obtain a mortgage loan guaranteed by
the VA covering financing of the purchase of a one- to four-family dwelling unit
at interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no Single Family Loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for that mortgage loan.
The maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 U.S.C. Section 1803(a), as amended. As
of November 1, 1998 the maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,570. The liability on the
guarantee is reduced or increased, pro rata, with any reduction or increase in
the amount of indebtedness, but in no event will the amount payable under the
guaranty exceed the amount of the original guaranty. The VA may, at its option
and without regard to the guaranty, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage loan upon the loan's assignment to the
VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the
master servicer or sub-servicer is, absent exceptional circumstances, authorized
to announce its intention to foreclose only when the default has continued for
three months. Generally, a claim under the guaranty is submitted after
liquidation of the mortgaged property.
49
The amount payable under the guaranty will be the percentage of the
VA-guaranteed Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that these amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related prospectus supplement, a separate special
hazard insurance policy will be obtained for the pool and will be issued by the
special hazard insurer named in the prospectus supplement. Subject to the
limitations described in the immediately following sentence, each special hazard
insurance policy will protect holders of the related securities from
o loss by reason of damage to mortgaged properties caused by
certain hazards -including earthquakes and, to a limited
extent, tidal waves and related water damage or as otherwise
specified in the prospectus supplement - not insured against
under the standard form of hazard insurance policy for the
respective states in which the mortgaged properties are
located or under a flood insurance policy if the mortgaged
property is located in a federally designated flood area,
and
o loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies.
SEE "Operative Agreements--Hazard Insurance" in this prospectus. No special
hazard insurance policy will cover losses occasioned by fraud or conversion by
the trustee or master servicer, war, insurrection, civil war, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear or chemical reaction, flood (if the
mortgaged property is located in a federally designated flood area), nuclear or
chemical contamination and certain other risks. The amount of coverage under any
special hazard insurance policy will be specified in the related prospectus
supplement. Each special hazard insurance policy will provide that no claim may
be paid unless hazard insurance and, if applicable, flood insurance on the
related mortgaged property have been kept in force and other protection and
preservation expenses have been paid.
Subject to the limitations set forth in the immediately preceding
paragraph, and unless otherwise specified in the related prospectus supplement,
each special hazard insurance policy will provide coverage where there has been
damage to property securing a foreclosed mortgage loan, and title to the
mortgaged property has been acquired by the insured, to the extent that the
damage is not covered by the hazard insurance policy or flood insurance policy,
if any, maintained by the borrower or the master servicer. In this circumstance,
the special hazard insurer will pay the LESSER of
o the cost to repair or replace the mortgaged property, and
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o upon transfer of the property to the special hazard insurer,
the unpaid principal balance of the loan at the time the
property is acquired by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim
settlement, together with certain expenses incurred by the
master servicer with respect to the property.
If the unpaid principal balance of a loan plus accrued interest and certain
servicing expenses are paid by the special hazard 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 to repair the damaged property will also reduce coverage by such
amount. So long as a pool insurance policy remains in effect, the payment by the
special hazard insurer to cover the unpaid principal balance of a loan plus
accrued interest and certain servicing expenses or to cover the cost to repair a
mortgaged property will not affect the total insurance proceeds paid to
securityholders, but will affect the relative amounts of coverage remaining
under the special hazard insurance policy and the pool insurance policy.
Since each special hazard insurance policy will be designed to permit
full recovery under the mortgage pool insurance policy in circumstances in which
recoveries would otherwise be unavailable because mortgaged properties have been
damaged by a cause not insured against by a standard hazard policy and thus
would not be restored, each operative agreement will provide that, unless
otherwise specified in the related prospectus supplement, the master servicer
will be under no obligation to maintain the special hazard insurance policy once
the related pool insurance policy has been terminated or been exhausted due to
payment of claims.
To the extent specified in the related prospectus supplement, the
master servicer may deposit in a special trust account, cash, an irrevocable
letter of credit or any other instrument acceptable to each rating agency named
in the prospectus supplement, in order to provide protection in lieu of or in
addition to that provided by a special hazard insurance policy. The amount of
any special hazard insurance policy or of the deposit to the special trust
account relating to securities may be reduced so long as the reduction will not
result in a downgrading of the rating of the securities by any rating agency
named in the prospectus supplement.
The terms of any special hazard insurance policy relating to a pool of
Manufactured Housing Contracts or Home Improvement Contracts will be described
in the related prospectus supplement.
BANKRUPTCY BONDS
If specified in the related prospectus supplement, a bankruptcy bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in the prospectus supplement. Each bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a loan or a reduction by the court of the principal
amount of a loan. The bankruptcy bond will also cover unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under any bankruptcy bond will be set
forth in the related prospectus supplement. Coverage under a bankruptcy bond may
be cancelled or reduced by the master servicer if the cancellation or reduction
would not adversely affect the then current rating of the securities by any
rating agency named in the prospectus supplement. SEE "Material Legal
51
Aspects of the Mortgage Loans--Anti-Deficiency Legislation and Other Limitations
on Lenders" in this prospectus.
To the extent specified in the related prospectus supplement, the
master servicer may deposit in a special trust account, cash, an irrevocable
letter of credit or any other instrument acceptable to each rating agency named
in the prospectus supplement, to provide protection in lieu of or in addition to
that provided by a bankruptcy bond. The amount of any bankruptcy bond or of the
deposit to the special trust account relating to the securities may be reduced
so long as the reduction would not result in a downgrading of the rating of the
securities by any rating agency named in the prospectus supplement.
The terms of any bankruptcy bond relating to a pool of Manufactured
Housing Contracts or Home Improvement Contracts will be described in the related
prospectus supplement.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the National 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 mortgage loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of a mortgage loan may be up to 40 years and the ratio of loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the National 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, generally up to 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 a loan-to-value
ratio of no more than 70% for the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. The insurance does not cover 100% of the mortgage loan
but is subject to certain deductions and certain losses of interest from the
date of the default.
RESERVE ACCOUNTS
If specified in the related prospectus supplement, credit support with
respect to a series of securities may be provided by the establishment and
maintenance of one or more reserve accounts for that series, in trust, with the
related trustee. The prospectus supplement will specify whether or not a reserve
accounts will be included in the related trust fund.
The reserve account for a series of securities will be funded in one of
the following ways:
o by a deposit of cash, U.S. Treasury securities, instruments
evidencing ownership of principal or interest payments on U.S.
Treasury securities, letters of credit, demand
52
notes, securities of deposit or a combination of these, in the
aggregate amount specified in the related prospectus supplement;
o by deposit from time to time of amounts specified in the related
prospectus supplement to which the subordinated securityholders,
if any, would otherwise be entitled; or
o in such other manner as the prospectus supplement may specify.
Any amounts on deposit in the reserve account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
permitted investments. Unless otherwise specified in the related prospectus
supplement, "permitted investments" will include obligations of the United
States and certain of its agencies, certificates of deposit, certain commercial
paper, time deposits and bankers acceptances sold by eligible commercial banks
and certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the trustee,
the letter of credit will be irrevocable. Unless otherwise specified in the
related prospectus supplement, any instrument deposited in a reserve account
will name the trustee, in its capacity as trustee for the securityholders, as
beneficiary and will be issued by an entity acceptable to each rating agency
named in the prospectus supplement. Additional information with respect to
instruments deposited in the reserve account will be set forth in the related
prospectus supplement.
Any amounts deposited, and payments on instruments deposited, in a
reserve account will be available for withdrawal from the reserve account for
distribution to securityholders, for the purposes, in the manner and at the
times specified in the related prospectus supplement.
CROSS SUPPORT
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust fund may be evidenced
by separate classes of securities. In this case, credit support may be provided
by a cross support feature which requires that distributions be made with
respect to securities evidencing a beneficial ownership interest in, or secured
by, other asset groups within the same trust fund. The related prospectus
supplement for a series which includes a cross support feature will describe the
manner and conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two or
more related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided and the application of the
coverage to the identified trust funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
If specified in the related prospectus supplement, a trust fund may
also include insurance, guaranties, surety bonds, letters of credit or similar
arrangements for the following purposes:
53
o to maintain timely payments or provide additional protection
against losses on the assets included in the trust fund,
o to pay administrative expenses, or
o to establish a minimum reinvestment rate on the payments made in
respect of the assets included in the trust fund or principal
payment rate on the assets.
These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the prospectus supplement.
FINANCIAL INSTRUMENTS
If specified in the related prospectus supplement, the trust fund may
include one or more swap arrangements or other financial instruments that are
intended to meet the following goals:
o to convert the payments on some or all of the assets from fixed
to floating payments, or from floating to fixed, or from floating
based on a particular index to floating based on another index;
o to provide payments in the event that any index rises above or
falls below specified levels; or
o to provide protection against interest rate changes, certain
types of losses, including reduced market value, or other payment
shortfalls to one or more classes of the related series.
If a trust fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the certificates
will be affected primarily by the amount and timing of principal payments
received on or in respect of the assets included in the related trust fund. The
original terms to maturity of the loans in a given pool will vary depending upon
the types of loans included. Each prospectus supplement will contain information
with respect to the types and maturities of the loans in the related pool.
Unless otherwise specified in the related prospectus supplement, loans may be
prepaid, without penalty, in full or in part at any time. Multifamily Loans may
prohibit prepayment for a specified period after origination, may prohibit
partial prepayments entirely, and may require the payment of a prepayment
penalty upon prepayment in full or in part. The prepayment experience of the
loans in a pool will affect the life of the related series of securities.
54
The rate of prepayments on the loans cannot be predicted. A number of
factors, including homeowner mobility, economic conditions, the presence and
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds may affect the prepayment experience of loans.
Some of these factors, as well as other factors including limitations on
prepayment and the relative tax benefits associated with the ownership of
income-producing real property, may affect the prepayment experience of
Multifamily Loans.
Home Equity Loans and Home Improvement Contracts have been originated
in significant volume only during the past few years and neither depositor is
aware of any publicly available studies or statistics on the rate of prepayment
of these types of loans. Generally, Home Equity Loans and Home Improvement
Contracts are not viewed by borrowers as permanent financing. Accordingly, these
loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because Home Equity Loans that are revolving credit
line loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgages. The prepayment
experience of the related trust fund may also be affected by the frequency and
amount of any future draws on any revolving credit line loans. Other factors
that might be expected to affect the prepayment rate of a pool of Home Equity
Loans or Home Improvement Contracts include the amounts of, and interest rates
on, the underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and junior mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles. Accordingly,
these types of loans may experience a higher rate of prepayment than traditional
fixed-rate mortgage loans. In addition, any future limitations on the right of
borrowers to deduct interest payments on Home Equity Loans for federal income
tax purposes may further increase the rate of prepayments of these loans.
Collections on Home Equity Loans that are revolving credit line loans
may vary because, among other things, borrowers may
o make payments during any month as low as the minimum monthly
payment for that month or, during the interest-only period for
revolving credit line loans and, in more limited circumstances,
closed-end loans, as to which an interest-only payment option has
been selected, the interest and the fees and charges for that
month; or
o make payments as high as the entire outstanding principal balance
plus accrued interest and related fees and charges.
It is possible that borrowers may fail to make the required periodic payments.
In addition, collection on these loans may vary due to seasonal purchasing and
the payment habits of borrowers.
Unless otherwise provided in the related prospectus supplement, all
conventional loans other than Multifamily Loans will contain due-on-sale
provisions permitting the mortgagee or holder of the contract to accelerate the
maturity of the related loan upon the sale or certain other transfers of the
related mortgaged property by the borrower. As described in the related
prospectus supplement, conventional Multifamily Loans may contain due-on-sale
provisions,
55
due-on-encumbrance provisions or both. Loans insured by the FHA, and loans
partially guaranteed by the VA, are assumable with the consent of the FHA and
the VA, respectively. Thus, the rate of prepayments of these loans may be lower
than that of conventional mortgage loans bearing comparable interest rates.
Unless otherwise provided in the related prospectus supplement, the master
servicer generally will enforce any due-on-sale or due-on-encumbrance clause, to
the extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the mortgaged property
and reasonably believes that it is entitled to do so under applicable law.
However, the master servicer will not take any enforcement action that would
impair or threaten to impair any recovery under any related insurance policy.
SEE "Operative Agreements--Collection Procedures" and "Material Legal Aspects of
the Mortgage Loans" in this prospectus for a description of certain provisions
of each operative agreement and certain legal matters that may affect the
prepayment experience of the loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, prepayment rates may be influenced by
a variety of economic, geographic, social and other factors, including changes
in housing needs, job transfers, unemployment and servicing decisions. In
general, however, if prevailing rates fall significantly below the loan rate
borne by a loan, that loan is likely to be subject to a higher prepayment rate
than would be the case if prevailing interest rates remain at or above its rate.
Conversely, if prevailing interest rates rise appreciably above the loan rate
borne by a loan, that loan is likely to experience a lower prepayment rate than
would be the case if prevailing rates remain at or below its loan rate. However,
there can be no assurance that these generalities will hold true in particular
cases. The rate of prepayment of Multifamily Loans may also be affected by other
factors including loan terms including the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment changes, relative
economic conditions in the area where the mortgaged properties are located, the
quality of management of the mortgaged properties and possible changes in tax
laws.
When a loan is prepaid in full, the borrower is charged interest on the
principal amount of the loan only for the number of days in the month actually
elapsed up to the date of the prepayment rather than for a full month. Unless
otherwise specified in the related prospectus supplement, the effect of a
prepayment in full will be to reduce the amount of interest passed through in
the following month to securityholders, because interest on the principal
balance of the prepaid loan will be paid only to the date of prepayment. Partial
prepayments in a given month may be applied to the outstanding principal
balances of the prepaid loans either on the first day of the month of receipt or
of the month following receipt. In the latter case, partial prepayments will not
reduce the amount of interest passed through in that month. Unless otherwise
specified in the related prospectus supplement, neither prepayments in full nor
partial prepayments will be passed through until the month following receipt.
Prepayment charges collected with respect to Multifamily Loans will be
distributed to securityholders, or to other persons entitled to them, as
described in the related prospectus supplement.
If so specified in the related prospectus supplement, the master
servicer will be required to remit to the trustee, with respect to each loan in
the related trust as to which a principal prepayment in full or a principal
payment which is in excess of the scheduled monthly payment and is not intended
to cure a delinquency was received during any due period, an amount, from
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and to the extent of amounts otherwise payable to the master servicer as
servicing compensation, equal to the EXCESS, if any, of
o 30 days' interest on the principal balance of the related loan at
the loan rate net of the annual rate at which the master
servicer's servicing fee accrues, OVER
o the amount of interest actually received on that loan during the
due period, net of the master servicer's servicing fee.
If the rate at which interest is passed through to the holders of
securities of a series is calculated on a loan by loan basis, disproportionate
principal prepayments with respect to loans bearing different loan rates will
affect the yield on the securities. In general, the effective yield to
securityholders will be slightly lower than the yield otherwise produced by the
applicable security pass-through rate and purchase price because, while interest
generally will accrue on each loan from the first day of the month, the
distribution of interest generally will not be made earlier than the month
following the month of accrual.
Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any other person named in the related
prospective supplement may have the option to purchase the assets of a trust
fund to effect early retirement of the related series of securities. SEE
"Operative Agreements--Termination; Optional Termination; Optional Calls" in
this prospectus.
Factors other than those identified in this prospectus and in the
related prospectus supplement could significantly affect principal prepayments
at any time and over the lives of the securities. The relative contribution of
the various factors affecting prepayment may also vary from time to time. There
can be no assurance as to the rate of payment of principal of trust fund assets
at any time or over the lives of the securities.
The prospectus supplement relating to a series of securities will
discuss in greater detail the effect of the rate and timing of principal
payments including prepayments, delinquencies and losses on the yield, weighted
average lives and maturities of the securities.
In the event that a receiver, bankruptcy trustee, debtor in possession
or similar entity (each, an "insolvency trustee") is appointed with respect to a
seller due to its insolvency or a seller becomes a debtor under the federal
Bankruptcy Code or any similar insolvency law, the insolvency trustee may
attempt to characterize the transfer of the related mortgage loans from the
seller to the depositor as a pledge to secure a financing rather than as a sale.
In the event that this attempt were successful, the insolvency trustee might
elect, among other remedies, to accelerate payment of the related securities and
liquidate the related loans, with each securityholder being entitled to receive
its allocable share of the principal balance of the loans, together with its
allocable share of interest on the loans at the applicable pass-through rate, or
weighted average "strip rate" as defined in the related prospectus supplement,
as the case may be, to the date of payment. In this event, the related
securityholders might incur reinvestment losses with respect to principal
received and investment losses attendant to the liquidation of the loans and the
resulting early retirement of the related security. In addition, certain delays
in distributions might be experienced by the securityholders in connection with
any such insolvency proceedings.
57
OPERATIVE AGREEMENTS
Set forth below is a summary of the material provisions of each
operative agreement that are not described elsewhere in this prospectus. This
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of each operative agreement applicable
to a particular series of certificates. Where particular provisions or terms
used in the operative agreements are referred to, those provisions or terms are
as specified in the agreements. Except as otherwise specified, the operative
agreements described in this prospectus contemplate a trust fund that is
comprised of loans. Although an agreement governing a trust fund that consists
of Agency Securities or Private Label Securities may contain provisions that are
similar to those described below, they will be described more fully in the
related prospectus supplement.
ASSIGNMENT OF TRUST FUND ASSETS
ASSIGNMENT OF THE TRUST FUND LOANS. When the securities of a series are
issued, the depositor named in the prospective supplement will cause the loans
comprising the related trust fund to be assigned to the trustee, together with
all principal and interest received by or on behalf of the depositor with
respect to those loans after the cut-off date, other than principal and interest
due on or before the cut-off date and other than any retained interest specified
in the related prospectus supplement. Concurrently with this assignment, the
trustee will deliver the securities to the depositor in exchange for the loans.
Each loan will be identified in a schedule appearing as an exhibit to the
related agreement. The schedule will include information as to the outstanding
principal balance of each loan after application of payments due on the cut-off
date, as well as information regarding the loan rate or APR, the current
scheduled monthly payment of principal and interest, the maturity of the loan,
its loan-to-value ratio or combined loan-to-value ratio at origination and
certain other information.
In addition, the depositor will deliver to the trustee or a custodian
the following items in connection with each loan in the related trust fund:
o the original mortgage note or contract, endorsed without recourse
in blank or to the order of the trustee;
o in the case of Single Family Loans, Home Equity Loans or
Multifamily Loans, the mortgage, deed of trust or similar
instrument (each, a "mortgage") with evidence of recording
indicated on the mortgage; however, in the case of any mortgage
not returned from the public recording office, the depositor will
deliver or cause to be delivered a copy of the mortgage together
with a certificate stating that the original mortgage was
delivered to the recording office;
o in the case of a contract, other than an unsecured contract, the
security interest in the mortgaged property securing the
contract;
o an assignment of the mortgage or contract to the trustee, which
assignment will be in recordable form in the case of a mortgage
assignment; and
58
o any other security documents as may be specified in the related
prospectus supplement, including those relating to any senior
lienholder interests in the related mortgaged property.
Unless otherwise specified in the related prospectus supplement, the
depositor will promptly cause the assignments of any Single Family Loan, Home
Equity Loan and Multifamily Loan to be recorded in the appropriate public office
for real property records, except in states in which, in the opinion of counsel
acceptable to the trustee, recording is not required to protect the trustee's
interest in the loans against the claim of any subsequent transferee or any
successor to, or creditor of, the depositor or the originator of the loans.
Unless otherwise specified in the related prospectus supplement, the depositor
will promptly make or cause to be made an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the trustee's
ownership of the contracts.
With respect to any loans which are cooperative loans, the depositor
will deliver the following items to the trustee:
o the related original cooperative note endorsed, without recourse,
in blank or to the order of the trustee,
o the original security agreement,
o the proprietary lease or occupancy agreement,
o the recognition agreement,
o an executed financing agreement and the relevant stock
certificate,
o related blank stock powers, and
o any other document specified in the related prospectus
supplement.
The depositor will cause to be filed in the appropriate office an assignment and
a financing statement evidencing the trustee's security interest in each
cooperative loan.
The trustee or custodian will review the mortgage loan documents, upon
receipt, within the time period specified in the related prospectus supplement.
The trustee will hold the documents in trust for the benefit of the
securityholders. Unless otherwise specified in the related prospectus
supplement, if any of these documents are found to be missing or defective in
any material respect, the trustee or custodian will notify the master servicer
and the depositor, and the master servicer will notify the related seller. If
the seller cannot cure the omission or defect within a specified member of days
after receipt of notice, the seller will be obligated either to purchase the
loan from the trustee or to substitute a qualified substitute loan for the
defective loan. There can be no assurance that a seller will fulfill this
obligation. Although the master servicer may be obligated to enforce the
seller's obligation to the extent described in this prospectus under "Mortgage
Loan Program--Representations by Sellers; Repurchases", neither the master
servicer nor the depositor will be obligated to purchase the mortgage loan if
the seller
59
defaults on its obligation, unless the breach also constitutes a breach of the
representations or warranties of the master servicer or the depositor, as the
case may be. Unless otherwise specified in the related prospectus supplement,
the seller's obligation to cure, purchase or substitute constitutes the sole
remedy available to the securityholders or the trustee for the omission of, or a
material defect in, a constituent loan document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
The master servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the agreement. Upon a breach of any representation of the
master servicer which materially and adversely affects the interests of the
securityholders in a loan, the master servicer will be obligated either to cure
the breach in all material respects or to purchase the loan. Unless otherwise
specified in the related prospectus supplement, this obligation to cure,
purchase or substitute constitutes the sole remedy available to the
securityholders or the trustee for a breach of representation by the master
servicer.
Notwithstanding the provisions of the foregoing two paragraphs, with
respect to a trust fund for which a REMIC election is to be made, unless the
related prospectus supplement otherwise provides, no purchase or substitution of
a loan will be made if the purchase or substitution would result in a prohibited
transaction tax under the Internal Revenue Code.
ASSIGNMENT OF AGENCY SECURITIES. The applicable depositor will cause
any Agency Securities included in a trust fund to be registered in the name of
the trustee or its nominee, and the trustee concurrently will execute,
countersign and deliver the securities. Each Agency Security will be identified
in a schedule appearing as an exhibit to the related pooling and servicing
agreement, which will specify as to each Agency Security its original principal
amount, outstanding principal balance as of the cut-off date, annual
pass-through rate, if any, and the maturity date.
ASSIGNMENT OF PRIVATE LABEL SECURITIES. The applicable depositor will
cause any Private Label Securities included in a trust fund to be registered in
the name of the trustee. The trustee or custodian will have possession of any
Private Label Securities that are in certificated form. Unless otherwise
specified in the related prospectus supplement, the trustee will not be in
possession, or be assignee of record, of any assets underlying the Private Label
Securities. SEE "The Trust Fund--Private Label Securities." The Private Label
Securities will be identified in a schedule appearing as an exhibit to the
related agreement, which will specify the original principal amount, the
outstanding principal balance as of the cut-off date, the annual pass-through
rate or interest rate, the maturity date and other pertinent information for the
Private Label Securities conveyed to the trustee.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each sub-servicer servicing a loan pursuant to a sub-servicing
agreement will establish and maintain a subservicing account which meets the
requirements and is otherwise acceptable
60
to the master servicer. A sub-servicing account must be established with a
Federal Home Loan Bank or with a depository institution (including the
sub-servicer if it is a depository institution), the accounts in which are
insured by the Federal Deposit Insurance Corporation (FDIC). If a sub-servicing
account is maintained at an institution that is a Federal Home Loan Bank or an
FDIC-insured institution and, in either case, the amount on deposit in the
sub-servicing account exceeds the FDIC insurance coverage amount, then such
excess amount must be remitted to the master servicer within one business day
after receipt. In addition, the sub-servicer must maintain a separate account
for escrow and impound funds relating to the loans. Each sub-servicer is
required to deposit into its sub-servicing account on a daily basis all amounts
that it receives in respect of the loans described immediately below under
"--Sub-Servicing by Sellers", less its servicing or other compensation. On or
before the date specified in the sub-servicing agreement, the sub-servicer will
remit to the master servicer or the trustee all funds held in the sub-servicing
account with respect to the loans that are required to be remitted. The
sub-servicer is also required to advance, on the scheduled remittance date, an
amount corresponding to any monthly installment of principal and interest, less
its servicing or other compensation, on any loan the payment of which was not
received from the borrower. Unless otherwise specified in the related prospectus
supplement, this obligation of each sub-servicer to advance continues up to and
including the first of the month following the date on which the related
mortgaged property is sold at a foreclosure sale or is acquired on behalf of the
securityholders by deed in lieu of foreclosure, or until the related loan is
liquidated.
The master servicer will establish and maintain with respect to the
related trust fund a security account which is a separate account or accounts
for the collection of payments on the assets in the trust fund. Unless otherwise
specified in the related prospectus supplement, each security account shall meet
one of the requirements listed below.
o It must be maintained with a depository institution the debt
obligations of which (or in the case of a depository institution
that is the principal subsidiary of a holding company, the
obligations of which) are rated in one of the two highest rating
categories by each rating agency rating(s) named in the
prospectus supplement.
o It must be an account the deposits in which are fully insured by
the FDIC.
o It must be an account or accounts the deposits in which are
insured by the FDIC to its established limits and the uninsured
deposits in which are otherwise secured such that, as evidenced
by an opinion of counsel, the securityholders have a claim with
respect to the funds in the security account or a perfected first
priority security interest against any collateral securing those
funds that is superior to the claims of any other depositors or
general creditors of the depository institution with which the
security account is maintained.
o It must be an account otherwise acceptable to each rating agency
named in the prospectus supplement.
The collateral eligible to secure amounts in the security account is limited to
United States government securities and other high-quality permitted
investments. A security account may be maintained as an interest-bearing account
or the funds held in the account may be invested
61
pending each succeeding distribution date in permitted investments. Unless
otherwise specified in the related prospectus supplement, the master servicer or
its designee will be entitled to receive any interest or other income earned on
funds in the security account as additional compensation and will be obligated
to deposit in the security account the amount of any loss immediately as
realized. The security account may be maintained with the master servicer or
with a depository institution that is an affiliate of the master servicer,
provided that the master servicer or its affiliate, as applicable, meets the
standards set forth above.
On a daily basis, the master servicer will deposit in the certificate
account for each trust fund, to the extent applicable and unless otherwise
specified in the related prospectus supplement and provided in the pooling and
servicing agreement, the following payments and collections received, or
advances made, by the master servicer or on its behalf subsequent to the cut-off
date, other than payments due on or before the cut-off date and exclusive of any
amounts representing a retained interest:
o all payments on account of principal, including principal
prepayments and, if specified in the related prospectus
supplement, prepayment penalties, on the loans;
o all payments on account of interest on the loans, net of
applicable servicing compensation;
o Insurance Proceeds;
o Liquidation Proceeds;
o any net proceeds received on a monthly basis with respect to any
properties acquired on behalf of the securityholders by
foreclosure or deed in lieu of foreclosure;
o all proceeds of any loan or mortgaged property purchased by the
master servicer, the depositor, any sub-servicer or any seller as
described in this prospectus under "Loan Program--Representations
by Sellers; Repurchases or Substitutions" or "--Assignment of
Trust Fund Assets" above and all proceeds of any loan repurchased
as described in this prospectus under "--Termination; Optional
Termination" below;
o all payments required to be deposited in the security account
with respect to any deductible clause in any blanket insurance
policy described in this prospectus under "--Hazard Insurance"
below;
o any amount required to be deposited by the master servicer in
connection with losses realized on investments of funds held in
the security account made for the benefit of the master servicer;
and
o all other amounts required to be deposited in the security
account pursuant to the related agreement.
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PRE-FUNDING ACCOUNT
If so provided in the related prospectus supplement, the master
servicer will establish and maintain a pre-funding account in the name of the
trustee on behalf of the related securityholders into which the applicable
depositor will deposit the pre-funded amount on the related closing date. The
trustee will use the pre-funded amount to purchase subsequent loans from the
depositor from time to time during the funding period which generally runs from
the closing date to the date specified in the related prospectus supplement. At
the end of the funding period, any amounts remaining in the pre-funding account
will be distributed to the related securityholders in the manner and priority
specified in the related prospectus supplement as a prepayment of principal of
the related securities.
SUB-SERVICING OF LOANS
Each seller of a loan or any other servicing entity may act as the
sub-servicer for that loan pursuant to a sub-servicing agreement which will not
contain any terms inconsistent with the related operative agreement. While each
sub-servicing agreement will be a contract solely between the master servicer
and the related sub-servicer, the operative agreement pursuant to which a series
of securities is issued will provide that, the trustee or any successor master
servicer must recognize the sub-servicer's rights and obligations under the
sub-servicing agreement, if for any reason the master servicer for that series
is no longer the master servicer of the related loans.
With the approval of the master servicer, a sub-servicer may delegate
its servicing obligations to third-party servicers, but the sub-servicer will
remain obligated under its sub-servicing agreement. Each sub-servicer will be
required to perform the customary functions of a servicer of mortgage loans.
These functions generally include
o collecting payments from borrowers and remitting collections to
the master servicer;
o maintaining hazard insurance policies as described in this
prospectus and in any related prospectus supplement, and filing
and settling claims under those policies, subject in certain
cases to the master servicer's right to approve settlements in
advance;
o maintaining borrower escrow or impoundment accounts for payment
of taxes, insurance and other items required to be paid by the
borrower under the related loan;
o processing assumptions or substitutions, although, unless
otherwise specified in the related prospectus supplement, the
master servicer is generally required to enforce due-on-sale
clauses to the extent their enforcement is permitted by law and
would not adversely affect insurance coverage;
o attempting to cure delinquencies;
o supervising foreclosures;
63
o inspecting and managing mortgaged properties under certain
circumstances;
o maintaining accounting records relating to the loans; and
o to the extent specified in the related prospectus supplement,
maintaining additional insurance policies or credit support
instruments and filing and settling claims under them.
A sub-servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on loans, as described more fully in this
prospectus under "--Payments on Loans; Deposits to Security Account" above, and
in respect of certain taxes and insurance premiums not paid on a timely basis by
borrowers.
As compensation for its servicing duties, each sub-servicer will be
entitled to a monthly servicing fee, to the extent the scheduled payment on the
related loan has been collected, in the amount set forth in the related
prospectus supplement. Each sub-servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the note or related instruments. Each sub-servicer will be reimbursed by the
master servicer for certain expenditures which it makes, generally to the same
extent the master servicer would be reimbursed under the agreement. The master
servicer may purchase the servicing of loans if the sub-servicer elects to
release the servicing of the loans to the master servicer. SEE "--Servicing and
Other Compensation and Payment of Expenses" below.
Each sub-servicer may be required to agree to indemnify the master
servicer for any liability or obligation sustained by the master servicer in
connection with any act or failure to act by the sub-servicer in its servicing
capacity. Each sub-servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the master servicer.
Each sub-servicer will be required to service each loan pursuant to the
terms of its sub-servicing agreement for the entire term of the loan, unless the
sub-servicing agreement is earlier terminated by the master servicer or unless
servicing is released to the master servicer. The master servicer may terminate
a sub-servicing agreement without cause, upon written notice to the sub-servicer
in the manner specified in that sub-servicing agreement.
The master servicer may agree with a sub-servicer to amend a
sub-servicing agreement or, upon termination of the sub-servicing agreement, the
master servicer may act as servicer of the related loans or enter into new
sub-servicing agreements with other sub-servicers. If the master servicer acts
as servicer, it will not assume liability for the representations and warranties
of the sub-servicer which it replaces. Each sub-servicer must be a seller or
meet the standards for becoming a seller or have such servicing experience as to
be otherwise satisfactory to the master servicer and the depositor. The master
servicer will make reasonable efforts to have the new sub-servicer assume
liability for the representations and warranties of the terminated sub-servicer,
but no assurance can be given that an assumption of liability will occur. In the
event of an assumption of liability, the master servicer may in the exercise of
its business judgment, release the terminated sub-servicer from liability in
respect of such representations and warranties. Any amendments to a
sub-servicing agreement or new sub-servicing agreements may
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contain provisions different from those which are in effect in the original
sub-servicing agreement. However, each sub-servicing agreement will provide that
any amendment or new agreement may not be inconsistent with or violate the
original sub-servicing agreement.
COLLECTION PROCEDURES
The master servicer, directly or through one or more sub-servicers,
will make reasonable efforts to collect all payments called for under the loans
and will, consistent with each agreement and any mortgage pool insurance policy,
primary mortgage insurance policy, FHA insurance, VA guaranty and bankruptcy
bond or alternative arrangements, follow such collection procedures as are
customary with respect to loans that are comparable to the loans included in the
related trust fund. Consistent with the preceding sentence, the master servicer
may, in its discretion,
o waive any assumption fee, late payment or other charge in
connection with a loan; and
o to the extent not inconsistent with the coverage of the loan by a
pool insurance policy, primary mortgage insurance policy, FHA
insurance, VA guaranty or bankruptcy bond or alternative
arrangements, arrange with the borrower a schedule for the
liquidation of delinquencies running for no more than 125 days
after the applicable due date for each payment.
Both the sub-servicer and the master servicer remain obligated to make advances
during any period when an arrangement of this type is in effect.
Unless otherwise specified in the related prospectus supplement, in any
case in which property securing a loan has been, or is about to be, conveyed by
the borrower, the master servicer will, to the extent it has knowledge of the
conveyance or proposed conveyance, exercise its rights to accelerate the
maturity of the loan under any applicable due-on-sale clause, but only if the
exercise of its rights is permitted by applicable law and will not impair or
threaten to impair any recovery under any primary mortgage insurance policy. If
these conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce the due-on-sale clause, or if the loan is
insured by the FHA or partially guaranteed by the VA, the master servicer will
enter into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed. Pursuant to the assumption
agreement, the transferee of the property becomes liable for repayment of the
loan and, to the extent permitted by applicable law, the original borrower also
remains liable on the loan. Any fee collected by or on behalf of the master
servicer for entering into an assumption agreement will be retained by or on
behalf of the master servicer as additional servicing compensation. In the case
of Multifamily Loans and unless otherwise specified in the related prospectus
supplement, the master servicer will agree to exercise any right it may have to
accelerate the maturity of a Multifamily Loan to the extent it has knowledge of
any further encumbrance of the related mortgaged property effected in violation
of any applicable due-on-encumbrance clause. SEE "Material Legal Aspects of the
Mortgage Loans--Due-on-Sale Clauses" in this prospectus. In connection with any
assumption, the terms of the original loan may not be changed.
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With respect to cooperative loans, any prospective purchaser of a
cooperative unit will generally have to obtain the approval of the board of
directors of the relevant cooperative before purchasing the shares and acquiring
rights under the related proprietary lease or occupancy agreement. SEE "Material
Legal Aspects of the Loans" in this prospectus. This approval is usually based
on the purchaser's income and net worth and numerous other factors. Although the
cooperative's approval is unlikely to be unreasonably withheld or delayed, the
need to acquire approval could limit the number of potential purchasers for
those shares and otherwise limit the trust fund's ability to sell and realize
the value of those shares.
In general, a "tenant-stockholder," as defined in section 216(b)(2) of
the Internal Revenue 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 certain interest expenses
and real estate taxes allowable as a deduction under section 216(a) of the Code
to the cooperative corporation under sections 163 and 164 of the Code. In order
for a corporation to qualify under Section 216(b)(1) of the Code for the taxable
year in which these items are allowable as a deduction to the corporation,
section 216(b)(1) requires, among other things, that at least 80% of the gross
income of the cooperative 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 particular
cooperative loans will qualify under this section for any given year. In the
event that a cooperative fail to qualify for one or more years, the value of the
collateral securing the related cooperative loan 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 such a failure would be
permitted to continue over a period of years appears remote.
HAZARD INSURANCE
The master servicer will require each borrower to maintain a hazard
insurance policy providing for no less than the coverage of the standard form of
fire insurance policy with extended coverage customary for the type of mortgaged
property in the state where the property is located. This coverage will be in an
amount not less than the replacement value of the improvements or manufactured
home securing the loan or the principal balance owing on the loan, whichever is
less. All amounts collected by the master servicer under any hazard policy will
be deposited in the related security account, except for amounts to be applied
to the restoration or repair of the mortgaged property or released to the
borrower in accordance with the master servicer's normal servicing procedures.
In the event that the master servicer maintains a blanket policy insuring
against hazard losses on all the loans comprising part of a trust fund, it will
conclusively be deemed to have satisfied its obligation to maintain hazard
insurance. A blanket policy may contain a deductible clause, in which case the
master servicer will be required to deposit into the related security account
from its own funds the amounts which would have been deposited in the security
account but for the deductible clause. Any additional insurance coverage for
mortgaged properties with respect to a pool of Multifamily Loans will be
specified in the related prospectus supplement.
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In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements or manufactured
home securing a loan by fire, lightning, explosion, smoke, windstorm and hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Although the policies relating to the loans may
have been underwritten by different insurers under different state laws in
accordance with different applicable forms and therefore may not contain
identical terms and conditions, the basic policy terms are dictated by
respective state laws. In addition, most 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 mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the mortgaged property
securing a loan is located in a federally designated special flood area at the
time of origination, the master servicer will require the borrower to obtain and
maintain flood insurance.
The hazard insurance policies covering mortgaged properties typically
contain a clause which have the effect of requiring the insured at all times to
carry insurance of a specified percentage -generally 80% to 90% - of the full
replacement value of the mortgaged property in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of
o the actual cash value (generally defined as replacement cost at
the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed, generally defined to equal
replacement cost at the time and place of the loss less physical
depreciation; and
o such 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 the master servicer may cause to be
maintained on the improvements securing the loans will decline as the principal
balances owing on the loans decrease, and since improved real estate generally
has appreciated in value over time in the past, the effect of this requirement
may be that, in the event of a partial loss, hazard insurance proceeds will be
insufficient to restore the damaged property fully. If specified in the related
prospectus supplement, a special hazard insurance policy will be obtained to
insure against certain of the uninsured risks described. SEE "Credit
Enhancement--Special Hazard Insurance Policies" in this prospectus.
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's cooperative dwelling or the
cooperative's building could significantly reduce
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the value of the collateral securing the cooperative loan to the extent not
covered by other credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
PRIMARY MORTGAGE INSURANCE POLICIES. To the extent specified in the
related prospectus supplement, the master servicer will maintain, or cause each
sub-servicer to maintain, in full force and effect, a primary mortgage insurance
policy with regard to each loan for which coverage is required. The master
servicer will not cancel or refuse to renew any primary mortgage 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 agreement unless the
primary mortgage insurance policy that replaces the cancelled or nonrenewed
policy is maintained with an insurer whose claims-paying ability is sufficient
to maintain the current rating of the classes of securities of that series by
each rating agency named in the related prospectus supplement.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a primary mortgage insurance policy
covering a loan will consist of the insured percentage of the unpaid principal
amount of the covered loan, accrued and unpaid interest thereon and
reimbursement of certain expenses, less the following amounts:
o all rents or other payments collected or received by the insured
other than the proceeds of hazard insurance that are derived from
or in any way related to the mortgaged property,
o hazard insurance proceeds in excess of the amount required to
restore the mortgaged property and which have not been applied to
the payment of the loan,
o amounts expended but not approved by the issuer of the related
primary mortgage insurance policy,
o claim payments previously made by the primary insurer, and
o unpaid premiums.
Primary mortgage insurance policies generally reimburse losses
sustained by reason of defaults in payments by borrowers. Primary mortgage
insurance policies do not insure against, and exclude from coverage, a loss
sustained by reason of a default arising from or involving the following
matters, among others:
o fraud or negligence in origination or servicing of the loan,
including misrepresentation by the originator, borrower or other
persons involved in the origination of the loan,
o failure to construct the related mortgaged property in accordance
with specified plans,
o physical damage to the mortgaged property and
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o lack of approval by the primary mortgage insurance policy insurer
of the master servicer or sub-servicer to act as servicer of the
loan.
RECOVERIES UNDER A PRIMARY MORTGAGE INSURANCE POLICY. As conditions
precedent to the filing or payment of a claim under a primary mortgage insurance
policy covering a loan, the insured will be required
o to advance or discharge all hazard insurance policy premiums;
o to advance
- real estate property taxes,
- all expenses required to maintain the related mortgaged
property in at least as good a condition as existed at the
effective date of the policy, ordinary wear and tear
excepted,
- mortgaged property sales expenses,
- any outstanding liens on the mortgaged property (as defined
in the policy) and
- foreclosure costs, including court costs and reasonable
attorneys' fees,
in each case as necessary and approved in advance by the primary
mortgage insurance policy insurer;
o in the event of any physical loss or damage to the mortgaged
property, to have the mortgaged property restored and
repaired to at least as good a condition as existed at the
effective date of the policy, ordinary wear and tear
excepted; and
o to tender to the primary mortgage insurance policy carrier
good and merchantable title to and possession of the
mortgaged property.
In those cases in which a loan is serviced by a sub-servicer, the
sub-servicer, on behalf of itself, the trustee and securityholders, will present
claims to the primary mortgage insurance policy carrier, and all collections
under the policy will be deposited in the sub-servicing account. In all other
cases, the master servicer, on behalf of itself, the trustee and the
securityholders, will present claims to the carrier of each primary mortgage
insurance policy and will take such reasonable steps as are necessary to receive
payment or to permit recovery under the policy with respect to defaulted loans.
As set forth above, all collections by or on behalf of the master servicer under
any primary mortgage insurance policy and, when the mortgaged property has not
been restored, the hazard insurance policy are to be deposited in the security
account, subject to withdrawal as previously described.
If the mortgaged property securing a defaulted loan is damaged and any
proceeds from the related hazard insurance policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any
related primary mortgage insurance policy, the master
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servicer is not required to expend its own funds to restore the damaged property
unless it determines that
o the restoration will increase the proceeds to securityholders
upon liquidation of the loan after reimbursement of the master
servicer for its expenses, and
o the master servicer will be able to recover its expenses from
related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted loan is not available under the primary
mortgage insurance policy for the reasons set forth in the preceding paragraph,
or if the defaulted loan is not covered by a primary mortgage insurance policy,
the master servicer will be obligated to follow such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
loan. If the proceeds of any liquidation of the related mortgaged property are
less than the principal balance of the loan plus accrued interest that is
payable to securityholders, the trust fund will realize a loss in the amount of
that difference plus the amount of expenses that it incurred in connection with
the liquidation and that are reimbursable under the agreement. In the unlikely
event that proceedings result in a total recovery which, after reimbursement to
the master servicer of its expenses, is in excess of the principal balance of
the defaulted loan plus accrued interest that is payable to securityholders, the
master servicer will be entitled to withdraw or retain from the security account
amounts representing its normal servicing compensation with respect to that loan
and, unless otherwise specified in the related prospectus supplement, amounts
representing the balance of the excess amount, exclusive of any amount required
by law to be forwarded to the related borrower , as additional servicing
compensation.
If the master servicer or its designee recovers Insurance Proceeds
which, when added to any related Liquidation Proceeds and after deduction of
certain expenses reimbursable to the master servicer, exceed the principal
balance of the related loan plus accrued interest that is payable to
securityholders, the master servicer will be entitled to withdraw or retain from
the security account amounts representing its normal servicing compensation with
respect to that loan. In the event that the master servicer has expended its own
funds to restore the damaged mortgaged property and those funds have not been
reimbursed under the related hazard insurance policy, the master servicer will
be entitled to withdraw from the security account, out of related Liquidation
Proceeds or Insurance Proceeds, an amount equal to the expenses that it
incurred, in which event the trust fund may realize a loss up to the amount of
those expenses. Since Insurance Proceeds cannot exceed deficiency claims and
certain expenses incurred by the master servicer, no payment or recovery will
result in a recovery to the trust fund that exceeds the principal balance of the
defaulted loan together with accrued interest. SEE "Credit Enhancement" in this
prospectus supplement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The master servicer's primary servicing compensation with respect to a
series of securities will come from the payment to it each month, out of each
interest payment on a loan, of an amount equal to the annual percentage
specified in the related prospectus supplement of the outstanding principal
balance of that loan. Since the master servicer's primary compensation is a
percentage of the outstanding principal balance of each mortgage loan, this
amount will decrease
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as the mortgage loans amortize. In addition to this primary servicing
compensation, the master servicer or the sub-servicers will be entitled to
retain all assumption fees and late payment charges to the extent collected from
borrowers and, if so provided in the related prospectus supplement, any
prepayment charges and any interest or other income which may be earned on funds
held in the security account or any sub-servicing account. Unless otherwise
specified in the related prospectus supplement, any sub-servicer will receive a
portion of the master servicer's primary compensation as its sub-servicing
compensation.
Unless otherwise specified in the related prospectus supplement, the
master servicer will pay from its servicing compensation, in addition to amounts
payable to any sub-servicer, certain expenses incurred in connection with its
servicing of the loans, including, without limitation
o payment of any premium for any insurance policy, guaranty, surety
or other form of credit enhancement as specified in the related
prospectus supplement;
o payment of the fees and disbursements of the trustee and
independent accountants;
o payment of expenses incurred in connection with distributions and
reports to securityholders; and
o payment of any other expenses described in the related prospectus
supplement.
EVIDENCE AS TO COMPLIANCE
Each operative agreement will provide that a firm of independent public
accountants will furnish a statement to the trustee, on or before a specified
date in each year, to the effect that, on the basis of the examination by the
firm conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced for Freddie
Mac, the servicing by or on behalf of the master servicer of loans, the Agency
Securities or the Private Label Securities, under agreements substantially
similar to one another (including the governing agreement), was conducted in
compliance with those agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced by Freddie Mac
requires it to report. In rendering this statement the accounting firm may rely,
as to matters relating to the direct servicing of mortgage loans, Agency
Securities or Private Label Securities by sub-servicers, upon comparable
statements of firms of independent public accountants rendered within one year
with respect to the sub-servicers for examinations conducted substantially in
compliance with the Uniform Single Audit Program for Mortgage Bankers or the
Audit Program for Mortgages Serviced for Freddie Mac.
Each operative agreement will also provide for delivery to the related
trustee, on or before a specified date in each year, of an annual statement
signed by two officers of the master servicer to the effect that the master
servicer has fulfilled its obligations under the agreement throughout the
preceding year.
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Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by securityholders of the
related series without charge upon written request to the master servicer at the
address set forth in the related prospectus supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITORS
The master servicer under each operative agreement will be named in the
related prospectus supplement. The entity serving as master servicer may have
normal business relationships with the depositor or the depositor's affiliates.
Each operative agreement will provide that the master servicer may not
resign from its obligations and duties under the agreement except upon a
determination that it is no longer permissible to perform them under applicable
law. In no event will the master servicer's resignation become effective until
the trustee or a successor servicer has assumed the master servicer's
obligations and duties under the agreement.
Each operative agreement will further provide that none of the master
servicer, the depositor or any director, officer, employee or agent of the
master servicer or of the depositor will be under any liability to the related
trust fund or the securityholders for any action taken, or for refraining from
the taking of any action, in good faith pursuant to the agreement, or for errors
in judgment. However, none of the master servicer, the depositor or any
director, officer, employee or agent of the master servicer or of the depositor
will be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of
duties under the agreement or by reason of reckless disregard of obligations and
duties under the agreement. Each operative agreement will further provide that
the master servicer, the depositor and any director, officer, employee or agent
of the master servicer or of the depositor will be entitled to indemnification
by the related trust fund and will be held harmless against any loss, liability
or expense incurred in connection with any legal action relating to the
agreement or the securities, other than
o any loss, liability or expense related to any specific loan in
the trust fund or the loans in general except for any loss,
liability or expense otherwise reimbursable under the agreement,
and
o any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of duties
under the agreement or by reason of reckless disregard of
obligations and duties under the agreement.
In addition, each operative agreement will provide that neither the
master servicer nor the depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its
responsibilities under the agreement and which, in its opinion, may involve it
in any expense or liability. However, the master servicer or the depositor may,
in its discretion, undertake any action which it may deem necessary or desirable
with respect to the agreement and the rights and duties of the parties and the
interests of the securityholders. In that event, 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 depositor, as the case may be,
will be entitled to reimbursement from funds otherwise distributable to
securityholders.
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Any entity into which the master servicer may be merged or
consolidated, or any entity resulting from any merger or consolidation to which
the master servicer is a party, or any entity succeeding to the business of the
master servicer, will be the successor of the master servicer under each
agreement, provided that the successor entity is qualified to sell loans to, and
service loans on behalf of, Fannie Mae or Freddie Mac and that the merger,
consolidation or succession does not adversely affect the then current rating of
the securities rated by each rating agency named in the related prospectus
supplement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Unless otherwise
specified in the related prospectus supplement, the following will be deemed
"events of default" under each agreement:
o any failure by the master servicer to distribute to security
holders of any class any required payment - other than an advance
- which failure continues unremedied for five business days after
the giving of written notice to the master servicer by the
trustee or the depositor, or to the master servicer, the
depositor and the trustee by the holders of securities of that
class evidencing not less than 25% of the aggregate percentage
interests evidenced by that class;
o any failure by the master servicer to make an advance as required
under the agreement, unless cured as specified in the agreement;
o any failure by the master servicer duly to observe or perform in
any material respect any of its other covenants or agreements in
the agreement, which failure continues unremedied for 30 days
after the giving of written notice of the failure to the master
servicer by the trustee or the depositor, or to the master
servicer, the depositor and the trustee by the holders of
securities of any class evidencing not less than 25% of the
aggregate percentage interests constituting that class; and
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by or
on behalf of the master servicer indicating its insolvency,
reorganization or inability to pay its obligations.
If specified in the related prospectus supplement, the agreement will
permit the trustee to sell the assets of the trust fund in the event that
payments are insufficient to make the payments required under the agreement. The
assets of the trust fund will be sold only under the circumstances and in the
manner specified in the related prospectus supplement.
So long as an event of default under the related agreement remains
unremedied, the depositor or the trustee may, and, at the direction of holders
of securities of any class evidencing not less than 51% of the aggregate
percentage interests constituting that class and under such other circumstances
as may be specified in the agreement, the trustee shall, terminate all of the
rights and obligations of the master servicer relating to the trust fund and in
and to the related loans. Thereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the master servicer under the
agreement, including, if specified in the related prospectus
73
supplement, the obligation to make advances, and the trustee will be entitled to
similar compensation arrangements. In the event that the trustee is unwilling or
unable to act in this way, it may appoint, or petition a court of competent
jurisdiction to appoint, a loan servicing institution with a net worth of at
least $10,000,000 to act as successor to the master servicer under the
agreement. Pending the appointment, the trustee is obligated to act in this
capacity. The trustee and any successor master servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the master servicer under the agreement.
No securityholder, solely by virtue of its status as a securityholder,
will have any right under any agreement to institute any proceeding with respect
to that agreement, unless
o the holder has previously given to the trustee written notice of
default;
o the holders of securities of any class evidencing not less than
25% of the aggregate percentage interests constituting that class
have made written request upon the trustee to institute the
proceeding in its own name as trustee and have offered a
reasonable indemnity to the trustee; and
o the trustee for 60 days has neglected or refused to institute any
such proceeding.
INDENTURE. Unless otherwise specified in the related prospectus
supplement, the following will be deemed "events of default" under the
indenture for each series of notes:
o failure to pay for five days or more any principal or interest on
any note of that series;
o failure by the depositor or the trust to perform any other
covenant in the indenture, which failure continues unremedied for
30 days after notice is given in accordance with the procedures
described in the related prospectus supplement;
o the material breach of any representation or warranty made by the
depositor or the trust in the indenture or in any document
delivered under the indenture, which breach continues uncured for
30 days after notice is given in accordance with the procedures
described in the related prospectus supplement;
o events of bankruptcy insolvency, receivership or liquidation of
the depositor in the trust; or
o any other event of default specified in the indenture.
If an event of default with respect to the notes of a series (other
than principal only notes) occurs and is continuing, either the trustee or the
holders of a majority of the then aggregate outstanding amount of the notes of
that series may declare the principal amount of all the notes of that series to
be due and payable immediately. In the case of principal only notes, the portion
of the principal amount necessary to make such a declaration will be specified
in the related prospective supplement. This declaration may, under certain
circumstances, be rescinded and annulled
74
by the holders of more than 50% of the percentage ownership interest of the
notes of that series.
If, following an event of default with respect to any series of notes,
the notes of that series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of that series and to continue
to apply distributions on the collateral as if there had been no declaration of
acceleration so long as the collateral continues to provide sufficient funds for
the payment of principal and interest on the notes 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 one of the following conditions precedent has occurred:
o the holders of 100% of the percentage ownership interest in the
related notes consent to the sale or liquidation;
o the proceeds of the sale or liquidation are sufficient to pay the
full amount of principal and accrued interest, due and unpaid, on
the related notes at the date of the sale or liquidation; or
o the trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the
related notes as they would have become due if the notes had not
been declared due and payable, and the trustee obtains the
consent of the holders of 66% of the percentage ownership
interest of each class of the related notes.
Unless otherwise specified in the related prospectus supplement, in the
event the principal of the notes of a series is declared due and payable as
described above, the holders of any of those notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount of those notes less the amount of the unamortized discount.
Subject to the provisions of the indenture relating to the duties of
the trustee, in case an event of default shall occur and be continuing with
respect to a series of notes, the trustee shall be under no obligation to
exercise any of the rights or powers under the indenture at the request or
direction of any of the holder of the related notes, unless the holders offer to
the trustee satisfactory security or indemnity against the trustee's costs,
expenses and liabilities which might be incurred in complying with their request
or direction. Subject to the indemnification provisions and certain limitations
contained in the indenture, the holders of a majority of the then aggregate
outstanding amount of the related notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee with respect to the related notes, and holders of a majority of the then
aggregate outstanding amount of the related notes may, in certain cases, waive
any default other than a default in the payment of principal or interest or a
default in respect of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all the holders of the affected notes.
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AMENDMENT
Unless otherwise specified in the related prospectus supplement, each
operative agreement may be amended by the depositor, the master servicer and the
trustee, without the consent of any of the securityholders, for the following
purposes:
o to cure any ambiguity,
o to correct or supplement any provision in the agreement which may
be defective or inconsistent with any other provision, or
o to make any other revisions with respect to matters or questions
arising under the agreement which are not inconsistent with its
other provisions.
In no event, however, shall any amendment adversely affect in any material
respect the interests of any securityholder as evidenced by either (i) an
opinion of counsel or (ii) confirmation by the rating agencies that such
amendment will not result in the downgrading of the securities. In addition, an
agreement may be amended without the consent of any of the securityholders to
change the manner in which the security account is maintained, so long as the
amendment does not adversely affect the then current ratings of the securities
rated by each rating agency named in the prospectus supplement. In addition, if
a REMIC election is made with respect to a trust fund, the related agreement may
be amended to modify, eliminate or add to any of its provisions to such extent
as may be necessary to maintain the qualification of the trust fund as a REMIC,
but the trustee shall have first received an opinion of counsel to the effect
that the action is necessary or helpful to maintain the REMIC qualification.
Unless otherwise specified in the related prospectus supplement, each
operative agreement may also be amended by the depositor, the master servicer
and the trustee with consent of holders of securities evidencing not less than
66% of the aggregate percentage ownership interests of each affected class for
the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, the agreement or of modifying in any
manner the rights of the holders of the related securities. In no event,
however, shall any amendment
o reduce in any manner the amount of, or delay the timing of,
payments received on loans which are required to be distributed
on any security without the consent of the holder of that
security, or
o reduce the percentage of the securities of any class the holders
of which are required to consent to any amendment without the
consent of the holders of all securities of that class then
outstanding.
If a REMIC election is made with respect to a trust fund, the trustee will not
be entitled to consent to an amendment to the agreement without having first
received an opinion of counsel to the effect that the amendment will not cause
the trust fund to fail to qualify as a REMIC.
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TERMINATION; OPTIONAL TERMINATION; CALLS
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise
specified in the related prospectus supplement, the obligations created by the
pooling and servicing agreement and trust agreement for the related series of
securities will terminate upon the payment to the securityholders of all amounts
held in the security account or held by the master servicer, and required to be
paid to the securityholders under the agreement, following the later to occur of
the following:
o the final payment or other liquidation of the last of the assets
of the trust fund subject to the agreement or the disposition of
all property acquired upon foreclosure of any assets remaining in
the trust fund, and
o the purchase from the trust fund by the master servicer, or such
other party as may be specified in the related prospectus
supplement, of all of the remaining trust fund assets and all
property acquired in respect of those assets.
SEE "Material Federal Income Tax Consequences" in this prospectus.
Unless otherwise specified in the related prospectus supplement, any
purchase of trust fund assets and property acquired in respect of trust fund
assets will be made at the option of the related master servicer or, if
applicable, another designated party, at a price, and in accordance with the
procedures, specified in the related prospectus supplement. The exercise of this
right will effect early retirement of the securities of that series. However,
this right can be exercised only at the times and upon the conditions specified
in the related prospectus supplement. If a REMIC election has been made with
respect to the trust fund, any repurchase pursuant to the second bullet point in
the immediately preceding paragraph will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of section 860F(g)(4) of
the Internal Revenue Code.
INDENTURE. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the trustee for cancellation of all the notes of
that series or, with certain limitations, upon deposit with the trustee of funds
sufficient for the payment in full of all of the notes of that series.
If specified for the notes of any series, the indenture will provide
that the related trust fund will be discharged from any and all obligations in
respect of the notes of that series (except for certain obligations relating to
temporary notes and exchange of notes, registering the transfer or exchange
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the trustee, in
trust, of money and/or direct obligations of or obligations guaranteed by the
United States which, through the payment of interest and principal in accordance
with their terms, will provide money in an amount sufficient to pay the
principal and each installment of interest on the related notes on the last
scheduled distribution date for the notes and any installment of interest on the
notes in accordance with the terms of the indenture and the notes of that
series. In the event of any such defeasance and discharge of a series of notes,
holders of the related notes would be able to look
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only to such money and/or direct obligations for payment of principal and
interest, if any, on their notes until maturity.
CALLS. One or more classes of securities may be subject to a mandatory
or optional call at the times and subject to the conditions specified in the
related prospectus supplement. In the case of a mandatory call or in the event
an optional call is exercised with respect to one or more classes of securities,
holders of each affected class of securities will receive the outstanding
principal balance of their securities together with accrued and unpaid interest
at the applicable pass-through rate, subject to the terms specified in the
related prospectus supplement.
THE TRUSTEE
The trustee under each agreement will be named in the related
prospectus supplement. The commercial bank or trust company serving as trustee
may have normal banking relationships with the depositor, the master servicer
and any of their respective affiliates.
MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion contains general summaries of material legal
matters relating to the loans. Because the legal matters are determined
primarily by applicable state law and because state laws may differ
substantially, the summaries do not purport to be complete, to reflect the laws
of any particular state or to encompass the laws of all states in which security
for the loans may be situated. The summaries are qualified in their entirety by
reference to the applicable laws of the states in which loans may be originated.
GENERAL
SINGLE FAMILY LOANS, MULTIFAMILY LOANS AND HOME EQUITY LOANS. The loans
may be secured by deeds of trust, mortgages, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the property
subject to the loan is located. A mortgage creates a lien upon the real property
encumbered by the mortgage. The mortgage lien generally is not prior to the lien
for real estate taxes and assessments. Priority between mortgages depends on
their terms and generally on the order of recording with a state or county
office. There are two parties to a mortgage: the mortgagor, who is the borrower
and owner of the mortgaged property, and the mortgagee, who is the lender. Under
the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust formally has three parties: the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, 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. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys to the
grantee title to, as opposed to merely creating a lien upon, the subject
property until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
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COOPERATIVE LOANS. Certain of the loans may be cooperative loans. The
cooperative owns all the real property that comprises the related project,
including the land, separate dwelling units and all common areas. The
cooperative is directly responsible for project management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If, as is
generally the case, there is a blanket mortgage on the cooperative and/or
underlying land, the cooperative, as project mortgagor, is also responsible for
meeting these mortgage obligations. A blanket mortgage is ordinarily incurred by
the cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under proprietary
leases or occupancy agreements to which the cooperative is a party are generally
subordinate to the interest of the holder of the blanket mortgage in that
building. If the cooperative is unable to meet the payment obligations arising
under its blanket mortgage, the mortgagee holding the blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements. In addition, the blanket mortgage on a cooperative may
provide financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of a trust fund
including cooperative loans, the collateral securing the cooperative loans.
A cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and the accompanying rights are financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender 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 lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or against the
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.
MANUFACTURED HOUSING CONTRACTS. Each Manufactured Housing Contract
evidences both
o the obligation of the borrower to repay the loan it represents,
and
o the grant of a security interest in a manufactured home to secure
repayment of the loan.
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The Manufactured Housing Contracts generally are "chattel paper" as
defined in the Uniform Commercial Code in effect in the states in which the
manufactured homes initially were registered. Pursuant to the UCC, the rules
governing the sale of chattel paper are similar to those governing the
perfection of a security interest in chattel paper. Under the related pooling
and servicing agreement, the depositor will transfer physical possession of the
Manufactured Housing Contracts to the trustee or its custodian. In addition the
depositor will file UCC-1 financing statements in the appropriate states to give
notice of the trustee's ownership of the Manufactured Housing 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 except Louisiana. These financing
statements are effective for five years and must be renewed at the end of each
five years. The certificate of title laws adopted by the majority of states
provide that ownership of motor vehicles and manufactured housing shall be
evidenced by a certificate of title generally issued by the motor vehicles
department of the state. In states which 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 that office, depending on state law.
Unless otherwise specified in the related prospectus supplement, the
master servicer will be required to effect such 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. If the master servicer fails to effect such notation or delivery,
due to clerical errors or otherwise, 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 the affected Manufactured Housing
Contract. As manufactured homes have become larger and have often been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
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 manufactured home is located. These
filings must be made in the real estate records office of the county where the
manufactured home is located. Generally, Manufactured Housing Contracts will
contain provisions prohibiting the borrower from permanently attaching the
manufactured home to its site. So long as the borrower does not violate this
agreement, a security interest in the manufactured home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site,
other parties could obtain an interest in the manufactured home which is prior
to the security interest originally retained by the seller and transferred to
the depositor.
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The depositor will assign to the trustee, on behalf of the
securityholders, a security interest in the manufactured homes. Unless otherwise
specified in the related prospectus supplement, none of the depositor, the
master servicer or 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 depositor 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 depositor'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, assignment of the security interest might
not be held effective against creditors of the depositor or seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the home owner, or administrative error by
state recording officials, the notation of the lien of the trustee 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
the manufactured home or subsequent lenders who take a security interest in the
manufactured home. In the case of any manufactured home as to which the security
interest assigned to the depositor and the trustee is not perfected, the
security interest would be subordinate to, among others, subsequent purchasers
for value of the manufactured home and holders of perfected security interests
in the home. There also exists a risk that, in not identifying the trustee, on
behalf of the securityholders, as the new secured party on the certificate of
title, the security interest of the trustee could be released through fraud or
negligence.
If the owner of a manufactured home moves it to a state other than the
state in which it initially is registered, the perfected security interest in
the manufactured home under the laws of most states would continue for four
months after relocation and thereafter until the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and re-register the manufactured home in the new state,
and if steps are not taken to re-perfect the trustee's security interest in the
new 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 trustee must
surrender possession if it holds the certificate of title to the manufactured
home or, in the case of manufactured homes registered in states which provide
for notation of lien, the master servicer would receive notice of surrender if
the security interest in the manufactured home is noted on the certificate of
title. Accordingly, the trustee would have the opportunity to re-perfect its
security interest in the manufactured home in the new state. In states which do
not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. Similarly, when a borrower under a
Manufactured Housing Contract sells a manufactured home, the lender 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 Contract before the
lien is released. The master servicer will be obligated, at its own expense, to
take all steps 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
depositor will obtain the representation of
the seller that it has no knowledge of any repair liens with respect to any
manufactured home securing a Manufactured Housing Contract. However, repair
liens could arise at any time during the term of a Manufactured Housing
Contract. No notice will be given to the trustee or securityholders in the event
a repair lien arises.
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FORECLOSURE
SINGLE FAMILY LOANS, MULTI-FAMILY LOANS AND HOME EQUITY LOANS.
Foreclosure of a deed of trust is generally accomplished by a non-judicial sale
under a specific provision in the deed of trust which authorizes the trustee to
sell the mortgaged property at public auction upon any default by the borrower
under the terms of the note or deed of trust. In some states, such as
California, the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. Before such non-judicial sale takes place, typically a notice of
sale must be posted in a public place and published during a specific period of
time in one or more newspapers, posted on the property and sent to parties
having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the mortgaged 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
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the deed
of trust is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate
82
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.
When the beneficiary under a junior mortgage or deed of trust cures the
default on the related senior mortgage or reinstates or redeems the senior
mortgage by paying it in full, the amount paid by the beneficiary to cure,
reinstate or redeem the senior mortgage becomes part of the indebtedness secured
by the junior mortgage or deed of trust. SEE "--Junior Mortgages, Rights of
Senior Mortgages" below.
COOPERATIVE LOANS. Cooperative shares owned by a tenant-stockholder and
pledged to a lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's articles of incorporation and
by-laws, as well as in the proprietary lease or occupancy agreement, and may be
cancelled by the cooperative if the tenant-stockholder fails to pay rent or
other obligations or charges owed, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the cooperative to
terminate such lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. Typically, the
lender and the cooperative enter into a recognition agreement which 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 such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides, that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under 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 value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest.
Recognition agreements also provide that, in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, lenders are
not limited in any rights they may have to dispossess tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time,
83
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative 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.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the cooperative when the building was so converted.
REPOSSESSION OF MANUFACTURED HOMES
Repossession of manufactured housing is governed by state law. A number
of states have enacted legislation that requires that the debtor be given an
opportunity to cure a monetary default (typically 30 days to bring the account
current) before repossession can commence. So long as a manufactured home has
not become attached to real estate in such way that it would be treated as a
part of the real estate under applicable state law, repossession in the event of
a default by the obligor will generally be governed by the UCC (except in
Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain particulars, the general repossession procedure is
discussed below.
Because manufactured homes generally depreciate in value, it is
unlikely that repossession and resale of a manufactured home will result in the
full recovery of the outstanding principal and unpaid interest on the related
defaulted Manufactured Housing Contract.
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, which are more commonly
employed, 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
84
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 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.
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.
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 judgment
in those states that do not prohibit or limit such 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.
Any contract secured by a manufactured home located in Louisiana will
be governed by Louisiana law rather than Article 9 of the UCC. Louisiana law
provides similar mechanisms for perfection and enforcement of a security
interest 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
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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.
RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS, MULTIFAMILY LOANS AND HOME EQUITY LOANS. 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 mortgaged property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan plus accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
MANUFACTURED HOUSING CONTRACTS. While state laws do not usually require
notice to be given 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 a manufactured home so that the
owner may redeem at or before resale. In addition, the sale generally must
comply with the requirements of the UCC.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to maintain the property adequately or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states, including California, have adopted statutory
prohibitions restricting the right of the beneficiary or mortgagee to obtain a
deficiency judgment against borrowers financing the purchase of their residence
or following sale under a deed of trust or certain other foreclosure
proceedings. A deficiency judgment is a personal judgment against the borrower
equal in most cases to the difference between the amount due to the lender and
the fair market value of the real property sold at the foreclosure sale. As a
result of these prohibitions, it is anticipated that in many instances the
master servicer will not seek deficiency judgments against defaulting borrowers.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment for any deficiency following possession and resale of a
manufactured home. However, some states impose prohibitions or limitations on
deficiency judgments in these cases.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral -- which, in the case
of a cooperative loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement -- was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code, the
federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws affording
relief to debtors, may interfere with or affect the ability of the secured
mortgage lender to realize upon its security. For example, in a proceeding under
the Bankruptcy Code, a lender may not foreclose on the mortgaged property
without the permission of the bankruptcy court. If the mortgaged property is not
the debtor's principal residence and the bankruptcy court determines that the
value of the mortgaged property is less than the principal balance of the
mortgage loan, the rehabilitation plan proposed by the debtor may
o reduce the secured indebtedness to the value of the mortgaged
property as of the date of the commencement of the bankruptcy
thereby rendering the lender a general unsecured creditor for the
difference,
o reduce the monthly payments due under the mortgage loan,
o change the rate of interest of the mortgage loan, and
o alter the mortgage loan repayment schedule.
The effect of proceedings under the Bankruptcy Code, including but not limited
to any automatic stay, could result in delays in receiving payments on the
mortgage loans underlying a series of certificates and possible reductions in
the aggregate amount of payments.
The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders and
manufactured housing lenders in connection with the
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origination, servicing and enforcement of loans. These laws include the federal
Truth in Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes and regulations. These federal and state laws impose specific statutory
liabilities upon lenders who fail to comply with the provisions of the law. In
some cases, this liability may affect assignees of the loans.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission
has the effect of subjecting a seller and certain 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 this FTC Rule is limited to the amounts
paid by a debtor on a Manufactured Housing Contract, and the holder of the
Manufactured Housing Contract may also be unable to collect amounts still due
under the Manufactured Housing Contract.
Most of the Manufactured Housing Contracts in a pool will be subject to
the requirements of this FTC Rule. Accordingly, the trustee, as holder of the
Manufactured Housing Contracts, will be subject to any claims or defenses that
the purchaser of the related manufactured home may assert against the seller of
the manufactured home, or that the purchaser of the home improvements may assert
against the contractor, subject to a maximum liability equal to the amounts paid
by the obligor on the Manufactured Housing Contract. If an obligor is successful
in asserting any such claim or defense, and if the seller had or should have had
knowledge of such claim or defense, the master servicer will have the right to
require the seller to repurchase the Manufactured Housing Contract because of a
breach of its representation and warranty that no claims or defenses exist which
would affect the borrower's obligation to make the required payments under the
Manufactured Housing Contract.
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 such manufactured housing components as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and others
in the distribution process. Plaintiffs have won judgments in some of these
lawsuits.
Under the FTC Rule discussed above, the holder of a Manufactured
Housing Contract secured by a manufactured home with respect to which a
formaldehyde claim has been asserted successfully may be liable to the borrower
for the amount paid by the borrower on that Manufactured Housing Contract and
may be unable to collect amounts still due under that Manufactured Housing
Contract. Because the successful assertion of this type of claim would
constitute the breach of a representation or warranty of the seller, the related
securityholders would suffer a loss only to the extent that
o the seller fails to perform its obligation to repurchase that
Manufactured Housing Contract, and
o the seller, the applicable depositor or the trustee is
unsuccessful in asserting a claim of contribution or subrogation
on behalf of the securityholders against the manufacturer or
other who are directly liable to the plaintiff for damages.
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Typical product liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities from the presence of
formaldehyde in manufactured housing. As a result, recoveries from manufacturers
and component suppliers may be limited to their corporate assets without the
benefit of insurance.
Certain loans also may be subject to the Riegle Community Development
and Regulatory Improvement Act of 1994 which incorporates the Home Ownership and
Equity Protection Act of 1994. This legislation and related regulations impose
additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans originated after October 1, 1995 that have
high interest rates or high up-front fees and charges. Violations can subject
creditors to monetary penalties and affect enforceability of the affected loans.
In addition, any assignee of the original lender is generally subject to all
claims and defenses that the consumer could assert against the lender, including
the right to rescind the loan.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related prospectus supplement, each
conventional loan will contain a due-on-sale clause which will generally provide
that, if the mortgagor or obligor sells, transfers or conveys the mortgaged
property, the loan may be accelerated by the mortgagee or secured party. Unless
otherwise provided in the related prospectus supplement, the master servicer
will, to the extent it has knowledge of the sale, transfer or conveyance,
exercise its rights to accelerate the maturity of the related loans through
enforcement of the due-on-sale clauses, subject to applicable state law. The
Garn-St Germain Depository Institutions Act of 1982, subject to certain
exceptions, pre-empts state constitutional, statutory and case law prohibiting
the enforcement of due-on-sale clauses. With respect to loans secured by an
owner-occupied residence including a manufactured home, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the mortgaged property to an
uncreditworthy person, which could increase the likelihood of default, or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
loans and the number of loans which may extend to maturity.
In addition, under the federal Bankruptcy Code, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and under certain circumstances may
be eliminated in a resulting loan modification.
PREPAYMENT CHARGES; LATE FEES
Under certain state laws, prepayment charges with respect to
prepayments on loans secured by liens encumbering owner-occupied residential
properties may not be imposed after a certain period of time following the
origination of a loan. Since many of the mortgaged properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the loans. The absence of this type of a restraint on
prepayment, particularly with respect to fixed rate loans having higher loan
rates or APRs, may increase the
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likelihood of refinancing or other early retirement of the loans. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related prospectus supplement.
Loans may also contain provisions obligating the borrower to pay a late
fee if payments are not timely made. In some states there may be specific
limitations on the late charges that a lender may collect from the borrower for
delinquent payments. Unless otherwise specified in the related prospectus
supplement, late fees will be retained by the applicable servicer as additional
servicing compensation.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. The Office of Thrift Supervision, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. The statute
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 such a
law prior to the April 1, 1983 deadline. In addition, even where Title V was not
rejected, any state is authorized to adopt a provision limiting discount points
or other charges on loans covered by Title V. No Manufactured Housing Contract
secured by a manufactured home located in any state in which application of
Title V was expressly rejected or a provision limiting discount points or other
charges has been adopted will be included in any trust fund if the Manufactured
Housing Contract imposes finance charges or provides for discount points or
charges in excess of permitted levels.
Title V also provides that state usury limitations will not apply to
any loan which is secured by a first lien on certain kinds of manufactured
housing provided that certain conditions are satisfied. These conditions relate
to the terms of any prepayment, balloon payment, late charges and deferral fees
and the requirement of a 30-day notice period prior to instituting any action
leading to repossession of or foreclosure with respect to the related unit.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended, borrowers who enter military service after the
origination of their mortgage loan may not be charged interest above an annual
rate of 6% during the period of active duty status, unless a court orders
otherwise upon application of the lender. The Relief Act also applies to
borrowers who are members of the National Guard or are on reserve status at the
time their mortgage is originated and are later called to active duty. It is
possible that the interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the master servicer to collect
full amounts of interest on affected mortgage loans. Unless otherwise provided
in the related prospectus supplement, any shortfall in interest collections
resulting from the application of the Relief Act could result in losses to the
related securityholders. In addition, the Relief Act imposes limitations which
would impair the ability of the master servicer to foreclose on an affected
mortgage loan during the borrower's period of active duty status. Thus, in the
event that
a mortgage loan goes into default, the application of the Relief Act could cause
delays and losses occasioned by the lender's inability to realize upon the
mortgaged property in a timely fashion.
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ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the payment of
the costs of clean-up. In several states such a lien has priority over the lien
of an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), the United States Environmental Protection Agency (EPA) may impose a
lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states and under CERCLA, there is a possibility
that a lender may be held liable as an "owner" or "operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA imposes liability for
such costs on any and all "responsible parties," including owners or operators.
However, CERCLA excludes from the definition of "owner or operator" a secured
creditor who holds indicia of ownership primarily to protect its security
interest but does not "participate in the management" of the property. Thus, if
a lender's activities begin to encroach on the actual management of a
contaminated facility or property, the lender may incur liability as an "owner
or operator" under CERCLA. Similarly, if a lender forecloses and takes title to
a contaminated facility or property, the lender may incur CERCLA liability in
various circumstances, including, but not limited to, when it holds the facility
or property as an investment, including leasing the facility or property to a
third party, or fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a property so that the lender would lose the protection of the
secured creditor exclusion referred to in the preceding paragraph, has been a
matter of judicial interpretation of the statutory language, and court decisions
have historically been inconsistent. In 1990, the United States Court of Appeals
for the Eleventh Circuit suggested, in UNITED STATES V. FLEET FACTORS CORP.,
that the mere capacity of the lender to influence a borrower's decisions
regarding disposal of hazardous substances was sufficient participation in the
management of the borrower's business to deny the protection of the secured
creditor exclusion to the lender, regardless of whether the lender actually
exercised such influence. Other judicial decisions did not interpret the secured
creditor exclusion as narrowly as did the Eleventh Circuit.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liability and Deposit Insurance Protection Act of
1996. The Asset Conservation Act provides that in order to be deemed to have
participated in the management of a secured property, a lender must actually
participate in the operational affairs of the property or of the borrower. The
Asset Conservation Act also provides that participation in the management of the
property does not include "merely having the capacity to influence, or
unexercised right to control" operations. Rather, a lender will lose the
protection of the secured creditor exclusion only if it exercises
decision-making control over the borrower's environmental compliance and
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hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the secured property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous owner
or operator, who created the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment-proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that the costs
arising from the circumstances set forth above would result in a loss to the
related securityholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act, which regulates underground petroleum storage tanks other than
heating oil tanks. The EPA has adopted a lender liability rule for underground
storage tanks under Subtitle I of the Resource Conservation Act. Under this
rule, a holder of a security interest in an underground storage tank or real
property containing an underground storage tank is not considered an operator of
the underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Asset Conservation Act, the
protections accorded to lenders under CERCLA are also accorded to holders of
security interests in underground petroleum storage tanks. It should be noted,
however, that liability for cleanup of petroleum contamination may be governed
by state law, which may not provide for any specific protection for secured
creditors.
The Asset Conservation Act specifically addresses the potential
liability under CERCLA of lenders that hold mortgages or similar conventional
security interests in real property, as the trust fund generally does in
connection with the loans. However, the Asset Conservation Act does not clearly
address the potential liability of lenders who retain legal title to a property
and enter into an agreement with the purchaser for the payment of the purchase
price and interest over the term of the contract as is the case with the
installment contracts.
If a lender (including a lender under an installment contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, these persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the loans (or at a
property subject to an installment contract), would be imposed on the trust
fund, and thus occasion a loss to the securityholders, depends on the specific
factual and legal circumstances at issue.
Except as otherwise specified in the applicable prospectus supplement,
at the time the mortgage loans were originated, no environmental assessment or a
very limited environment assessment of the mortgage properties was conducted.
The pooling and servicing agreement will provide that the master
servicer, acting on behalf of the trust fund, may not acquire title to a
multifamily residential property or mixed-use property underlying a loan or take
over its operation unless the master servicer has previously
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determined, based upon a report prepared by a person who regularly conducts
environmental audits, that the mortgaged property is in compliance with
applicable environmental laws and regulations or that the acquisition would not
be more detrimental than beneficial to the value of the mortgaged property and
the interests of the related securityholders.
THE HOME IMPROVEMENT CONTRACTS
GENERAL. The Home Improvement Contracts, other than those that are
unsecured or secured by mortgages on real estate, generally are "chattel paper"
or constitute "purchase money security interests" each as defined in the UCC.
Under the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related agreement,
the depositor will transfer physical possession of these contracts to the
trustee or a designated custodian or may retain possession of them as custodian
for the trustee. In addition, the depositor will file a UCC-1 financing
statement in the appropriate states to give notice of the trustee's ownership of
the contracts. Unless otherwise specified in the related prospectus supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the depositor to the trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the contracts without notice of such assignment, the trustee's interest in
the contracts could be defeated.
SECURITY INTERESTS IN HOME IMPROVEMENTS. The Home Improvement Contracts
that are secured by the related home improvements grant to the originator a
purchase money security interest in the home improvements to secure all or part
of the purchase price of the home improvements and related services. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods and the purchase money security interests
are assignable. In general, a purchase money security interest grants to the
holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of the collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in the home improvement must generally be perfected by a timely fixture filing.
In general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the home improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS. So long as the
home improvement has not become subject to the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that
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the debtor be given notice of any sale prior to resale of the unit that the
debtor may redeem at or before the resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
INSTALLMENT CONTRACTS
Under an installment contract the seller retains legal title to the
property and enters into an agreement with the purchaser/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 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 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 the 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 such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the installment contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment 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 such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an installment 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.
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JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the loans comprising the trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to affect
the property or the rights of the mortgagee under the mortgage. Upon a failure
of the mortgagor to perform any of these obligations, the mortgagee is given the
right under certain mortgages to perform the obligation itself, at its election,
with the mortgagor agreeing to reimburse the mortgagee for any sums expended by
the mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee
become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
cut-off date with respect to any mortgage will not be included in the trust
fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is
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entitled to receive the same priority as amounts initially advanced under the
trust deed or mortgage, notwithstanding the fact that there may be junior trust
deeds or mortgages and other liens which intervene between the date of recording
of the trust deed or mortgage and the date of the future advance, and
notwithstanding that the beneficiary or lender had actual knowledge of such
intervening junior trust deeds or mortgages and other liens at the time of the
advance. In most states, the trust deed or mortgage lien securing mortgage loans
of the type which includes home equity credit lines applies retroactively to the
date of the original recording of the trust deed or mortgage, provided that the
total amount of advances under the home equity credit line does not exceed the
maximum specified principal amount of the recorded trust deed or mortgage,
except as to advances made after receipt by the lender of a written notice of
lien from a judgment lien creditor of the trustor.
THE TITLE I PROGRAM
GENERAL. Certain of the loans contained in a trust fund may be loans
insured under the FHA Title I Insurance program created pursuant to Sections 1
and 2(a) of the National Housing Act of 1934. Under the Title I Program, the FHA
is authorized and empowered to insure qualified lending institutions against
losses on eligible loans. The Title I Program operates as a coinsurance program
in which the FHA insures up to 90% of certain losses incurred on an individual
insured loan, including the unpaid principal balance of the loan, but only to
the extent of the insurance coverage available in the lender's FHA insurance
coverage reserve account. The owner of the loan bears the uninsured loss on each
loan.
Title I loan means a loan made to finance actions or items that
substantially protect or improve the basic livability or utility of a one- to
four-family residential property.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties to the
transaction. With respect to a dealer Title I loan, a dealer may include a
seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated and
agreed to by the borrower and the lender and must be fixed for the term of the
loan and recited in the note. Interest on an insured loan must accrue from the
date of the loan and be calculated according to
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the actuarial method. The lender must assure that the note and all other
documents evidencing the loan are in compliance with applicable federal, state
and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD unless the lender determines and documents in
the loan file the existence of compensating factors concerning the borrower's
creditworthiness which support approval of the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS. The maximum principal amount for Title
I loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I loans with respect to multiple properties, and a borrower may
obtain more than one Title I loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I loans in the same
property does not exceed the maximum loan amount for the type of Title I loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I loan or a recorded land installment contract for the purchase of
the real property. In the case of a Title I loan with a total principal balance
in excess of $15,000, if the property is not occupied by the owner, the borrower
must have equity in the property being improved at least equal to the principal
amount of the loan, as demonstrated by a current appraisal. Any Title I loan in
excess of $7,500 must be secured by a recorded lien on the improved property
which is evidenced by a mortgage or deed of trust executed by the borrower and
all other owners in fee simple.
The proceeds from a Title I loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed
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in the loan application. The Secretary of HUD has published a list of items and
activities which cannot be financed with proceeds from any Title I loan and from
time to time the Secretary of HUD may amend such list of items and activities.
With respect to any dealer Title I loan, before the lender may disburse funds,
the lender must have in its possession a completion certificate on a HUD
approved form, signed by the borrower and the dealer. With respect to any direct
Title I loan, the lender is required to obtain, promptly upon completion of the
improvements but not later than 6 months after disbursement of the loan proceeds
with one 6 month extension if necessary, a completion certificate, signed by the
borrower. The lender is required to conduct an on-site inspection on any Title I
loan where the principal obligation is $7,500 or more, and on any direct Title I
loan where the borrower fails to submit a completion certificate.
FHA INSURANCE COVERAGE. Under the Title I Program, the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I contract of insurance. The amount of insurance coverage in this account
is a maximum of 10% of the amount disbursed, advanced or expended by the lender
in originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required to
pay to the Title I lender. Loans to be insured under the Title I Program will be
registered for insurance by the FHA and the insurance coverage attributable to
such loans will be included in the insurance coverage reserve account for the
originating or purchasing lender following the receipt and acknowledgment by the
FHA of a loan report on the prescribed form pursuant to the Title I regulations.
For each eligible loan reported and acknowledged for insurance, the FHA charges
a premium. For loans having a maturity of 25 months or less, the FHA bills the
lender for the entire premium in an amount equal to the product of 0.50% of the
original loan amount and the loan term. For home improvement loans with a
maturity greater than 25 months, each year that a loan is outstanding the FHA
bills the lender for a premium in an amount equal to 0.50% of the original loan
amount. If a loan is prepaid during the year, the FHA will not refund or abate
the premium paid for that year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of new
eligible loans will continue to increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer insurance
coverage between insurance coverage reserve accounts with earmarking with
respect to a particular insured loan or group of insured loans when a
determination is made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of
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insurance. Unless an insured loan is transferred with recourse or with a
guaranty or repurchase agreement, the FHA, upon receipt of written notification
of the transfer of such loan in accordance with the Title I regulations, will
transfer from the transferor's insurance coverage reserve account to the
transferee's insurance coverage reserve account an amount, if available, equal
to 10% of the actual purchase price or the net unpaid principal balance of such
loan (whichever is less). However, under the Title I Program not more than
$5,000 in insurance coverage shall be transferred to or from a lender's
insurance coverage reserve account during any October 1 to September 30 period
without the prior approval of the Secretary of HUD. Amounts which may be
recovered by the Secretary of HUD after payment of an insurance claim are not
added to the amount of insurance coverage in the related lender's insurance
coverage reserve account.
CLAIMS PROCEDURES UNDER TITLE I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the property under a security instrument (or
if it accepts a voluntary conveyance or surrender of the property), the lender
may file an insurance claim only with the prior approval of the Secretary of
HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I loan must be filed
with the FHA no later than 9 months after the date of default of the loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lien of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. Although the FHA may contest
any insurance claim and make a demand for repurchase of the loan at any time up
to two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the
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part of the lender, the FHA has expressed an intention to limit the period of
time within which it will take such action to one year from the date the claim
was certified for payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the claimable amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "claimable
amount" means an amount equal to 90% of the sum of:
o the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with
adjustments thereto if the lender has proceeded against property
securing the loan;
o the interest on the unpaid amount of the loan obligation from the
date of default to the date of the claim's initial submission for
payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per year;
o the uncollected court costs;
o the attorney's fees not to exceed $500; and
o the expenses for recording the assignment of the security to the
United States.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the Title I Program; however,
the Secretary of HUD may waive such violations if it determines that enforcement
of the regulations would impose an injustice upon a lender which has
substantially complied with the regulations in good faith.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material federal income tax consequences
of the purchase, ownership and disposition of certificates is based on the
opinion of tax counsel to the depositor, any of McKee Nelson LLP, Sidley Austin
Brown & Wood LLP or Thacher Proffitt & Wood, as specified in the related
prospectus supplement. This summary is based on the provisions of the Internal
Revenue Code of 1986, as amended, and the regulations, including the REMIC
Regulations, rulings and decisions promulgated thereunder and, where applicable,
proposed regulations, all of which are subject to change either prospectively or
retroactively. This summary does not address the material federal income tax
consequences of an investment in securities applicable to certain financial
institutions, banks, insurance companies, tax exempt organizations, dealers in
options, currency or securities, traders in securities that elect to mark to
market, or persons who hold positions other than securities such that the
securities are treated as part of a hedging transaction, straddle, conversion or
other integrated transaction which are subject to special rules. Because of the
complexity of the tax issues involved, we strongly suggest that prospective
investors consult their tax advisors regarding the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of
securities.
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GENERAL
The federal income tax consequences to securityholders will vary
depending on whether an election is made to treat the trust fund relating to a
particular series of securities as a REMIC under the Code. The prospectus
supplement for each series of securities will specify whether a REMIC election
will be made. In the discussion that follows, all references to a "section" or
"sections" shall be understood to refer, unless otherwise specifically
indicated, to a section or sections of the Code.
If a REMIC election is not made, in the opinion of tax counsel:
o the trust fund will not be classified as an association taxable
as a corporation;
o the trust fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code;
o as a grantor trust, the trust fund as such will not be subject to
federal income tax; and
o owners of certificates will be treated for federal income tax
purposes as owners of a portion of the trust fund's assets as
described below.
With respect to each trust fund that elects REMIC status, in the
opinion of tax counsel, assuming compliance with all provisions of the related
agreement, the trust fund will qualify as a REMIC and the related certificates
will be considered to be regular interests or residual interests in the REMIC.
The related prospectus supplement for each series of securities will indicate
whether the trust fund will make a REMIC election and whether a class of
securities will be treated as a regular or residual interest in the REMIC.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service or any third party.
TAXATION OF DEBT SECURITIES
STATUS AS REAL PROPERTY LOANS. Except to the extent otherwise provided
in the related prospectus supplement, if the securities are regular interests in
a REMIC or represent interests in a grantor trust, in the opinion of tax
counsel:
o securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code; and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A)
of the Code and interest on securities will be considered
"interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of section
856(c)(3)(B) of the Code.
INTEREST AND ACQUISITION DISCOUNT. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of
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indebtedness issued by the REMIC. Stated interest on the securities that are
REMIC regular interests will be taxable as ordinary income and taken into
account using the accrual method of accounting, regardless of the holder's
normal accounting method. Interest (other than original issue discount) on
securities (other than securities that are REMIC regular interests) which are
characterized as indebtedness for federal income tax purposes will be includible
in income by their holders in accordance with their usual methods of accounting.
When we refer to "debt securities" in this section, we mean securities
characterized as debt for federal income tax purposes and securities that are
REMIC regular interests.
In the opinion of tax counsel, "compound interest securities" (I.E.,
debt securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other debt
securities issued at a discount may, be issued with "original issue discount" or
OID. The following discussion is based in part on the OID Regulations. A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of debt securities is sold for cash on
or prior to the closing date, the issue price for that class will be treated as
the fair market value of that class on the closing date. The issue price of a
debt security also includes the amount paid by an initial debt security holder
for accrued interest that relates to a period prior to the issue date of the
debt security. The stated redemption price at maturity of a debt security
includes the original principal amount of the debt security, but generally will
not include distributions of interest if the distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below), provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Although the matter is not free
from doubt, the trustee intends to treat interest on such debt securities as
unconditionally payable and as constituting qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities with respect to which deferred interest will accrue,
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will not constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such debt securities includes all distributions
of interest as well as principal thereon. Where the interval between the issue
date and the first distribution date on a debt security is longer than the
interval between subsequent distribution dates, the greater of (i) the interest
foregone and (ii) the excess of the stated principal amount over the issue price
will be included in the stated redemption price at maturity and tested under the
DE MINIMIS rule described below. Where the interval between the issue date and
the first distribution date on a debt security is shorter than the interval
between subsequent distribution dates, all of the additional interest will be
included in the stated redemption price at maturity and tested under the DE
MINIMIS rule described below. In the case of a debt security with a long first
period that has NON-DE MINIMIS OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the debt security will
generally have OID. Holders of debt securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a debt security.
Under the DE MINIMIS rule, OID on a debt security will be considered to
be zero if the OID is less than 0.25% of the stated redemption price at maturity
of the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (I.E., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report DE MINIMIS OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, accrual method holders may elect to accrue
all DE MINIMIS OID as well as market discount under a constant interest method.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective
rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers
interest payments on the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
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The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, the trustee intends to base its computation on
section 1272(a)(6) and the OID Regulations as described in this prospectus.
However, because no regulatory guidance currently exists under section
1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross
income, for all days during its taxable year on which it holds the debt
security, the sum of the "daily portions" of OID. The amount of OID includible
in income by a holder will be computed by allocating to each day during a
taxable year a pro rata portion of the original issue discount that accrued
during the relevant accrual period. In the case of a debt security that is not a
Regular Interest Security and the principal payments on which are not subject to
acceleration resulting from prepayments on the loans, the amount of OID
includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the debt security and the adjusted issue price of the
debt security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to the debt security in all
prior periods, other than qualified stated interest payments.
Certain classes of the debt securities may be "pay-through securities,"
which are debt instruments that are subject to acceleration due to prepayments
on other debt obligations securing those instruments. The amount of OID to be
included in the income of a pay-through security is computed by taking into
account the prepayment rate assumed in pricing the debt instrument. The amount
of OID that will accrue during an accrual period on a pay-through security is
the EXCESS, if any, of the
o sum of
- the present value of all payments remaining to be made on the
pay-through security as of the close of the accrual period and
- the payments during the accrual period of amounts included in the
stated redemption price of the pay-through security,
OVER
o the adjusted issue price of the pay-through security at the
beginning of the accrual period.
The present value of the remaining payments is to be determined on the
basis of three factors:
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o the original yield to maturity of the pay-through security
(determined on the basis of compounding at the end of each
accrual period and properly adjusted for the length of the
accrual period),
o events that have occurred before the end of the accrual period,
and
o the assumption that the remaining payments will be made in
accordance with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect to
the loans at a rate that exceeds the prepayment assumption, and to decrease (but
not below zero for any period) the portions of OID required to be included in
income by a holder of a pay-through security to take into account prepayments
with respect to the loans at a rate that is slower than the prepayment
assumption. Although OID will be reported to holders of pay-through securities
based on the prepayment assumption, no representation is made to holders that
loans will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a class of securities
that are regular REMIC interests (or other regular interests in a REMIC) in a
manner that it believes to be appropriate, to take account of realized losses on
the loans, although the OID Regulations do not provide for such adjustments. If
the IRS were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a class of securities that are regular REMIC interests
could increase.
Certain classes of securities that are regular REMIC interests may
represent more than one class of REMIC regular interests. Unless otherwise
provided in the related prospectus supplement, the applicable trustee intends,
based on the OID Regulations, to calculate OID on such securities as if, solely
for the purposes of computing OID, the separate regular interests were a single
debt instrument.
A subsequent holder of a debt security will also be required to include
OID in gross income, but the holder who purchases the debt security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a debt security's issue price) to offset such
OID by comparable economic accruals of portions of the excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
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INTEREST WEIGHTED SECURITIES. An "interest weighted security" is a
security that is a REMIC regular interest or a "stripped" security (as discussed
under "--Tax Status as a Grantor Trust; General" below) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on loans underlying pass-through
securities. It is not clear how income should be accrued with respect to
interest weighted securities. The trustee intends to take the position that all
of the income derived from an interest weighted security should be treated as
OID and that the amount and rate of accrual of such OID should be calculated by
treating the interest weighted security as a compound interest security.
However, in the case of interest weighted securities that are entitled to some
payments of principal and are REMIC regular interests, the IRS could assert that
income derived from the interest weighted security should be calculated as if
the security were a security purchased at a premium equal to the excess of the
price paid by the holder for the Security over its stated principal amount, if
any. Under this approach, a holder would be entitled to amortize such premium
only if it has in effect an election under section 171 of the Code with respect
to all taxable debt instruments held by such holder, as described below.
Alternatively, the IRS could assert that an interest weighted security should be
taxable under the rules governing bonds issued with contingent payments. This
treatment may be more likely in the case of interest weighted securities that
are stripped securities as described below. SEE "--Non-REMIC Certificates--B.
Multiple Classes of Senior Certificates--Stripped Bonds and Stripped Coupons"
below.
VARIABLE RATE DEBT SECURITIES. In the opinion of tax counsel, in the
case of debt securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that the yield
to maturity of the debt securities and in the case of pay-through securities,
the present value of all payments remaining to be made on the debt securities,
should be calculated as if the interest index remained at its value as of the
issue date of the securities. Because the proper method of adjusting accruals of
OID on a variable rate debt security is uncertain, holders of variable rate debt
securities should consult their own tax advisers regarding the appropriate
treatment of such securities for federal income tax purposes.
MARKET DISCOUNT. In the opinion of tax counsel, a purchaser of a
security may be subject to the market discount rules of sections 1276 through
1278 of the Code. A holder that acquires a debt security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of the
principal amount of the debt security over the purchaser's purchase price) will
be required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on the
debt security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (or in the case of
a pass-through security, as set forth below, the loans underlying
the security) not originally issued with OID, stated interest
payable in the relevant period to total stated interest remaining
to be paid at the beginning of the period or (b) in the case of
securities (or, in the case of a pass-through security, as
described below, the loans underlying the security)
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originally issued at a discount, OID in the relevant period to
total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the debt security (or, in the case of a pass-through security, the
loans), the excess of interest paid or accrued to purchase or carry the security
(or, in the case of a pass-through security, as described below, the underlying
loans) with market discount over interest received on the security is allowed as
a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the security (or in the case of a
pass-through security, an underlying loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
PREMIUM. In the opinion of tax counsel, a holder who purchases a debt
security (other than an interest weighted security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the security at a premium, which it may
elect to amortize as an offset to interest income on the security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on comparable securities have been
issued, the legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that the
accrual of premium on a class of pay-through securities will be calculated using
the prepayment assumption used in pricing the class. If a holder makes an
election to amortize premium on a debt security, the election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by the holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
On December 30, 1997, the IRS issued final amortizable bond premium
regulations dealing with amortizable bond premium. The regulations specifically
do not apply to prepayable debt instruments subject to code section 1272(a)(6)
of the Code. Absent further guidance from the IRS, the trustee intends to
account for amortizable bond premium in the manner described above. Prospective
purchasers of the debt securities should consult their tax advisors regarding
the possible application of the amortizable bond premium regulations.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium
income as interest, based on a constant yield method for Debt securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a debt security with market discount, the holder of the debt security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the debt security acquires during the year
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of the election or thereafter. Similarly, the holder of a debt security that
makes this election for a debt security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that the holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a debt security is irrevocable.
NON-REMIC CERTIFICATES
A. Single Class of Senior Certificates
CHARACTERIZATION. The trust fund may be created with one class of
senior certificates and one class of subordinated certificates. In this case,
each senior certificateholder will be treated as the owner of a pro rata
undivided interest in the interest and principal portions of the trust fund
represented by that senior certificate and will be considered the equitable
owner of a pro rata undivided interest in each of the mortgage loans in the
related mortgage pool. Any amounts received by a senior certificateholder in
lieu of amounts due with respect to any mortgage loan because of a default or
delinquency in payment will be treated for federal income tax purposes as having
the same character as the payments they replace.
Each holder of a senior certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
mortgage loans in the trust fund represented by that senior certificate,
including interest, original issue discount, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the master servicer in accordance with the senior certificateholder's method
of accounting. Under section 162 or 212 of the Code, each senior
certificateholder will be entitled to deduct its pro rata share of servicing
fees, prepayment fees, assumption fees, any loss recognized upon an assumption
and late payment charges retained by the master servicer, provided that these
amounts are reasonable compensation for services rendered to the trust fund. A
senior certificateholder that is an individual, estate or trust will be entitled
to deduct its share of expenses only to the extent such expenses, plus all other
section 212 expenses, exceed 2% of that senior certificateholder's adjusted
gross income. A senior certificateholder using the cash method of accounting
must take into account its pro rata share of income and deductions as and when
collected by or paid to the master servicer. A senior certificateholder using an
accrual method of accounting must take into account its pro rata share of income
and deductions as they become due or are paid to the master servicer, whichever
is earlier. If the servicing fees paid to the master servicer were deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as a retained ownership interest by the master servicer, or any
person to whom the master servicer assigned for value all or a portion of the
servicing fees, in a portion of the interest payments on the mortgage loans. The
mortgage loans might then be subject to the "coupon stripping" rules of the Code
discussed below.
Unless otherwise specified in the related prospectus supplement, tax
counsel will deliver its opinion to the depositor with respect to each series of
certificates that:
o a senior certificate owned by a "domestic building and loan
association" within the meaning of section 7701(a)(19) of the
Code representing principal and interest payments on mortgage
loans will be considered to represent "loans . . . secured by an
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interest in real property which is . . . residential property"
within the meaning of section 7701(a)(19)(C)(v) of the Code to
the extent that the mortgage loans represented by that senior
certificate are of a type described in the section;
o a senior certificate owned by a real estate investment trust
representing an interest in mortgage loans will be considered to
represent "real estate assets" within the meaning of section
856(c)(4)(A) of the Code and interest income on the mortgage
loans will be considered "interest on obligations secured by
mortgages on real property" within the meaning of section
856(c)(3)(B) of the Code to the extent that the mortgage loans
represented by that senior certificate are of a type described in
the section; and
o a senior certificate owned by a REMIC will be an "obligation . .
. which is principally secured by an interest in real property"
within the meaning of section 860G(a)(3)(A) of the Code.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
section 593(d) of the Code to any taxable year beginning after December 31,
1995.
The assets constituting certain trust funds may include "buydown"
mortgage loans. The characterization of any investment in "buydown" mortgage
loans will depend upon the precise terms of the related buydown agreement, but
to the extent that such "buydown" mortgage loans are secured in part by a bank
account or other personal property, they may not be treated in their entirety as
assets described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in "buydown" mortgage loans. Accordingly,
holders of senior certificates should consult their own tax advisors with
respect to characterization of investments in senior certificates representing
an interest in a trust fund that includes "buydown" mortgage loans.
PREMIUM. The price paid for a senior certificate by a holder will be
allocated to the holder's undivided interest in each mortgage loan based on each
mortgage loan's relative fair market value, so that the holder's undivided
interest in each mortgage loan will have its own tax basis. A senior
certificateholder that acquires an interest in mortgage loans at a premium may
elect to amortize the premium under a constant interest method, provided that
the mortgage loan was originated after September 27, 1985. Premium allocable to
a mortgage loan originated on or before September 27, 1985 should be allocated
among the principal payments on the mortgage loan and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on a senior certificate. The basis for a
senior certificate will be reduced to the extent that amortizable premium is
applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under section 171 of the
Code. A certificateholder that makes this election for a certificate that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that the certificateholder acquires during the year of the election or
thereafter.
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If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a senior certificate acquired at a premium
should recognize a loss, if a mortgage loan prepays in full, equal to the
difference between the portion of the prepaid principal amount of the mortgage
loan that is allocable to the senior certificate and the portion of the adjusted
basis of the senior certificate that is allocable to the mortgage loan. If a
reasonable prepayment assumption is used to amortize the premium, it appears
that a loss would be available, if at all, only if prepayments have occurred at
a rate faster than the reasonable assumed prepayment rate. It is not clear
whether any other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
On December 30, 1997, the Internal Revenue Service issued final
amortizable bond premium regulations. These regulations, which generally are
effective for bonds issued or acquired on or after March 2, 1998 (or, for
holders making an election for the taxable year that included March 2, 1998 or
any subsequent taxable year, shall apply to bonds held on or after the first day
of the taxable year of the election). The amortizable bond premium regulations
specifically do not apply to prepayable debt instruments or any pool of debt
instruments, such as the trust fund, the yield on which may be affected by
prepayments which are subject to section 1272(a)(6) of the Code. Absent further
guidance from the IRS and unless otherwise specified in the related prospectus
supplement, the trustee will account for amortizable bond premium in the manner
described above. Prospective purchasers should consult their tax advisors
regarding amortizable bond premium and the amortizable bond premium regulations.
ORIGINAL ISSUE DISCOUNT. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code (currently sections 1271 through 1273 and section 1275) relating to
original issue discount (OID) will be applicable to a senior certificateholder's
interest in those mortgage loans meeting the conditions necessary for these
sections to apply. Accordingly, the following discussion is based in part on the
Treasury's OID Regulations issued on February 2, 1994 under sections 1271
through 1273 and section 1275 of the Code. Certificateholders should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the certificates. Rules regarding
periodic inclusion of OID income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. OID could arise by the financing of points or
other charges by the originator of the mortgages in an amount greater than a
statutory DE MINIMIS exception to the extent that the points are not currently
deductible under applicable provisions of the Code or are not for services
provided by the lender. OID generally must be reported as ordinary gross income
as it accrues under a constant interest method. SEE "--B. Multiple Classes of
Senior Certificates--Senior Certificates Representing Interests in Loans Other
than ARM LOANS--ACCRUAL OF ORIGINAL ISSUE DISCOUNT" below.
MARKET DISCOUNT. A senior certificateholder that acquires an undivided
interest in mortgage loans may be subject to the market discount rules of
sections 1276 through 1278 to the extent an undivided interest in a mortgage
loan is considered to have been purchased at a "market discount". Generally, the
excess of the portion of the principal amount of a mortgage loan allocable to
the holder's undivided interest over the holder's tax basis in such interest.
Market discount with respect to a senior certificate will be considered to be
zero if the amount
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allocable to the senior certificate is less than 0.25% of the senior
certificate's stated redemption price at maturity multiplied by the weighted
average maturity remaining after the date of purchase. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors should consult their own tax advisors regarding the application of
these rules and the advisability of making any of the elections allowed under
sections 1276 through 1278 of the Code.
The Code provides that any principal payment, whether a scheduled
payment or a prepayment, or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants to the Department of the Treasury authority to
issue regulations providing for the computation of accrued market discount on
debt instruments, the principal of which is payable in more than one
installment. Although the Treasury has not yet issued regulations, rules
described in the relevant legislative history will apply. Under those rules, the
holder of a market discount bond may elect to accrue market discount either on
the basis of a constant interest rate or according to one of the following
methods. If a senior certificate is issued with OID, the amount of market
discount that accrues during any accrual period is equal to the product of
o the total remaining market discount
TIMES
o a fraction, the numerator of which is the original issue discount
accruing during the period and the denominator of which is the
total remaining original issue discount at the beginning of the
accrual period.
For senior certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
o the total remaining market discount
TIMES
o a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be paid
at the beginning of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the senior certificates) which provide for
payments which may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of original issue discount will apply. Because the
regulations described above have not been issued, it is impossible to predict
111
what effect those regulations might have on the tax treatment of a senior
certificate purchased at a discount or premium in the secondary market.
A holder who acquires a senior certificate at a market discount also
may be required to defer, until the maturity date of the senior certificate or
its earlier disposition in a taxable transaction, the deduction of a portion of
the amount of interest that the holder paid or accrued during the taxable year
on indebtedness incurred or maintained to purchase or carry the senior
certificate in excess of the aggregate amount of interest (including OID)
includible in such holder's gross income for the taxable year with respect to
the senior certificate. The amount of such net interest expense deferred in a
taxable year may not exceed the amount of market discount accrued on the senior
certificate for the days during the taxable year on which the holder held the
senior certificate and, in general, would be deductible when such market
discount is includible in income. The amount of any remaining deferred deduction
is to be taken into account in the taxable year in which the senior certificate
matures or is disposed of in a taxable transaction. In the case of a disposition
in which gain or loss is not recognized in whole or in part, any remaining
deferred deduction will be allowed to the extent of gain recognized on the
disposition. This deferral rule does not apply if the senior certificateholder
elects to include such market discount in income currently as it accrues on all
market discount obligations acquired by the senior certificateholder in that
taxable year or thereafter.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a certificateholder to elect to accrue all interest, discount
(including DE MINIMIS market or original issue discount) and premium in income
as interest, based on a constant yield method for certificates acquired on or
after April 4, 1994. If such an election is made with respect to a mortgage loan
with market discount, the certificateholder will be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such certificateholder
acquires during the year of the election or thereafter. Similarly, a
certificateholder that makes this election for a certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
certificateholder owns or acquires. SEE "--Regular Certificates--ORIGINAL ISSUE
DISCOUNT AND PREMIUM" below. The election to accrue interest, discount and
premium on a constant yield method with respect to a certificate is irrevocable.
ANTI-ABUSE RULE. The IRS is permitted to apply or depart from the rules
contained in the OID Regulations as necessary or appropriate to achieve a
reasonable result where a principal purpose in structuring a mortgage asset,
mortgage loan or senior certificate, or the effect of applying the otherwise
applicable rules, is to achieve a result that is unreasonable in light of the
purposes of the applicable statutes (which generally are intended to achieve the
clear reflection of income for both issuers and holders of debt instruments).
B. Multiple Classes of Senior Certificates
Stripped Bonds and Stripped Coupons
GENERAL. Pursuant to section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to
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receive some or all of the principal payments results in the creation of
"stripped bonds" with respect to principal payments and "stripped coupons" with
respect to interest payments. For purposes of sections 1271 through 1288 of the
Code, section 1286 treats a stripped bond or a stripped coupon as an obligation
issued on the date that such stripped interest is created. If a trust fund is
created with two classes of senior certificates, one class of senior
certificates will represent the right to principal and interest, or principal
only, on all or a portion of the mortgage loans ("stripped bond certificates"),
while the second class of senior certificates will represent the right to some
or all of the interest on such portion ("stripped coupon certificates").
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If such excess servicing fee is less than 100
basis points (I.E., 1% interest on the mortgage loan principal balance) or the
certificates are initially sold with a DE MINIMIS discount (assuming no
prepayment assumption is required), any non-DE MINIMIS discount arising from a
subsequent transfer of the certificates should be treated as market discount.
The IRS appears to require that reasonable servicing fees be calculated on a
mortgage loan by mortgage loan basis, which could result in some mortgage loans
being treated as having more than 100 basis points of interest stripped off.
Although not entirely clear, a stripped bond certificate generally
should be treated as a single debt instrument issued on the day it is purchased
for purposes of calculating any original issue discount. Generally, if the
discount on a stripped bond certificate is larger than a DE MINIMIS amount (as
calculated for purposes of the original issue discount rules), a purchaser of
such a certificate will be required to accrue the discount under the original
issue discount rules of the Code. SEE "--Single Class of Senior
Certificates--ORIGINAL ISSUE DISCOUNT" above. However, a purchaser of a stripped
bond certificate will be required to account for any discount on the certificate
as market discount rather than original issue discount if either
o the amount of OID with respect to the certificate was treated as
zero under the OID DE MINIMIS rule when the certificate was
stripped, or
o no more than 100 basis points (including any amount of servicing
in excess of reasonable servicing) are stripped off the trust
fund's mortgage loans.
Pursuant to Revenue Procedure 91-49 issued on August 8, 1991, purchasers of
stripped bond certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
The precise tax treatment of stripped coupon certificates is
substantially uncertain. The Code could be read literally to require that
original issue discount computations be made on a mortgage loan by mortgagee
loan basis. However, based on recent IRS guidance, it appears that a stripped
coupon certificate should be treated as a single installment obligation subject
to the original issue discount rules of the Code. As a result, all payments on a
stripped coupon certificate would be included in the certificate's stated
redemption price at maturity for purposes of calculating income on such
certificate under the original issue discount rules of the Code.
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It is unclear under what circumstances, if any, the prepayment of
mortgage loans will give rise to a loss to the holder of a stripped bond
certificate purchased at a premium or a stripped coupon certificate. If a senior
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 senior 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 assumed prepayment rate. However, if the senior
certificate is treated as an interest in discrete mortgage loans or if no
prepayment assumption is used, then, when a mortgage loan is prepaid, the holder
of the certificate should be able to recognize a loss equal to the portion of
the adjusted issue price of the certificate that is allocable to the mortgage
loan.
Because of the complexity of these issues, we strongly suggest that
holders of stripped bond certificates and stripped coupon certificates consult
with their own tax advisors regarding the proper treatment of these certificates
for federal income tax purposes.
TREATMENT OF CERTAIN OWNERS. Several sections of the Code provide
beneficial treatment to certain taxpayers that invest in mortgage loans of the
type that make up the trust fund. With respect to these sections, no specific
legal authority exists regarding whether the character of the senior
certificates, for federal income tax purposes, will be the same as that of the
underlying mortgage loans. While section 1286 treats a stripped obligation as a
separate obligation for purposes of the provisions of the Code addressing
original issue discount, it is not clear whether such characterization would
apply with regard to these other sections. Although the issue is not free from
doubt, in the opinion of tax counsel, based on policy considerations, each class
of senior certificates should be considered to represent "real estate assets"
within the meaning of section 856(c)(4)(A) of the Code and "loans . . . secured
by, an interest in real property which is . . . residential real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code, and interest income
attributable to senior certificates should be considered to represent "interest
on obligations secured by mortgages on real property" within the meaning of
section 856(c)(3)(B) of the Code, provided that in each case the underlying
mortgage loans and interest on such mortgage loans qualify for such treatment.
Prospective purchasers to which such characterization of an investment in senior
certificates is material should consult their own tax advisors regarding the
characterization of the senior certificates and related income. Senior
certificates will be "obligations (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.
Senior Certificates Representing Interests in Loans Other Than ARM
Loans
GENERAL. The OID rules of sections 1271 through 1275 of the Code will
be applicable to a senior certificateholder's interest in those mortgage loans
as to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, OID could arise by the charging of points by the originator of the
mortgage in an amount greater than the statutory DE MINIMIS exception, including
a payment of points that is currently deductible by the borrower under
applicable provisions of the Code, or, under certain circumstances, by the
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presence of "teaser" rates on the mortgage loans. OID on each senior certificate
must be included in the owner's ordinary income for federal income tax purposes
as it accrues, in accordance with a constant interest method that takes into
account the compounding of interest, in advance of receipt of the cash
attributable to such income. The amount of OID required to be included in an
owner's income in any taxable year with respect to a senior certificate
representing an interest in mortgage loans other than mortgage loans with
interest rates that adjust periodically (ARM loans) likely will be computed as
described under "--ACCRUAL OF ORIGINAL ISSUE DISCOUNT" below. The following
discussion is based in part on the OID Regulations and in part on the provisions
of the Tax Reform Act of 1986, as amended. The OID Regulations generally are
effective for debt instruments issued on or after April 4, 1994, but may be
relied upon as authority with respect to debt instruments such as the senior
certificates issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issue date of the mortgage loans should be used or, in the case of
stripped bond certificates or stripped coupon certificates, the date when these
certificates are acquired. The holder of a senior certificate should be aware,
however, that neither the proposed OID Regulations nor the OID Regulations
adequately address certain issues relevant to prepayable securities.
Under the Code, the mortgage loans underlying each senior certificate
will be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such mortgage loan's stated redemption
price at maturity over its issue price. The issue price of a mortgage loan is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a mortgage loan is the sum of all payments to be made on such mortgage loan
other than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described under "--ACCRUAL OF ORIGINAL ISSUE DISCOUNT"
below, will, unless otherwise specified in the related prospectus supplement,
utilize the original yield to maturity of the senior certificate calculated
based on a reasonable assumed prepayment rate for the mortgage loans underlying
the senior certificates and will take into account events that occur during the
calculation period. This prepayment assumption will be determined in the manner
prescribed by regulations that have not yet been issued. The legislative history
of the Tax Reform Act provides, however, that the regulations will require that
this prepayment assumption be the prepayment assumption that is used in
determining the offering price of the certificate. No representation is made
that any certificate will prepay at the prepayment assumption or at any other
rate. The prepayment assumption contained in the Code literally only applies to
debt instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in such debt instruments, such
as the certificates represent. However, no other legal authority provides
guidance with regard to the proper method for accruing OID on obligations that
are subject to prepayment, and, until further guidance is issued, the master
servicer intends to calculate and report OID under the method described below.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. Generally, the owner of a senior
certificate must include in gross income the sum of the "daily portions", as
defined below, of the OID on that senior certificate for each day on which it
owns the senior certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily
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portions of original issue discount with respect to each component generally
will be determined as follows under the Amendments. A calculation will be made
by the master servicer or such other entity specified in the related prospectus
supplement of the portion of original issue discount that accrues during each
successive monthly accrual period (or shorter period from the date of original
issue) that ends on the day in the calendar year corresponding to each of the
distribution dates on the senior certificate (or the day prior to each such
date). This will be done, in the case of each full month accrual period, by
adding
o the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
respective component, under the Prepayment Assumption) of all
remaining payments to be received under the Prepayment Assumption
on the respective component, and
o any payments received during such accrual period (other than a
payment of qualified stated interest), and subtracting from that
total the "adjusted issue price" of the respective component at
the beginning of such accrual period.
The "adjusted issue price" of a senior certificate at the beginning of the first
accrual period is its issue price; the "adjusted issue price" of a senior
certificate at the beginning of a subsequent accrual period is the "adjusted
issue price" at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period reduced by the amount of any
payment (other than a payment of qualified stated interest) made at the end of
or during that accrual period. The OID during the accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
OID generally must be reported as ordinary gross income as it accrues
under a constant interest method that takes into account the compounding of
interest as it accrues rather than when received. However, the amount of OID
includible in the income of a holder of an obligation is reduced when the
obligation is acquired after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued OID, less prior
payments of principal. Accordingly, if mortgage loans acquired by a
certificateholder are purchased at a price equal to the then unpaid principal
amount of such mortgage loan, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
mortgage loan (I.E., points) will be includible by such holder. Other OID on the
mortgage loans (E.G., that arising from a "teaser" rate) would still need to be
accrued.
Senior Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such
as the senior certificates (if the related trust fund includes ARM loans), which
represent interests in ARM loans. Additionally, the IRS has not issued guidance
under the coupon stripping rules of the Code with respect to these instruments.
In the absence of any authority, the master servicer will report OID on senior
certificates attributable to ARM loans ("stripped ARM obligations") to holders
in a manner it believes to be consistent with the rules described under the
heading "--
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Senior Certificates Representing Interests in Loans Other Than ARM Loans" above
and with the OID Regulations. In general, application of these rules may require
inclusion of income on a stripped ARM obligation in advance of the receipt of
cash attributable to such income. Further, the addition of deferred interest
resulting from negative amortization to the principal balance of an ARM loan may
require the inclusion of such amount in the income of the senior
certificateholder when the amount accrues. Furthermore, the addition of deferred
interest to the senior certificate's principal balance will result in additional
income (including possibly OID income) to the senior certificateholder over the
remaining life of the senior certificates.
Because the treatment of stripped ARM obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to these certificates.
C. Possible Application of Contingent Payment Regulations to Certain Non-
REMIC Certificates
Final regulations issued on June 11, 1996 with respect to OID under
section 1275 include "contingent payment regulations" covering obligations that
provide for one or more contingent payments. Rights to interest payments on a
mortgage loan might be considered to be contingent within the meaning of the
contingent payment regulations if the interest would not be paid if the borrower
exercised its right to prepay the mortgage loan. However, in the case of an
investor having a right to shares of the interest and principal payments on a
mortgage loan when the share of interest is not substantially greater than the
share of principal, the possibility of prepayment should not be considered to
characterize otherwise noncontingent interest payments as contingent payments.
The absence of interest payments following a prepayment would be the normal
consequence of the return of the investor's capital in the form of a principal
payment. On the other hand, a right to interest on such a mortgage loan is more
likely to be regarded as contingent if held by an investor that does not also
hold a right to the related principal. Such an investor would not recover its
capital through receipt of a principal payment at the time of the prepayment of
the mortgage loan.
Applying these principles to the senior certificates, because the
mortgage loans are subject to prepayment at any time, payments on a class of
senior certificates representing a right to interest on the mortgage loans could
be considered to be contingent within the meaning of the contingent payment
regulations, at least if the senior certificate was issued at a premium. The
likelihood that such payments will be considered contingent increases the
greater the amount of such premium.
In the event that payments on a senior certificate in respect of
interest on the mortgage loans are considered contingent, then the holder would
generally report income or loss as described under the heading "--Stripped Bonds
and Stripped Coupons" above; PROVIDED, HOWEVER, that the yield that would be
used in calculating interest income would not be the actual yield but would
instead equal the "applicable Federal rate" (AFR), in effect at the time of
purchase of the senior certificate by the holder. The AFR generally is an
average of current yields on Treasury securities computed and published monthly
by the IRS. In addition, once the holder's adjusted basis in the senior
certificate has been reduced (by prior distributions or losses) to an amount
equal to the aggregate amount of the remaining noncontingent payments of the
mortgage loans that are allocable to the senior certificate (or to zero if the
senior certificate does
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not share in principal payments), then the holder would recognize income in each
subsequent month equal to the full amount of interest on the mortgage loans that
accrues in that month and is allocable to the senior certificate. It is
uncertain whether, under the contingent payment regulations, any other
adjustments would be made to take account of prepayments of the mortgage loans.
D. Sale or Exchange of a Senior Certificate
Sale or exchange of a senior certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the seller's adjusted basis in the senior certificate. Such
adjusted basis generally will equal the seller's purchase price for the senior
certificate, increased by the OID included in the seller's gross income with
respect to the senior certificate, and reduced by principal payments on the
senior certificate previously received by the seller. Such gain or loss will be
capital gain or loss to a seller for which a senior certificate is a "capital
asset" within the meaning of section 1221 of the Code, and will be long-term or
short-term depending on whether the senior certificate has been owned for the
long-term capital gain holding period (currently more than one year).
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
It is possible that capital gain realized by holders of the senior
certificates could be considered gain realized upon the disposition of property
that was part of a "conversion transaction". A sale of a senior certificate will
be part of a conversion transaction if substantially all of the holder's
expected return is attributable to the time value of the holder's net
investment, and one of the following conditions is met:
o the holder entered the contract to sell the senior certificate
substantially contemporaneously with acquiring the senior
certificate;
o the senior certificate is part of a straddle;
o the senior certificate is marketed or sold as producing capital
gain; or
o other transactions to be specified in Treasury regulations that
have not yet been issued occur.
If the sale or other disposition of a senior certificate is part of a conversion
transaction, all or any portion of the gain realized upon the sale or other
disposition would be treated as ordinary income instead of capital gain.
Senior 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 senior certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
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E. Non-U.S. Persons
A non-U.S. Person who is an individual or corporation (or an entity
treated as a corporation for federal income tax purposes) holding the senior
certificates on its own behalf will not be subject to United States federal
income taxes on payments of principal, premium, interest or original issue
discount on a senior certificate, unless such non-U.S. Person is a direct or
indirect 10% or greater shareholder of the issuer, a controlled foreign
corporation related to the issuer or a bank receiving interest described in
section 881(c)(3)(A) of the Code. To qualify for the exemption from taxation,
the Withholding Agent, as defined below, must have received a statement from the
individual or corporation that:
o is signed under penalties of perjury by the beneficial owner of
the senior certificate,
o certifies that such owner is not a U.S. Person, and
o provides the beneficial owner's name and address.
A "Withholding Agent" is the last United States payor (or a non-U.S. payor who
is a qualified intermediary, U.S. branch of a foreign person, or withholding
foreign partnership) in the chain of payment prior to a non-U.S. Person (which
itself is not a Withholding Agent). Generally, this statement is made on an IRS
Form W-8BEN ("W-8BEN"), which is effective for the remainder of the year of
signature plus three full calendar years unless a change in circumstances makes
any information on the form incorrect. Notwithstanding the preceding sentence, a
W-8BEN with a U.S. taxpayer identification number will remain effective until a
change in circumstances makes any information on the form incorrect, provided
that the Withholding Agent reports at least annually to the beneficial owner on
IRS Form 1042-S. The beneficial owner must inform the Withholding Agent within
30 days of such change and furnish a new W-8BEN. A senior certificateholder who
is not an individual or corporation (or an entity treated as a corporation for
federal income tax purposes) holding the senior certificates on its own behalf
may have substantially increased reporting requirements. In particular, in the
case of senior certificates held by a foreign partnership (or foreign trust),
the partners (or beneficiaries) rather than the partnership (or trust) will be
required to provide the certification discussed above, and the partnership (or
trust) will be required to provide certain additional information.
A foreign certificateholder whose income with respect to its investment
in a senior certificate is effectively connected with the conduct of a U.S.
trade or business would generally be taxed as if the holder was a U.S. Person
provided the holder provides to the Withholding Agent an IRS Form W-8ECI.
Certain securities clearing organizations, and other entities who are
not beneficial owners, may be able to provide a signed statement to the
Withholding Agent. However, in such case, the signed statement may require a
copy of the beneficial owner's W-8BEN (or the substitute form).
Generally, a non-U.S. Person will not be subject to federal income
taxes on any amount which constitutes capital gain upon retirement or
disposition of a senior certificate, unless such non-U.S. Person is an
individual who is present in the United States for 183 days or more in the
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taxable year of the disposition and such gain is derived from sources within the
United States. Certain other exceptions may be applicable, and a non-U.S. Person
should consult its tax advisor in this regard.
The senior certificates will not be includible in the estate of a
non-U.S. Person unless the individual is a direct or indirect 10% or greater
shareholder of the issuer or, at the time of such individual's death, payments
in respect of the senior certificates would have been effectively connected with
the conduct by such individual of a trade or business in the United States.
F. Backup Withholding
Backup withholding of United States federal income tax may apply to
payments made in respect of the senior certificates to registered owners who are
not "exempt recipients" and who fail to provide certain identifying information
(such as the registered owner's taxpayer identification number) in the required
manner. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients. Payments made in
respect of the senior certificates to a U.S. Person must be reported to the IRS,
unless the U.S. Person is an exempt recipient or establishes an exemption.
Compliance with the identification procedures described in the preceding section
would establish an exemption from backup withholding for those non-U.S. Persons
who are not exempt recipients.
In addition, upon the sale of a senior certificate to (or through) a
broker, the broker must report the sale and withhold on the entire purchase
price, unless either (i) the broker determines that the seller is a corporation
or other exempt recipient or (ii) the seller certifies that such seller is a
non-U.S. Person (and certain other conditions are met). Certification of the
registered owner's non-U.S. status would be made normally on an IRS Form W-8BEN
under penalties of perjury, although in certain cases it may be possible to
submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment
to a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States federal income tax provided the required
information is furnished to the IRS.
Prospective investors are strongly urged to consult their own tax
advisors with respect to the Withholding Regulations.
REMIC CERTIFICATES
A. General
The trust fund relating to a series of certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Although a REMIC is not generally subject to federal income
tax (SEE, however, "--Prohibited Transactions and Other Taxes") below, if a
trust fund with respect to which a REMIC election is made fails to comply with
one or more of the ongoing requirements of the Code for REMIC status during any
taxable year (including the implementation of restrictions on the purchase and
transfer of the residual interest in a REMIC as described under "--Residual
Certificates" below), the Code provides that a trust fund will not be treated as
a REMIC for such year and thereafter. In that event, such entity may be taxable
as a separate corporation, and the related REMIC certificates
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may not be accorded the status or given the tax treatment described below. While
the Code authorizes the Treasury to issue regulations providing relief in the
event of an inadvertent termination of status as a REMIC, no such regulations
have been issued. Moreover, any relief may be accompanied by sanctions 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 such status are not satisfied. With
respect to each trust fund that elects REMIC status, in the opinion of tax
counsel, assuming compliance with all provisions of the related Agreement, the
trust fund will qualify as a REMIC and the related certificates will be
considered to be regular interests ("regular certificates") or residual
interests ("residual certificates") in the REMIC. The related prospectus
supplement for each series of certificates will indicate whether the trust fund
will make a REMIC election and whether a class of certificates will be treated
as a regular or residual interest in the REMIC.
In general, with respect to each series of certificates for which a
REMIC election is made,
o certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets described
in section 7701(a)(19)(C) of the Code;
o certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of section
856(c)(4)(A) of the Code; and
o interest on certificates held by a real estate investment trust
will be considered "interest on obligations secured by mortgages
on real property" within the meaning of section 856(c)(3)(B) of
the Code.
If less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing sections, the certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. In addition, payments on
mortgage loans held pending distribution on the REMIC certificates will be
considered to be qualifying assets under the foregoing sections.
In some instances, the mortgage loans may not be treated entirely as
assets described in the foregoing sections. SEE, in this regard, the discussion
of "buydown" mortgage loans contained in "--NON-REMIC CERTIFICATES--SINGLE CLASS
OF SENIOR CERTIFICATEs" above. REMIC certificates held by a real estate
investment trust will not constitute "Government Securities" within the meaning
of section 856(c)(4)(A) of the Code and REMIC certificates held by a regulated
investment company will not constitute "Government Securities" within the
meaning of section 851(b)(4)(A)(ii) of the Code. REMIC certificates held by
certain financial institutions will constitute "evidences of indebtedness"
within the meaning of section 582(c)(1) of the Code.
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) which are
"single family residences" under section 25(e)(10) of the Code will qualify as
real property without regard to state law classifications. Under section
25(e)(10), a single family residence includes any manufactured home which has a
minimum of 400 square feet of living space and a
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minimum width in excess of 102 inches and which is of a kind customarily used at
a fixed location.
B. Tiered REMIC Structures
For certain series of certificates, two separate elections may be made
to treat designated portions of the related trust fund as REMICs (respectively,
the "subsidiary REMIC" and the "master REMIC") for federal income tax purposes.
Upon the issuance of any such series of certificates, tax counsel will deliver
its opinion generally to the effect that, assuming compliance with all
provisions of the related pooling and servicing agreement, the master REMIC as
well as any subsidiary REMIC will each qualify as a REMIC and the REMIC
certificates issued by the master REMIC and the subsidiary REMIC, respectively,
will be considered to evidence ownership of regular certificates or residual
certificates in the related REMIC within the meaning of the REMIC provisions.
Only REMIC certificates issued by the master REMIC will be offered
under this prospectus. The subsidiary REMIC and the master REMIC will be treated
as one REMIC solely for purposes of determining
o whether the REMIC certificates will be (i) "real estate assets"
within the meaning of section 856(c)(4)(A) of the Code or (ii)
"loans secured by an interest in real property" under section
7701(a)(19)(C) of the Code; and
o whether the income on the certificates is interest described in
section 856(c)(3)(B) of the Code.
C. Regular Certificates
GENERAL. Except as otherwise stated in this discussion, regular
certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of regular certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
regular certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. The regular certificates may be
issued with OID within the meaning of section 1273(a) of the Code. Generally,
the amount of OID, if any, will equal the difference between the "stated
redemption price at maturity" of a regular certificate and its "issue price".
Holders of any class of certificates issued with OID will be required to include
such OID in gross income for federal income tax purposes as it accrues, in
accordance with a constant interest method based on the compounding of interest,
in advance of receipt of the cash attributable to such income. The following
discussion is based in part on the OID Regulations and in part on the provisions
of the Tax Reform Act. Holders of regular certificates should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities such as the regular certificates.
Rules governing OID are set forth in sections 1271 through 1273 and
section 1275 of the Code. These rules require that the amount and rate of
accrual of OID be calculated based on a Prepayment Assumption and prescribe a
method for adjusting the amount and rate of accrual of
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such discount where the actual prepayment rate differs from the Prepayment
Assumption. Under the Code, the Prepayment Assumption must be determined in the
manner prescribed by regulations which have not yet been issued. The Legislative
History provides, however, that Congress intended the regulations to require
that the Prepayment Assumption be the prepayment assumption that is used in
determining the initial offering price of the regular certificates. The
prospectus supplement for each series of regular certificates will specify the
prepayment assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the regular certificates
will prepay at the prepayment assumption or at any other rate.
In general, each regular certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price". The issue price of
a regular certificate is the first price at which a substantial amount of
regular certificates of that class are sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). If less than a substantial amount
of a particular class of regular certificates is sold for cash on or prior to
the date of their initial issuance, the issue price for that class will be
treated as the fair market value of that class on the initial issue date. The
issue price of a regular certificate also includes the amount paid by an initial
regular certificateholder for accrued interest that relates to a period prior to
the initial issue date of the regular certificate. The stated redemption price
at maturity of a regular certificate includes the original principal amount of
the regular certificate, but generally will not include distributions of
interest if such distributions constitute "qualified stated interest". Qualified
stated interest generally means interest payable at a single fixed rate or
qualified variable rate (as described below) provided that the interest payments
are unconditionally payable at intervals of one year or less during the entire
term of the regular certificate. Interest is payable at a single fixed rate only
if the rate appropriately takes into account the length of the interval between
payments. Distributions of interest on regular certificates with respect to
which deferred interest will accrue will not constitute qualified stated
interest payments, in which case the stated redemption price at maturity of the
regular certificates includes all distributions of interest as well as principal
thereon.
Where the interval between the initial issue date and the first
distribution date on a regular certificate is longer than the interval between
subsequent distribution dates, the greater of any OID (disregarding the rate in
the first period) and any interest foregone during the first period is treated
as the amount by which the stated redemption price at maturity of the
certificate exceeds its issue price for purposes of the DE MINIMIS rule
described below. The OID Regulations suggest that all interest on a
long-first-period regular certificate that is issued with non-DE MINIMIS OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first distribution date on a regular certificate
is shorter than the interval between subsequent distribution dates, interest due
on the first Distribution Date in excess of the amount that accrued during the
first period would be added to the certificates stated redemption price at
maturity. Regular securityholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a regular
certificate.
Under the DE MINIMIS rule, OID on a regular certificate will be
considered to be zero if the amount of OID is less than 0.25% of the stated
redemption price at maturity
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of the regular certificate multiplied by the weighted average maturity of the
regular certificate. For this purpose, the weighted average maturity of the
regular certificate is computed as the sum of the amounts determined by
multiplying
o the number of full years (I.E., rounding down partial years) from
the issue date until each distribution in reduction of stated
redemption price at maturity is scheduled to be made
TIMES
o a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity
of the regular certificate and the denominator of which is the
stated redemption price at maturity of the regular certificate.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
mortgage loans and the anticipated reinvestment rate, if any, relating to the
regular certificates. This prepayment assumption with respect to a series of
regular certificates will be set forth in the related prospectus supplement.
Holders generally must report DE MINIMIS OID pro rata as principal payments are
received and such income will be capital gain if the regular certificate is held
as a capital asset. However, accrual method holders may elect to accrue all DE
MINIMIS OID as well as market discount under a constant interest method.
The prospectus supplement with respect to a trust fund may provide for
certain regular certificates to be issued as "super-premium" certificates at
prices significantly exceeding their principal amounts or based on notional
principal balances. The income tax treatment of these super-premium certificates
is not entirely certain. For information reporting purposes, the trust fund
intends to take the position that the stated redemption price at maturity of the
super-premium certificates is the sum of all payments to be made on these
certificates determined under the prepayment assumption set forth in the related
prospectus supplement, with the result that the super-premium certificates would
be treated as being issued with OID. The calculation of income in this manner
could result in negative OID (which delays future accruals of OID rather than
being immediately deductible) when prepayments on the mortgage loans exceed
those estimated under the prepayment assumption. The IRS might contend, however,
that the contingent payment regulations should apply to the super-premium
certificates.
Although the contingent payment regulations are not applicable to
instruments governed by section 1272(a)(6) of the Code, they represent the only
guidance regarding the current view of the IRS with respect to contingent
payment instruments. In the alternative, the IRS could assert that the stated
redemption price at maturity of such regular certificates should be limited to
their principal amount (subject to the discussion under "--ACCRUED INTEREST
CERTIFICATES" below), so that such regular certificates would be considered for
U.S. federal income tax purposes to be issued at a premium. If such position
were to prevail, the rules described under "--PREMIUM" below would apply. It is
unclear when a loss may be claimed for any unrecovered basis for a super-premium
certificate. It is possible that a holder of a super-premium certificate may
only claim a loss when its remaining basis exceeds the maximum amount of future
payments,
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assuming no further prepayments, or when the final payment is received with
respect to the super-premium certificate.
Under the REMIC Regulations, if the issue price of a regular
certificate (other than regular certificate based on a notional amount) does not
exceed 125% of its actual principal amount, the interest rate is not considered
disproportionately high. Accordingly, a regular certificate generally should not
be treated as a super-premium certificate and the rules described below under
"--PREMIUM" below should apply. However, it is possible that holders of regular
certificates issued at a premium, even if the premium is less than 25% of the
certificate's actual principal balance, will be required to amortize the premium
under an OID method or contingent interest method even though no election under
section 171 of the Code is made to amortize such premium.
Generally, a regular certificateholder must include in gross income the
"daily portions," as determined below, of the OID that accrues on a regular
certificate for each day the regular certificateholder holds the regular
certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a regular certificate, a calculation will be
made of the portion of the OID that accrues during each successive accrual
period that ends on the day in the calendar year corresponding to a distribution
date (or if distribution dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on the last day
of the immediately preceding month) and begins on the day after the end of the
immediately preceding accrual period (or on the issue date in the case of the
first accrual period). This will be done, in the case of each full accrual
period, by adding
o the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
regular certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the
regular certificate under the Prepayment Assumption, and
o any payments included in the stated redemption price at maturity
received during the accrual period,
and subtracting from that total the "adjusted issue price" of the regular
certificates at the beginning of the accrual period.
The "adjusted issue price" of a regular certificate at the beginning of
the first accrual period is its issue price; the "adjusted issue price" of a
regular certificate at the beginning of a subsequent accrual period is the
"adjusted issue price" at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the accrual period. The OID accrued during an accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the accrual period. The calculation of OID under the method
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in a given accrual period to reflect the fact that
prepayments are occurring faster or slower than under the Prepayment Assumption.
With respect to an initial accrual period shorter than a full accrual period,
the daily portions of OID may be determined according to an appropriate
allocation under any reasonable method.
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A subsequent purchaser of a regular certificate issued with OID who
purchases the regular certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that regular certificate. In computing
the daily portions of OID for such a purchaser (as well as an initial purchaser
that purchases at a price higher than the adjusted issue price but less than the
stated redemption price at maturity), however, the daily portion is reduced by
the amount that would be the daily portion for such day (computed in accordance
with the rules set forth above) multiplied by a fraction, the numerator of which
is the amount, if any, by which the price paid by such holder for that regular
certificate exceeds the following amount:
o the sum of the issue price plus the aggregate amount of OID that
would have been includible in the gross income of an original
regular certificateholder (who purchased the regular certificate
at its issue price),
LESS
o any prior payments included in the stated redemption price at
maturity,
and the denominator of which is the sum of the daily portions for that regular
certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as original issue.
VARIABLE RATE REGULAR CERTIFICATES. Regular certificates may provide
for interest based on a variable rate. Interest based on a variable rate will
constitute qualified stated interest and not contingent interest if, generally,
o the interest is unconditionally payable at least annually;
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments; and
o interest is based on a "qualified floating rate", an "objective
rate", a combination of a single fixed rate and one or more
"qualified floating rates", one "qualified inverse floating
rate", or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers
interest payments on the regular certificate.
The amount of OID with respect to a regular certificate bearing a
variable rate of interest will accrue in the manner described under "--ORIGINAL
ISSUE DISCOUNT AND PREMIUM" above by assuming generally that the index used for
the variable rate will remain fixed throughout the term of the certificate.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the depositor intends to treat interest on
a regular certificate that is a weighted average of the net interest rates on
mortgage loans as qualified stated interest. In such case, the weighted average
rate used to compute the initial pass-through rate on the regular certificates
will be deemed to be the index in effect through the life of the regular
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certificates. It is possible, however, that the IRS may treat some or all of the
interest on regular certificates with a weighted average rate as taxable under
the rules relating to obligations providing for contingent payments. Such
treatment may effect the timing of income accruals on regular certificates.
MARKET DISCOUNT. A purchaser of a regular certificate may be subject
to the market discount provisions of sections 1276 through 1278 of the Code.
Under these provisions and the OID Regulations, "market discount" equals the
excess, if any, of
o the regular certificate's stated principal amount or, in the case
of a regular certificate with OID, the adjusted issue price
(determined for this purpose as if the purchaser had purchased
the regular certificate from an original holder)
OVER
o the price for the regular certificate paid by the purchaser.
A holder who purchases a regular certificate at a market discount will recognize
income upon receipt of each distribution representing stated redemption price.
In particular, under section 1276 of the Code such a holder generally will be
required to allocate each principal distribution 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, such 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 using the accrual method of accounting to
elect to accrue all interest, discount (including DE MINIMIS market or original
issue discount) and premium in income as interest, based on a constant yield
method. If such an election is made with respect to a regular certificate with
market discount, the certificateholder will be deemed to have made an election
to include in income currently market discount with respect to all other debt
instruments having market discount that the certificateholder acquires during
the year of the election or thereafter. Similarly, a certificateholder that
makes this election for a certificate that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that the certificateholder owns
or acquires. SEE "--ORIGINAL ISSUES DISCOUNT AND PREMIUM" above. The election to
accrue interest, discount and premium on a constant yield method with respect to
a certificate is irrevocable.
Market discount with respect to a regular certificate will be
considered to be zero if the amount allocable to the regular certificate is less
than 0.25% of the regular certificate's stated redemption price at maturity
multiplied by the regular certificate's weighted average maturity remaining
after the date of purchase. If market discount on a regular certificate is
considered to be zero under this rule, the actual amount of market discount must
be allocated to the remaining principal payments on the regular certificate and
gain equal to such allocated amount will be recognized when the corresponding
principal payment is made. Treasury regulations implementing the market discount
rules have not yet been issued; therefore, investors should
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consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code sections 1276
through 1278 of the Code.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants authority to the Treasury to issue regulations
providing for the computation of accrued 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, rules described in the legislative
history of the Tax Reform Act will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. For
regular certificates issued with OID, the amount of market discount that accrues
during a period is equal to the product of
o the total remaining market discount
MULTIPLIED BY
o a fraction, the numerator of which is the OID accruing during the
period and the denominator of which is the total remaining OID at
the beginning of the period.
For regular certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
o the total remaining market discount
MULTIPLIED BY
o a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be paid
at the beginning of the period.
For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the regular certificates) which
provide for payments which may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption applicable
to calculating the accrual of OID will apply.
A holder of a regular certificate that acquires it at a market discount
also may be required to defer, until the maturity date of the regular
certificate or its earlier disposition in a taxable transaction, the deduction
of a portion of the amount of interest that the holder paid or accrued during
the taxable year on indebtedness incurred or maintained to purchase or carry the
regular certificate in excess of the aggregate amount of interest (including
OID) includible in the holder's gross income for the taxable year with respect
to the regular certificate. The amount of such net interest expense deferred in
a taxable year may not exceed the amount of market
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discount accrued on the regular certificate for the days during the taxable year
on which the holder held the regular certificate and, in general, would be
deductible when such market discount is includible in income. The amount of any
remaining deferred deduction is to be taken into account in the taxable year in
which the regular certificate matures or is disposed of in a taxable
transaction. In the case of a disposition in which gain or loss is not
recognized in whole or in part, any remaining deferred deduction will be allowed
to the extent of gain recognized on the disposition. This deferral rule does not
apply if the regular certificateholder elects to include such market discount in
income currently as it accrues on all market discount obligations acquired by
the regular certificateholder in that taxable year or thereafter.
PREMIUM. A purchaser of a regular certificate who purchases the regular
certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the regular certificate at a premium and may elect to amortize
such premium under a constant yield method. A certificateholder that makes this
election for a certificate that is acquired at a premium will be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such certificateholder acquires during the
year of the election or thereafter. It is not clear whether the prepayment
assumption would be taken into account in determining the life of the regular
certificate for this purpose. However, the legislative history of the Tax Reform
Act states that the same rules that apply to accrual of market discount (which
rules require use of a prepayment assumption in accruing market discount with
respect to regular certificates without regard to whether the certificates have
OID) will also apply in amortizing bond premium under section 171 of the Code.
The Code provides that amortizable bond premium will be allocated among the
interest payments on the regular certificates and will be applied as an offset
against the interest payment.
On June 27, 1996, the IRS published in the Federal Register proposed
regulations on the amortization of bond premium. The foregoing discussion is
based in part on such proposed regulations. On December 30, 1997, the IRS issued
the amortizable bond premium regulations which generally are effective for bonds
acquired on or after March 2, 1998 or, for holders making an election to
amortize bond premium as described above, the taxable year that includes March
2, 1998 or any subsequent taxable year, will apply to bonds held on or after the
first day of taxable year in which such election is made. Neither the proposed
regulations nor the final regulations, by their express terms, apply to
prepayable securities described in section 1272(a)(6) of the Code such as the
regular certificates. Holders of regular certificates should consult their tax
advisors regarding the possibility of making an election to amortize any such
bond premium.
DEFERRED INTEREST. Certain classes of regular certificates will provide
for the accrual of interest when one or more ARM Loans are adding deferred
interest to their principal balance by reason of negative amortization. Any
deferred interest that accrues with respect to a class of regular certificates
will constitute income to the holders of such certificates prior to the time
distributions of cash with respect to deferred interest are made. It is unclear,
under the OID Regulations, whether any of the interest on such certificates will
constitute qualified stated interest or whether all or a portion of the interest
payable on the certificates must be included in the stated redemption price at
maturity of the certificates and accounted for as OID (which could accelerate
such inclusion). Interest on regular certificates must in any event be accounted
for under an accrual method by the holders of these certificates. Applying the
latter analysis
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therefore may result only in a slight difference in the timing of the inclusion
in income of interest on the regular certificates.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Certain series of certificates
may contain one or more classes of subordinated certificates and, in the event
there are defaults or delinquencies on the mortgage loans, amounts that would
otherwise be distributed on the subordinated certificates may instead be
distributed on the senior certificates. Holders of subordinated certificates
nevertheless will be required to report income with respect to these
certificates under an accrual method without giving effect to delays and
reductions in distributions on such subordinated certificates attributable to
defaults and delinquencies on the mortgage loans, except to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a holder of a subordinated certificate in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the subordinated certificate is reduced as a result of defaults
and delinquencies on the mortgage loans. However, the timing and character of
such losses or reductions in income are uncertain. Accordingly, holders of
subordinated certificates should consult their own tax advisors on this point.
SALE, EXCHANGE OR REDEMPTION. If a regular certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the regular certificate. The
adjusted basis generally will equal the cost of the regular certificate to the
seller, increased by any OID and market discount included in the seller's gross
income with respect to the regular certificate, and reduced (but not below zero)
by payments included in the stated redemption price at maturity previously
received by the seller and by any amortized premium. Similarly, a holder who
receives a payment which is part of the stated redemption price at maturity of a
regular certificate will recognize gain equal to the excess, if any, of the
amount of the payment over the holder's adjusted basis in the regular
certificate. The holder of a regular certificate that receives a final payment
which is less than the holder's adjusted basis in the regular certificate will
generally recognize a loss. Except as provided in the following paragraph and as
provided under "--MARKET DISCOUNT" above, any such gain or loss will be capital
gain or loss, provided that the regular certificate is held as a "capital asset"
(generally, property held for investment) within the meaning of section 1221 of
the Code.
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
Gain from the sale or other disposition of a regular certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that such gain does not exceed the EXCESS, if any, of:
o the amount that would have been includible in such holder's
income with respect to the regular certificate had income accrued
thereon at a rate equal to 110% of the AFR
130
as defined in section 1274(d) of the Code determined as of the
date of purchase of such regular certificate,
OVER
o the amount actually includible in the holder's income.
Gain from the sale or other disposition of a regular certificate that
might otherwise be capital gain will be treated as ordinary income, (i) if the
regular certificate is held as part of a "conversion transaction" as defined in
section 1258(c) of the Code, up to the amount of interest that would have
accrued at the applicable federal rate under section 1274(d) of the Code in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, or (ii) if the regular
certificate is held as part of a straddle. Potential investors should consult
their tax advisors with respect to the tax consequences of ownership and
disposition of an investment in regular certificates in their particular
circumstances.
Regular 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 regular certificate by a bank or a thrift institution to which
such section applies will be ordinary income or loss.
The regular certificate information reports will include a statement of
the adjusted issue price of the regular certificate at the beginning of each
accrual period. In addition, the reports will include information necessary to
compute the accrual of any market discount that may arise upon secondary trading
of regular certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
ACCRUED INTEREST CERTIFICATES. Regular certificates that are "payment
lag" certificates may provide for payments of interest based on a period that
corresponds to the interval between distribution dates but that ends prior to
each distribution date. The period between the initial issue date of the payment
lag certificates and their first distribution date may or may not exceed such
interval. Purchasers of payment lag certificates for which the period between
the initial issue date and the first distribution date does not exceed such
interval could pay upon purchase of the regular certificates accrued interest in
excess of the accrued interest that would be paid if the interest paid on the
distribution date were interest accrued from distribution date to distribution
date. If a portion of the initial purchase price of a regular certificate is
allocable to interest that has accrued prior to the issue date ("pre-issuance
accrued interest"), and the regular certificate provides for a payment of stated
interest on the first payment date (and the first payment date, is within one
year of the issue date) that equals or exceeds the amount of the pre-issuance
accrued interest, then the regular certificate's issue price may be computed by
subtracting from the issue price the amount of pre-issuance accrued interest,
rather than as an amount payable on the regular certificate. However, it is
unclear under this method how the proposed OID Regulations treat interest on
payment lag certificates as described above. Therefore, in the case of a payment
lag certificate, the REMIC intends to include accrued interest
131
in the issue price and report interest payments made on the first distribution
date as interest only to the extent such payments represent interest for the
number of days that the certificateholder has held the payment lag certificate
during the first accrual period.
Investors should consult their own tax advisors concerning the
treatment for federal income tax purposes of payment lag certificates.
NON-INTEREST EXPENSES OF THE REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC", a portion
of the REMIC's servicing, administrative and other noninterest expenses will be
allocated as a separate item to those regular securityholders that are
"pass-through interest holders". Generally, a single-class REMIC is defined as
(i) a REMIC that would be treated as a fixed investment trust under Treasury
regulations but for its qualification as a REMIC or (ii) a REMIC that is
substantially similar to an investment trust but is structured with the
principal purpose of avoiding this allocation requirement imposed by the
temporary regulations. Such a pass-through interest holder would be required to
add its allocable share, if any, of such expenses to its gross income and to
treat the same amount as an item of investment expense. An individual generally
would be allowed a deduction for such expenses only as a miscellaneous itemized
deduction subject to the limitations under section 67 of the Code. That section
allows such deductions only to the extent that in the aggregate such expenses
exceed 2% 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 certain amount (the "applicable
amount") will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over the applicable amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income recognized by residual securityholders who
are subject to the limitations of either section 67 or section 68 may be
substantial. The REMIC is required to report to each pass-through interest
holder and to the IRS such holder's allocable share, if any, of the REMIC's
non-interest expenses. The term "pass-through interest holder" generally refers
to individuals, entities taxed as individuals and certain pass-through entities
including regulated investment companies, but does not include real estate
investment trusts. Certificateholders that are "pass-through interest holders"
should consult their own tax advisors about the impact of these rules on an
investment in the regular certificates.
TREATMENT OF REALIZED LOSSES. Although not entirely clear, it appears
that holders of regular certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any regular certificates becoming wholly or partially worthless
and that, in general, holders of certificates that are not corporations should
be allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any regular certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of certificates
may be allowed a bad debt deduction at such time that the principal balance of
any regular certificate is reduced to reflect realized losses resulting from any
liquidated mortgage loans. The IRS, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect realized
losses only after all mortgage loans remaining in the related trust fund have
been liquidated or the certificates of the related series have been otherwise
retired. Prospective investors in and holders of the certificates are urged to
consult their own tax advisors regarding the appropriate timing, amount
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and character of any loss sustained with respect to such certificates, including
any loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
certificates.
NON-U.S. PERSONS. A non-U.S. Person who is an individual or corporation
(or an entity treated as a corporation for federal income tax purposes) holding
the regular certificates on its own behalf will not be subject to United States
federal income taxes on payments of principal, premium, interest or original
issue discount on a regular certificate, unless such non-U.S. Person is a direct
or indirect 10% or greater shareholder of the issuer, a controlled foreign
corporation related to the issuer or a bank receiving interest described in
section 881(c)(3)(A) of the Code. To qualify for the exemption from taxation,
the Withholding Agent must have received a statement from the individual or
corporation that:
o is signed under penalties of perjury by the beneficial owner of
the regular certificate,
o certifies that such owner is not a U.S. Person, and
o provides the beneficial owner's name and address.
Generally, this statement is made on an IRS Form W-8BEN ("W-8BEN"), which is
effective for the remainder of the year of signature plus three full calendar
years unless a change in circumstances makes any information on the form
incorrect. Notwithstanding the preceding sentence, a W-8BEN with a U.S. taxpayer
identification number will remain effective until a change in circumstances
makes any information on the form incorrect, provided that the Withholding Agent
reports at least annually to the beneficial owner on IRS Form 1042-S. The
beneficial owner must inform the Withholding Agent within 30 days of such change
and furnish a new W-8BEN. A regular certificateholder who is not an individual
or corporation (or an entity treated as a corporation for federal income tax
purposes) holding the regular certificates on its own behalf may have
substantially increased reporting requirements. In particular, in the case of
regular certificates held by a foreign partnership (or foreign trust), the
partners (or beneficiaries) rather than the partnership (or trust) will be
required to provide the certification discussed above, and the partnership (or
trust) will be required to provide certain additional information.
A foreign regular certificateholder whose income with respect to its
investment in a regular certificate is effectively connected with the conduct of
a U.S. trade or business would generally be taxed as if the holder was a U.S.
Person provided the holder provides to the Withholding Agent an IRS Form W-8ECI.
Certain securities clearing organizations, and other entities who are
not beneficial owners, may be able to provide a signed statement to the
Withholding Agent. However, in such case, the signed statement may require a
copy of the beneficial owner's W-8BEN (or the substitute form).
Generally, a non-U.S. Person will not be subject to federal income
taxes on any amount which constitutes a capital gain upon retirement or
disposition of a regular certificate, unless
133
such non-U.S. Person is an individual who is present in the United States for
183 days or more in the taxable year of the disposition and such gain is derived
from sources within the United States. Certain other exceptions may be
applicable, and a non-U.S. Person should consult its tax advisor in this regard.
The regular certificates will not be includible in the estate of a
non-U.S. Person unless the individual is a direct or indirect 10% or greater
shareholder of the issuer or, at the time of such individual's death, payments
in respect of the regular certificates would have been effectively connected
with the conduct by such individual of a trade or business in the United States.
BACKUP WITHHOLDING. Backup withholding of United States federal income
tax may apply to payments made in respect of the regular certificates to
registered owners who are not "exempt recipients" and who fail to provide
certain identifying information (such as the registered owner's taxpayer
identification number) in the required manner. Generally, individuals are not
exempt recipients, whereas corporations and certain other entities generally are
exempt recipients. Payments made in respect of the regular certificates to a
U.S. Person must be reported to the IRS, unless the U.S. Person is an exempt
recipient or establishes an exemption. Compliance with the identification
procedures described in the preceding section would establish an exemption from
backup withholding for those non-U.S. Persons who are not exempt recipients.
In addition, upon the sale of a regular certificate to (or through) a
broker, the broker must report the sale and withhold on the entire purchase
price, unless either (i) the broker determines that the seller is a corporation
or other exempt recipient or (ii) the seller certifies that such seller is a
non-U.S. Person (and certain other conditions are met). Certification of the
registered owner's non-U.S. Person status would be made normally on an IRS Form
W-8BEN under penalties of perjury, although in certain cases it may be possible
to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment
to a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States federal income tax provided the required
information is furnished to the IRS.
Prospective investors are strongly urged to consult their own tax
advisors with respect to the Withholding Regulations.
D. Residual Certificates
ALLOCATION OF THE INCOME OF THE REMIC TO THE RESIDUAL CERTIFICATES. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. SEE "--Prohibited
Transactions and Other Taxes" below. Instead, each original holder of a residual
certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which such holder owns any residual certificates. The taxable income of
the REMIC for each day will be determined by allocating the taxable income of
the REMIC for each calendar quarter ratably to each day in the quarter. The
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding residual certificates that the holder owns
134
on that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the residual securityholders without regard to the
timing or amounts of cash distributions by the REMIC. Ordinary income derived
from residual certificates will be "portfolio income" for purposes of the
taxation of taxpayers subject to the limitations on the deductibility of
"passive losses." As residual interests, the residual certificates will be
subject to tax rules, described below, that differ from those that would apply
if the residual certificates were treated for federal income tax purposes as
direct ownership interests in the certificates or as debt instruments issued by
the REMIC.
A residual certificateholder may be required to include taxable income
from the residual certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(I.E., a fast-pay, slow-pay structure) may generate such a mismatching of income
and cash distributions (I.E., "phantom income"). This mismatching may be caused
by the use of certain required tax accounting methods by the REMIC, variations
in the prepayment rate of the underlying mortgage loans and certain other
factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
residual certificate to a residual certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a residual
certificate and the impact of such tax treatment on the after-tax yield of a
residual certificate.
A subsequent residual certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that the residual certificateholder owns the residual
certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original residual certificateholder,
as described above. The legislative history of the Tax Reform Act indicates that
certain adjustments may be appropriate to reduce (or increase) the income of a
subsequent holder of a residual certificate that purchased the residual
certificate at a price greater than (or less than) the adjusted basis the
residual certificate would have in the hands of an original residual
certificateholder. SEE "--SALE OR EXCHANGE OF RESIDUAL CERTIFICATES" below. It
is not clear, however, whether such adjustments will in fact be permitted or
required and, if so, how they would be made. The REMIC Regulations do not
provide for any such adjustments.
TAXABLE INCOME OF THE REMIC ATTRIBUTABLE TO RESIDUAL CERTIFICATES. The
taxable income of the REMIC will reflect a netting of the income from the
mortgage loans and the REMIC's other assets and the deductions allowed to the
REMIC for interest and OID on the regular certificates and, except as described
under "--NON-INTEREST EXPENSES OF THE REMIC" below, other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the regular and residual certificates (or, if a class of certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the mortgage loans and other assets of the REMIC in proportion
to their respective fair market values. A mortgage loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less or greater, respectively than its principal balance. Any such
discount (whether market discount or OID) will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
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OID on the regular certificates. The REMIC expects to 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 would be amortized under a constant yield
method. It is likely that the yield of a mortgage loan would be calculated for
this purpose taking account of the prepayment assumption. However, the election
would not apply to any mortgage loan originated on or before September 27, 1985.
Instead, premium on such a mortgage loan would be allocated among the principal
payments thereon and would be deductible by the REMIC as those payments become
due.
The REMIC will be allowed a deduction for interest and OID on the
regular certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to regular
certificates except that the 0.25% per annum DE MINIMIS rule and adjustments for
subsequent holders described therein will not apply.
A residual certificateholder will not be permitted to amortize the cost
of the residual certificate as an offset to its share of the REMIC's taxable
income. However, such taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the residual certificates will be added to the issue
price of the regular certificates in determining the REMIC's initial basis in
its assets. SEE "--SALE OR EXCHANGE OF RESIDUAL CERTIFICATES" below. For a
discussion of possible adjustments to income of a subsequent holder of a
residual certificate to reflect any difference between the actual cost of the
residual certificate to such holder and the adjusted basis the residual
certificate would have in the hands of an original residual certificateholder,
SEE "--ALLOCATION OF THE INCOME OF THE REMIC TO THE RESIDUAL CERTIFICATES"
above.
ADDITIONAL TAXABLE INCOME OF RESIDUAL INTERESTS. Any payment received
by a holder of a residual certificate in connection with the acquisition of the
residual certificate will be taken into account in determining the income of
such holder for federal income tax purposes. Although it appears likely that any
such payment would be includible in income immediately upon its receipt or
accrual as ordinary income, the IRS might assert that such payment 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
such payments, holders of residual certificates should consult their tax
advisors concerning the treatment of such payments for income tax purposes.
NET LOSSES OF THE REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. The net loss
would be allocated among the residual securityholders in the same manner as the
REMIC's taxable income. The net loss allocable to any residual certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in the residual certificate. Any net loss that is not
currently deductible by reason of this limitation may only be used by the
residual certificateholder to offset its share of the REMIC's taxable income in
future periods (but not otherwise). The ability of residual securityholders that
are individuals or closely held corporations to deduct net losses may be subject
to additional limitations under the Code.
MARK-TO-MARKET REGULATIONS. Prospective purchasers of a residual
certificate should be aware that the IRS finalized mark-to-market regulations
which provide that a residual certificate
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acquired after January 3, 1995 cannot be marked to market. The mark-to-market
regulations replaced the temporary regulations which allowed a residual
certificate to be marked to market provided that it was not a "negative value"
residual interest.
NON-INTEREST EXPENSES OF THE REMIC. The REMIC's taxable income will be
determined in the same manner as if the REMIC were an individual. However, all
or a portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to residual securityholders that
are "pass-through interest holders". Such a holder would be required to add an
amount equal to its allocable share, if any, of such expenses to its gross
income and to treat the same amount as an item of investment expense.
Individuals are generally allowed a deduction for such an investment expense
only as a miscellaneous itemized deduction subject to the limitations under
section 67 of the Code which allows such deduction only to the extent that, in
the aggregate, all such expenses exceed 2% of an individual's adjusted gross
income. In addition, the personal exemptions and itemized deductions of
individuals with adjusted gross incomes above particular levels are subject to
certain limitations which reduce or eliminate the benefit of such items. The
REMIC is required to report to each pass-through interest holder and to the IRS
the holder's allocable share, if any, of the REMIC's non-interest expenses. The
term "pass-through interest holder" generally refers to individuals, entities
taxed as individuals and certain pass-through entities, but does not include
real estate investment trusts. Residual securityholders that are "pass-through
interest holders" should consult their own tax advisors about the impact of
these rules on an investment in the residual certificates. SEE "--Regular
Certificates--NON-INTEREST EXPENSES OF THE REMIC" above.
EXCESS INCLUSIONS. A portion of the income on a residual certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion
o may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a residual
certificateholder;
o will be treated as "unrelated business taxable income" within the
meaning of section 512 of the Code if the residual
certificateholder is a pension fund or any other organization
that is subject to tax only on its unrelated business taxable
income (SEE "Tax-Exempt Investors" below); and
o is not eligible for any reduction in the rate of withholding tax
in the case of a residual certificateholder that is a foreign
investor.
SEE "--NON-U.S. PERSONS" below. The exception for thrift institutions is
available only to the institution holding the residual certificate and not to
any affiliate of the institution, unless the affiliate is a subsidiary all the
stock of which, and substantially all the indebtedness of which, is held by the
institution, and which is organized and operated exclusively in connection with
the organization and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any
residual certificateholder, the excess inclusions for any calendar quarter is
the EXCESS, if any, of
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o the income of the residual certificateholder for that calendar
quarter from its residual certificate
OVER
o the sum of the "daily accruals" for all days during the calendar
quarter on which the residual certificateholder holds the
residual certificate.
For this purpose, the daily accruals with respect to a residual certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" of the residual certificate at the
beginning of the calendar quarter and 120% of the "Federal long-term rate" in
effect at the time the residual certificate is issued. For this purpose, the
"adjusted issue price" of a residual certificate at the beginning of any
calendar quarter equals the issue price of the residual certificate, increased
by the amount of daily accruals for all prior quarters, and decreased (but not
below zero) by the aggregate amount of payments made on the residual certificate
before the beginning of such quarter. The "Federal long-term 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.
In the case of any residual certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such 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 such trust in
proportion to the dividends received by the shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
residual certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds and certain cooperatives are subject to
similar rules.
The Small Business Job Protection Act of 1996 has eliminated the
special rule permitting section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from residual certificates that have "significant value" within
the meaning of the REMIC Regulations, effective for taxable years beginning
after December 31, 1995 except with respect to residual certificates
continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act provides three rules
for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual certificateholder. First, the alternative minimum
taxable income for the residual certificateholder is determined without regard
to the special rule that taxable income cannot be less than excess inclusion.
Second, the amount of any alternative minimum tax net operating loss deductions
must be computed without regard to any excess inclusions. Third, the residual
certificateholder's alternative minimum taxable income for a tax year cannot be
less than excess inclusions for the year. The effect of this last statutory
amendment is to prevent the use of nonrefundable tax credits to reduce a
taxpayer's income tax below its tentative minimum tax computed only on excess
inclusions. These rules are effective for tax years beginning after December 31,
1996, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
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PAYMENTS. Any distribution made on a residual certificate to a residual
certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the residual certificateholder's adjusted basis in the
residual certificate. To the extent a distribution exceeds such adjusted basis,
it will be treated as gain from the sale of the residual certificate.
PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders of
the residual certificates. In the case of a "single class REMIC", however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the holders of the regular certificates
and the holders of the residual certificates on a daily basis in proportion to
the relative amounts of income accruing to each certificateholder on that day.
In the case of individuals (or trusts, estates or other persons who compute
their income in the same manner as individuals) who own an interest in a regular
certificate directly or through a pass-through entity which is required to pass
miscellaneous itemized deductions through to its owners or beneficiaries (E.G.,
a partnership, an S corporation or a grantor trust), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. The reduction or disallowance of this deduction coupled with the
allocation of additional income may have a significant impact on the yield of
the regular certificate to such a holder. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. In general terms, a single class REMIC is one that
either (i) would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax purposes) or
(ii) is similar to such a trust and is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise stated in the applicable
prospectus supplement, the expenses of the REMIC will be allocated to holders of
the related residual certificates in their entirety and not to holders of the
related regular certificates.
SALE OR EXCHANGE OF RESIDUAL CERTIFICATES. If a residual certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the residual certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a residual certificate generally equals the cost of the residual certificate
to the residual certificateholder, increased by the taxable income of the REMIC
that was included in the income of the residual certificateholder with respect
to the residual certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to the residual certificateholder
with respect to the residual certificate and by the distributions received
thereon by the residual certificateholder. In general, any such gain or loss
will be capital gain or loss provided the residual certificate is held as a
capital asset. However, residual certificates will be "evidences of
indebtedness" within the meaning of section 582(c)(1) of the Code, so that gain
or loss recognized from sale of a residual certificate by a bank or thrift
institution to which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a residual certificate reacquires the residual certificate or acquires
any other residual certificate, any residual interest in another REMIC or
similar interest in a "taxable mortgage pool" (as defined in
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section 7701(i)) of the Code during the period beginning six months before, and
ending six months after, the date of such 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 residual certificateholder on the sale will not be deductible, but
instead will increase the residual certificateholder's adjusted basis in the
newly acquired asset.
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
E. Prohibited Transactions and Other Taxes
The REMIC is subject to a tax at a rate equal to 100% of the net income
derived from "prohibited transactions". In general, a prohibited transaction
means the disposition of a mortgage loan other than pursuant to certain
specified exceptions, the receipt of investment income from a source other than
a mortgage loan or certain other permitted investments or the disposition of an
asset representing a temporary investment of payments on the mortgage loans
pending payment on the residual certificates or regular certificates. In
addition, the assumption of a mortgage loan by a subsequent purchaser could
cause the REMIC to recognize gain which would also be subject to the 100% tax on
prohibited transactions.
In addition, certain contributions to a REMIC made after the initial
issue date of the certificates could result in the imposition of a tax on the
REMIC equal to 100% of the value of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related prospectus supplement, such tax would be
borne first by the residual securityholders, to the extent of amounts
distributable to them, and then by the master servicer.
F. Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the meaning
of section 860F(a)(4)(A)(i) of the Code, which may be accomplished by
designating in the REMIC's final tax return a date on which such adoption is
deemed to occur, and sells all of its assets (other than cash) within a 90-day
period beginning on such date, the REMIC will not be subject to any prohibited
transaction tax, provided that the REMIC credits or distributes in liquidation
all of the sale proceeds plus its cash (other than the amounts retained to meet
claims) to holders of regular and residual certificates within the 90-day
period.
The REMIC will terminate shortly following the retirement of the
regular certificates. If a residual certificateholder's adjusted basis in the
residual certificate exceeds the amount of cash distributed to the residual
certificateholder in final liquidation of its interest, it would appear that the
residual certificateholder would be entitled to a loss equal to the amount of
such excess. It is unclear whether such a loss, if allowed, will be a capital
loss or an ordinary loss.
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G. Administrative Matters
Solely for the purpose of the administrative provisions of the Code,
the REMIC will be treated as a partnership and the residual securityholders will
be treated as the partners. Under temporary regulations, however, if there is at
no time during the taxable year more than one residual certificateholder, a
REMIC shall not be subject to the rules of subchapter C of chapter 63 of the
Code relating to the treatment of partnership items for a taxable year.
Accordingly, the REMIC will file an annual tax return on Form 1066, U.S. Real
Estate Mortgage Investment Conduit Income Tax Return. In addition, certain other
information will be furnished quarterly to each residual certificateholder who
held the residual certificate on any day in the previous calendar quarter.
Each residual certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
residual certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to section 6111 of the Code because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a 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 such person
and other information.
H. Tax-Exempt Investors
Any residual certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of section 512 of the Code will be subject to
such tax on that portion of the distributions received on a residual certificate
that is considered an "excess inclusion." SEE "--Residual Certificates--EXCESS
INCLUSIONS" above.
I. Non-U.S. Persons
Amounts paid to residual securityholders who are not U.S. Persons (see
"--Regular Certificates--Non-U.S. Persons" above) are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Amounts distributed to residual securityholders should qualify as "portfolio
interest", subject to the conditions described in "--Regular Certificates"
above, but only to the extent that the mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a residual
certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. SEE "--Residual Certificates--Excess
Inclusions" above. If the portfolio interest exemption is unavailable, such
amount will be subject to United States withholding tax when paid or otherwise
distributed (or when the residual certificate is disposed of) under rules
similar to those for withholding upon disposition of debt instruments that have
OID. The Code, however, grants the Treasury authority to issue regulations
requiring that those amounts be taken into account earlier than otherwise
provided where necessary to prevent avoidance of tax (e.g., where the residual
certificates do not have significant value). SEE "--Residual
Certificates--Excess
141
Inclusions" above. If the amounts paid to residual securityholders that are not
U.S. Persons are effectively connected with their conduct of a trade or business
within the United States, the 30% (or lower treaty rate) withholding tax will
not apply. Instead, the amounts paid to such non-U.S. Person will be subject to
U. S. federal income taxation at regular graduated rates. For special
restrictions on the transfer of residual certificates, SEE "--Tax-Related
Restrictions on Transfers of Residual Certificates" below.
Regular securityholders and persons related to such holders should not
acquire any residual certificates, and residual securityholders and persons
related to residual securityholders should not acquire any regular certificates
without consulting their tax advisors as to the possible adverse tax
consequences of such acquisition.
J. Tax-Related Restrictions on Transfers of Residual Certificates
DISQUALIFIED ORGANIZATIONS. An entity may not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that residual
interests in such entity are not held by "disqualified organizations". Further,
a tax is imposed on the transfer of a residual interest in a REMIC to a
disqualified organization. The amount of the tax equals the product of
o an amount (as determined under the REMIC Regulations) equal to
the present value of the total anticipated "excess inclusions"
with respect to such interest for periods after the transfer
MULTIPLIED BY
o the highest marginal federal income tax rate applicable to
corporations.
The tax is imposed on the transferor unless the transfer is through an agent
(including a broker or other middlemen) for a disqualified organization, in
which event the tax is imposed on the agent. The person otherwise liable for the
tax shall be relieved of liability for the tax if the transferee furnished to
such person an affidavit that the transferee is not a disqualified organization
and, at the time of the transfer, such person does not have actual knowledge
that the affidavit is false. A "disqualified organization" means
o the United States, any state, possession, or political
subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the
foregoing (provided that such term does not include an
instrumentality if all its activities are subject to tax and,
except for Freddie Mac, a majority of its board of directors is
not selected by any such governmental agency),
o any organization (other than certain farmers' cooperatives)
generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable
income", and
o a rural electric or telephone cooperative.
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A tax is imposed on a "pass-through entity" holding a residual interest
in a REMIC if at any time during the taxable year of the pass-through entity a
disqualified organization is the record holder of an interest in such entity.
The amount of the tax is equal to the product of
o the amount of excess inclusions for the taxable year allocable to
the interest held by the disqualified organization, and
o the highest marginal federal income tax rate applicable to
corporations.
The pass-through entity otherwise liable for the tax, for any period during
which the disqualified organization is the record holder of an interest in such
entity, will be relieved of liability for the tax if such record holder
furnishes to such entity an affidavit that such record holder is not a
disqualified organization and, for such period, the pass-through entity does not
have actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means
o a regulated investment company, real estate investment trust or
common trust fund,
o a partnership, trust or estate, and
o certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will, with
respect to such interest, be treated as a pass-through entity. The tax on
pass-through entities is generally effective for periods after March 31, 1988,
except that in the case of regulated investment companies, real estate
investment trusts, common trust funds and publicly-traded partnerships the tax
shall apply only to taxable years of such entities beginning after December 31,
1988. Under proposed legislation, large partnerships (generally with 250 or more
partners) will be taxable on excess inclusion income as if all partners were
disqualified organizations.
In order to comply with these rules, the pooling and servicing
agreement will provide that no record or beneficial ownership interest in a
residual certificate may be, directly or indirectly, purchased, transferred or
sold without the express written consent of the master servicer. The master
servicer will grant such consent to a proposed transfer only if it receives the
following: (i) an affidavit from the proposed transferee to the effect that it
is not a disqualified organization and is not acquiring the residual certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the residual
certificate.
NON-ECONOMIC RESIDUAL CERTIFICATES. The REMIC Regulations disregard,
for federal income tax purposes, any transfer of a non-economic residual
certificate to a U.S. Person, unless no significant purpose of the transfer is
to enable the transferor to impede the assessment or collection of tax. A
"non-economic residual certificate" is any residual certificate (including a
residual certificate with a positive value at issuance) unless at the time of
transfer, taking into account the prepayment assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents,
143
o the present value of the expected future distributions on the
residual certificate at least equals the product of the present
value of the anticipated excess inclusions and the highest
corporate income tax rate in effect for the year in which the
transfer occurs, and
o the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an
amount sufficient to satisfy the accrued taxes.
A significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A transferor is presumed not to have such
knowledge if
o the transferor conducted a reasonable investigation of the
transferee; and
o the transferee acknowledges to the transferor that the residual
interest may generate tax liabilities in excess of the cash flow
and the transferee represents that it intends to pay such taxes
associated with the residual interest as they become due.
The IRS has issued proposed Treasury regulations that would add to the
conditions necessary to ensure that a transfer of a noneconomic residual
interest would be respected. The proposed additional condition provides that the
transfer of a noneconomic residual interest will not qualify under this safe
harbor unless the present value of the anticipated tax liabilities associated
with holding the residual interest does not exceed the present value of the sum
of
o any consideration given to the transferee to acquire the interest
(the inducement payment),
o future distributions on the interest, and
o any anticipated tax savings associated with holding the interest
as the REMIC generates losses.
For purposes of this calculation, the present value is calculated using
a discount rate equal to the lesser of the applicable federal rate and the
transferee's cost of borrowing. The proposed effective date for the changes is
February 4, 2000.
On December 8, 2000, the IRS issued Revenue Procedure 2001-12,
effective February 4, 2001 pending finalization of proposed regulations, which
expands the safe harbor for transfers of noneconomic residual interests to
include transfers to certain taxable domestic corporations with significant
gross and net assets, provided that those corporations agree to transfer the
residual interests only to other taxable domestic corporations in transactions
qualifying for one of the safe harbor provisions. Eligibility for the expanded
safe harbor requires, among other things, that the transferor not know of any
facts or circumstances that reasonably indicate that the taxes associated with
the residual interest will not be paid. The Revenue Procedure provides that if
the amount of consideration given to the transferee to acquire the residual
interest is so low that
144
under any set of reasonable assumptions a reasonable person would conclude that
the taxes associated with holding the residual interest will not be paid, then
the transferor will be deemed to know that the transferee cannot or will not
paid those taxes.
If a transfer of a non-economic residual certificate is disregarded,
the transferor would continue to be treated as the owner of the residual
certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
residual certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person, unless such transferee's income in
respect of the residual certificate is effectively connected with the conduct of
a United States trade or business. A residual certificate is deemed to have a
tax avoidance potential unless, at the time of transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee amounts that
will equal at least 30% of each excess inclusion and that such amounts will be
distributed at or after the time the excess inclusion accrues and not later than
the end of the calendar year following the year of accrual. If the non-U.S.
Person transfers the residual certificate to a U.S. Person, the transfer will be
disregarded and the foreign transferor will continue to be treated as the owner,
if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions. The provisions in the REMIC Regulations regarding
transfers to foreign persons of residual certificates that have tax avoidance
potential are effective for all transfers after June 30, 1992. The pooling and
servicing agreement will provide that no record or beneficial ownership interest
in a residual certificate may be, directly or indirectly, transferred to a
non-U.S. Person unless such person provides the trustee with a duly completed
IRS Form W-8ECI and the trustee consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in residual certificates are advised to consult
their own tax advisors with respect to transfers of the residual certificates
and, in addition, passthrough entities are advised to consult their own tax
advisors with respect to any tax which may be imposed on a pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in this
prospectus under "Material Federal Income Tax Considerations" above, potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the certificates. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various tax consequences of investments in
the certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended, and the Code, which apply
only to securities of a series that are not divided into subclasses. If
securities are divided into subclasses, the related prospectus
145
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to those subclasses.
ERISA and Section 4975 of the Code impose requirements on certain
employee benefit plans -- and on certain other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which plans,
accounts or arrangements are invested -- and on persons who are fiduciaries with
respect to these types of plans and arrangements. In this prospectus we refer to
these types of plans and arrangements as "Plans." Generally, ERISA applies to
investments made by Plans. Among other things, ERISA requires that the assets of
a Plan be held in trust and that the trustee, or other duly authorized
fiduciary, have exclusive authority and discretion to manage and control the
assets of the Plan. ERISA also imposes certain duties on persons who are
fiduciaries of Plans, such as the duty to invest prudently, to diversify
investments unless it is prudent not to do so, and to invest in accordance with
the documents governing the Plan. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of that Plan (subject to certain exceptions
not here relevant). Certain employee benefit plans, such as 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 to ERISA's requirements. Accordingly, assets of such plans may
be invested in securities without regard to the ERISA considerations described
above and below, subject to the provisions of applicable federal or state 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.
On January 5, 2000, the United States Department of Labor (DOL) issued
final regulations under Section 401(c) of ERISA describing a safe harbor for
insurers that, on or before December 31, 1998, issued certain nonguaranteed
policies supported by their general accounts to Plans, and under which an
insurer would not be considered an ERISA fiduciary with respect to its general
account by virtue of a Plan's investment in such a policy. In general, to meet
the safe harbor, an insurer must
o disclose certain specified information to investing Plan
fiduciaries initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days'
notice to the insurer, and to elect, without penalty, either a
lump-sum payment or annual installment payments over a ten-year
period, with interest; and
o give Plans written notice of "insurer-initiated amendments" 60
days before the amendments take effect.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest"), and impose
additional prohibitions where parties in interest are fiduciaries with respect
to a Plan. Certain parties in interest that participate in a prohibited
transaction may be subject to excise taxes imposed pursuant to section 4975 of
the Code, or penalties imposed
146
pursuant to Section 502(i) of ERISA, unless a statutory, regulatory or
administrative exemption is available.
The DOL issued Plan Asset Regulations concerning the definition of what
constitutes the assets of a Plan (Labor Reg. section 2510.3-101). Under these
regulations, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity" investment
could be deemed for purposes of ERISA to be assets of the investing Plan in
certain circumstances.
Under the Plan Asset Regulations, the term "equity" interest is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the trust fund issues notes that are not treated as equity
interests in the trust fund for purposes of the Plan Asset Regulations, a Plan's
investment in such notes would not cause the assets of the trust to be deemed
assets of a Plan. However, the seller, the servicer, the backup servicer, the
indenture trustee, the owner trustee, the underwriter and the depositor may be
the sponsor of or investment advisor with respect to one or more Plans. Because
these parties may receive certain benefits in connection with the sale of the
notes, the purchase of notes using assets of a Plan over which any of these
parties (or their affiliates) has investment authority might be deemed to be a
violation of the prohibited transaction rules of ERISA and the Code for which no
exemption may be available. Accordingly, notes may not be purchased using the
assets of any Plan if the seller, the servicer, the backup servicer, the
indenture trustee, the owner trustee, the underwriter, the depositor or any of
their affiliates
o has investment or administrative discretion with respect to the
assets of the Plan;
o has authority or responsibility to give, or regularly gives,
investment advice with respect to assets of the Plan for a fee
and pursuant to an agreement of understanding that the advice
will serve as a primary basis for investment decisions with
respect to the assets of the Plan and will be based on the
particular investment needs for the Plan; or
o unless Prohibited Transaction Class Exemption (PTCE) 90-1, PTCE
91-38 or PTCE 95-60 applies, is an employer maintaining or
contributing to the Plan.
In addition, the trust fund, any underwriter, the trustee or their
affiliates might be considered or might become "parties in interest" with
respect to a Plan. Also, any holder of certificates of the trust fund, because
of its activities or the activities of its respective affiliates, may be deemed
to be a "party in interest" with respect to certain Plans, including but not
limited to Plans sponsored by the holder. In either case, whether nor not the
assets of the trust are considered to be assets of a Plan the acquisition or
holding of notes by or on behalf of a Plan could give rise to a prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more exemptions such as:
o PTCE 84-14, which exempts certain transactions effected on behalf
of a Plan by a "qualified professional asset manager;"
147
o PTCE 90-1, which exempts certain transactions involving insurance
company pooled separate accounts;
o PTCE 91-38, which exempts certain transactions involving bank
collective investment funds;
o PTCE 95-60, which exempts certain transactions involving
insurance company general accounts; or
o PTCE 96-23, which exempts certain transactions effected on behalf
of a Plan by certain "in-house asset managers."
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan's investment in notes, or, even if it did apply,
that any exemption would apply to all prohibited transactions that may occur in
connection with such an investment. Unless a different requirement is imposed in
the prospectus supplement, each prospective purchaser or transferee of a note
that is a Plan or a person acting on behalf or investing the assets of a Plan
shall be required to represent (or, with respect to any transfer of a beneficial
interest in a global note, shall be deemed to represent) to the indenture
trustee and the note registrar that the relevant conditions for exemptive relief
under at least one of the foregoing exemptions have been satisfied.
The Plan Asset Regulations provide that, generally, the assets of an
entity in which a Plan invests will not be deemed to be assets of the Plan for
purposes of ERISA if the equity interest acquired by the investing Plan is a
publicly-offered security, or if equity participation by benefit plan investors
is not significant. In general, a publicly-offered security, as defined in the
Plan Asset Regulations, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934. Equity participation
in an entity by benefit plan investors is not significant if, after the most
recent acquisition of an equity interest in the entity, less than 25% of the
value of each class of equity interest in the entity is held by "benefit plan
investors," which include benefit plans described in ERISA or under section 4975
of the Code, whether or not they are subject to ERISA, as well as entities whose
underlying assets include assets of a Plan by reason of a Plan's investment in
the entity.
If no exception under the Plan Asset Regulations applies and if a Plan
(or a person investing assets of a Plan, such as an insurance company general
account) acquires an equity interest in the trust, then the assets of the trust
would be considered to be assets of the Plan. Because the loans held by the
trust may be deemed assets of each Plan that purchases an equity interest, an
investment in an equity interest issued by the trust by a Plan might be a
prohibited transaction under ERISA and subject to an excise tax under section
4975 of the Code, and may cause transactions undertaken in the course of
operating the trust to constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies.
In Prohibited Transaction Exemption (PTE) 83-1, the DOL exempted from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase, sale
and holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTE 83-1 permits, subject to certain
148
conditions, transactions which might otherwise be prohibited between Plans and
parties in interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTE 83-1 are satisfied,
investments by a Plan in "single family certificates" that represent interests
in a mortgage pool consisting of Single Family Loans will be exempt from the
prohibitions of sections 406(a) and 407 of ERISA (relating generally to
transactions with parties in interest who are not fiduciaries) if the Plan
purchases the single family certificates at no more than fair market value and
will be exempt from the prohibitions of sections 406(b)(1) and (2) of ERISA
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all single family
certificates, and at least 50% of all single family certificates are purchased
by persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving subordinated certificates or for
certificates representing an interest in a mortgage pool containing Multifamily
Loans, Contracts or cooperative loans. Accordingly, unless the related
prospectus supplement indicates that an exemption other than PTE 83-1 is
available, no transfer of a subordinated certificate or a certificate which is
not a single family certificate may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only
to single family certificates. The depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include:
o certificates issued in a series consisting of only a single class
of certificates, and
o senior certificates issued in a series in which there is only one
class of senior certificates;
provided that the certificates, in the case of the first bullet above, or the
senior certificates, in the case of the second bullet above, evidence the
beneficial ownership of both a specified percentage (greater than 0%) of future
interest payments and a specified percentage (greater than 0%) of future
principal payments on the mortgage loans. It is not clear whether a class of
certificates that evidences the beneficial ownership of a specified percentage
of interest payments only or principal payments only, or a notional amount of
either principal or interest payments would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption:
o the maintenance of a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and
for indemnifying certificateholders against reductions in
pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of
the aggregate principal balance of all covered pooled mortgage
loans or the principal balance of the largest covered pooled
mortgage loan;
149
o the existence of a pool trustee who is not an affiliate of the
pool sponsor; and
o a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to not
more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool
sponsor to the mortgage pool.
The depositor believes that the first general condition referred to above will
be satisfied with respect to the certificates in a series issued without a
subordination feature, or the senior certificates only in a series issued with a
subordination feature, provided that the subordination and reserve fund,
subordination by shifting of interests, the pool insurance or other form of
credit enhancement described herein (such subordination, pool insurance or other
form of credit enhancement being the system of insurance or other protection
referred to above) with respect to a series of certificates is maintained in an
amount not less than the greater of one percent of the aggregate principal
balance of the mortgage loans or the principal balance of the largest mortgage
loan. SEE "Description of the Securities" in this prospectus. In the absence of
a ruling that the system of insurance or other protection with respect to a
series of certificates satisfies the first general condition referred to above,
there can be no assurance that these features will be so viewed by the DOL. The
trustee will not be affiliated with the depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold single family
certificates must make its own determination as to whether the first and third
general conditions of PTE 83-1, and the specific conditions described briefly in
the first paragraph discussing PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan fiduciary
should also determine whether, under the general fiduciary standards of
investment prudence and diversification, an investment in the certificates is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc.
an underwriter exemption (PTE 90-59, Application No. D-8374, 55 Fed. Reg. 36724
(1990)) from certain of the prohibited transaction rules of ERISA and the
related excise tax provisions of Section 4975 of the Code with respect to the
initial purchase, holding and subsequent resale by Plans of "securities" that
are obligations of an issuer containing certain receivables, loans and other
obligations, with respect to which Greenwich Capital Markets, Inc. is the
underwriter, manager or co-manager of an underwriting syndicate. The exemption,
which was amended and expanded by PTE 97-34, Applications No. D-10245 and
D-10246, 62 Fed. Reg. 39021 (1997) and PTE 2000-58, Application No. D-10829, 65
Fed. Reg. 67765 (2000), provides relief which is generally similar to that
provided by PTE 83-1, but is broader in several respects.
The underwriter exemption contains a number of requirements. It does
not apply to any investment pool unless, among other things, the following
conditions are met:
o the investment pool consists only of assets of a type which have
been included in other investment pools;
150
o securities evidencing interests in such other investment pools
have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of securities pursuant
to the exemption; and
o securities in such other investment pools have been rated in one
of the three (or four, if the investment pool contains certain
types of assets) highest generic rating categories by one of the
credit rating agencies noted below.
Generally, the underwriter exemption holds that the acquisition of the
securities by a Plan must be on terms (including the price for the securities)
that are at least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party. The exemption requires that the rights and
interests evidenced by the securities not be "subordinated" to the rights and
interests evidenced by other securities of the same trust, except when the trust
holds certain types of assets. The exemption requires that securities acquired
by a Plan have received a rating at the time of their acquisition that is in one
of the three (or four, if the trust holds certain types of assets) highest
generic rating categories of Standard & Poor's Ratings Services, Moody's
Investors Service, Inc. or Fitch, Inc. The exemption specifies that the pool
trustee must not be an affiliate of any other member of the "restricted group"
defined below. The exemption stipulates that any Plan investing in the
securities must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the SEC under the Securities Act of 1933, as amended. Finally,
the exemption requires that, depending on the type of issuer, the documents
establishing the issuer and governing the transaction contain certain provisions
to protect the assets of the issuer, and that the issuer receive certain legal
opinions.
Moreover, the underwriter exemption generally provides relief from
certain self-dealing and conflict of interest prohibited transactions that may
occur when the Plan fiduciary causes a Plan to acquire securities of an issuer
holding receivables as to which the fiduciary (or its affiliate) is an obligor,
provided that, among other requirements:
o in the case of an acquisition in connection with the initial
issuance of securities, at least 50% of each class of securities
in which Plans have invested and at least 50% of the aggregate
interest in the issuer is acquired by persons independent of the
restricted group;
o the fiduciary (or its affiliate) is an obligor with respect to
not more than 5% of the fair market value of the obligations
contained in the issuer;
o the Plans' investment in securities of any class does not exceed
25% of all of the securities of that class outstanding at the
time of the acquisition; and
o immediately after the acquisition, no more than 25% of the assets
of any Plan with respect to which the person is a fiduciary is
invested in securities representing an interest in one or more
issuers containing assets sold or serviced by the same entity.
The underwriter exemption provides only limited relief to Plans
sponsored by the "restricted group" consisting of the seller, the underwriter,
the trustee, the master servicer, any servicer, any counterparty of a permitted
swap or notional principal contract or any insurer with
151
respect to the mortgage loans, any obligor with respect to mortgage loans
included in the investment pool constituting more than five percent of the
aggregate principal balance of the assets in the investment pool, or any
affiliate of those parties.
The underwriter exemption generally allows mortgage loans or other
secured receivables supporting payments to securityholders, and having a value
equal to no more than twenty-five percent of the total principal amount of the
securities being offered by the issuer, to be transferred to the issuer within a
90-day or three-month period following the closing date, instead of requiring
that all obligations be either identified or transferred on or before the
closing date. This relief is available when certain conditions are met.
The rating of a security may change. If a class of securities no longer
satisfies the applicable rating requirement of the underwriter exemption,
securities of that class will no longer be eligible for relief under the
underwriter exemption, and consequently may not be purchased by or sold to a
Plan (although a Plan that had purchased the security when it had an
investment-grade rating would not be required by the underwriter exemption to
dispose of it).
The prospectus supplement for each series of certificates will indicate
the classes of certificates, if any, offered thereby as to which it is expected
that the exemption will apply.
Any Plan fiduciary which proposes to cause a Plan to purchase
certificates should consult with their counsel concerning the impact of ERISA
and the Code, the applicability of PTE 83-1 and the underwriter exemption, and
the potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
The prospectus supplement for each series of certificates will specify
which, if any, of those classes of certificates constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended (SMMEA). Classes of certificates that qualify as "mortgage
related securities" 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
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of these entities with respect to "mortgage related
securities," certificates will constitute legal investments for entities subject
to the legislation only to the extent provided therein. Approximately twenty-one
states adopted the legislation prior to the October 4, 1991 deadline. 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
certificates, or require the sale or other disposition of certificates, so
152
long as such contractual commitment was made or such certificates were 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 in
certificates without limitations as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase certificates 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 authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration (NCUA)
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No. 108,
which includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
All depository institutions considering an investment in the
certificates (whether or not the class of certificates under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators),
setting forth, in relevant part, certain securities trading and sales practices
deemed unsuitable for an institution's investment portfolio, and guidelines for
(and restrictions on) investing in mortgage derivative products, including
"mortgage related securities", which are "high-risk mortgage securities" as
defined in the Policy Statement. According to the Policy Statement, "high-risk
mortgage securities" include securities such as certificates not entitled to
distributions allocated to principal or interest, or subordinated certificates.
Under the Policy Statement, it is the responsibility of each depository
institution to determine, prior to purchase (and at stated intervals
thereafter), whether a particular mortgage derivative product is a "high-risk
mortgage security", and whether the purchase (or retention) of such a product
would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
The Office of Thrift Supervision, or OTS, has issued Thrift Bulletins
73a, entitled "Investing in Complex Securities" ("TB 73a"), which is effective
as of December 18, 2001 and applies to savings associations regulated by the
OTS, and 13a, entitled "Management of Interest Rate Risk, Investment Securities,
and Derivatives Activities" ("TB 13a"), which is effective as of December 1,
1998, and applies to thrift institutions regulated by the OTS.
One of the primary purposes of TB 73a is to require savings
associations, prior to taking any investment position, to determine that the
investment position meets applicable regulatory and policy requirements
(including those set forth TB 13a (see below)) and internal guidelines, is
suitable for the institution, and is safe and sound. OTS recommends, with
respect to purchases
153
of specific securities, additional analysis, including, among others, analysis
of repayment terms, legal structure, expected performance of the issuer and any
underlying assets as well as analysis of the effects of payment priority, with
respect to a security which is divided into separate tranches with unequal
payments, and collateral investment parameters, with respect to a security that
is prefunded or involves a revolving period. TB 73a reiterates OTS's due
diligence requirements for investing in all securities and warns that if a
savings association makes an investment that does not meet the applicable
regulatory requirements, the savings association's investment practices will be
subject to criticism, and OTS may require divestiture of such securities. OTS
also recommends, with respect to an investment in any "complex securities," that
savings associations should take into account quality and suitability, interest
rate risk, and classification factors. For the purposes of each of TB 73a and TB
13a, "complex security" includes among other things any collateralized mortgage
obligation or real estate mortgage investment conduit security, other than any
"plain vanilla" mortgage pass-through security (that is, securities that are
part of a single class of securities in the related pool that are non-callable
and do not have any special features). Accordingly, all Classes of the Offered
Certificates would likely be viewed as "complex securities." With respect to
quality and suitability factors, TB 73a warns (i) that a savings association's
sole reliance on outside ratings for material purchases of complex securities is
an unsafe and unsound practice, (ii) that a savings association should only use
ratings and analyses from nationally recognized rating agencies in conjunction
with, and in validation of, its own underwriting processes, and (iii) that it
should not use ratings as a substitute for its own thorough underwriting
analyses. With respect the interest rate risk factor, TB 73a recommends that
savings associations should follow the guidance set forth in TB 13a. With
respect to collateralized loan or bond obligations, TB 73a also requires that
the savings associations meet similar requirements with respect to the
underlying collateral, and warns that investments that are not fully rated as to
both principal and interest do not meet OTS regulatory requirements.
One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position, to (i) conduct a
pre-purchase portfolio sensitivity analysis for any "significant transaction"
involving securities or financial derivatives, and (ii) conduct a pre-purchase
price sensitivity analysis of any "complex security" or financial derivative.
The OTS recommends that while a thrift institution should conduct its own
in-house pre-acquisition analysis, it may rely on an analysis conducted by an
independent third-party as long as management understands the analysis and its
key assumptions. Further, TB 13a recommends that the use of "complex securities
with high price sensitivity" be limited to transactions and strategies that
lower a thrift institution's portfolio interest rate risk. TB 13a warns that
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by OTS
examiners as an unsafe and unsound practice.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase certificates or to
purchase certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the certificates constitute legal
investments for them.
154
METHOD OF DISTRIBUTION
The certificates offered by this prospectus and by the related
prospectus supplement will be offered in series. The distribution of the
certificates may be effected from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of commitment
therefor. If so specified in the related prospectus supplement and subject to
the receipt of any required approvals from the Board of Governors of the Federal
Reserve System, the certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Greenwich Capital Markets, Inc. (GCM) acting as underwriter with other
underwriters, if any, named in the prospectus supplement. In such event, the
related prospectus supplement may also specify that the underwriters will not be
obligated to pay for any certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the depositor. In connection with
the sale of the certificates, underwriters may receive compensation from the
depositor or from purchasers of the certificates in the form of discounts,
concessions or commissions. The related prospectus supplement will describe any
compensation paid by the depositor.
Alternatively, the related prospectus supplement may specify that the
certificates will be distributed by GCM acting as agent or in some cases as
principal with respect to certificates that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of certificates, GCM will
receive a selling commission with respect to each series of certificates,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related mortgage assets as of the cut-off date. The
exact percentage for each series of certificates will be disclosed in the
related prospectus supplement. To the extent that GCM elects to purchase
certificates as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The prospectus
supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the depositor and purchasers of
certificates of that series.
The depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments GCM and any underwriters may be required to make in
respect of those liabilities.
In the ordinary course of business, GCM and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of the mortgage loans or interests in the loans, including the certificates.
The depositor anticipates that the certificates will be sold primarily
to institutional investors. Purchasers of certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, in connection
with reoffers and sales of certificates by them. Holders of certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
155
LEGAL MATTERS
The legality of the certificates of each series, including certain
material federal income tax consequences with respect to the certificates, will
be passed upon for the depositor by McKee Nelson LLP, 1919 M Street, N.W.,
Washington, D.C. 20036, by Sidley Austin Brown & Wood LLP, 875 Third Avenue, New
York, New York 10022, or by Thacher Proffitt & Wood, 11 West 42nd Street, New
York, New York 10036, as specified in the related prospectus supplement.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of
certificates 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 will be included in this Prospectus or in the related prospectus
supplement.
AVAILABLE INFORMATION
The depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the certificates. This
prospectus, which forms a part of the Registration Statement, and the prospectus
supplement relating to each series of certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the Registration Statement and the exhibits thereto. The Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the SEC at its Public Reference
Section, 450 Fifth Street, N. W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 233
Broadway, New York, New York 10279. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the depositor, that file
electronically with the SEC.
RATINGS
It is a condition to the issuance of the certificates of each series
offered by this prospectus and the accompanying prospectus supplement that they
shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
related prospectus supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
securityholders might suffer a lower than
156
anticipated yield, and, in addition, holders of stripped pass-through
certificates in certain cases might fail to recoup their underlying 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.
157
GLOSSARY OF TERMS
Agency Securities: Mortgage pass-through securities issued or
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.
Home Equity Loans: Closed end and/or revolving home equity loans
generally secured by junior liens on one- to four-family residential properties.
Home Improvement Contracts: Home improvement installment sales
contracts and loan agreements that are either unsecured or secured by senior or
junior liens on one- to four-family residential or mixed-use properties or by
purchase money security interests in the related home improvements.
Insurance Proceeds: All proceeds of the related hazard insurance
policies and any primary mortgage insurance policies to the extent the proceeds
are not applied to property restoration or released to mortgagors in accordance
with the master servicer's normal servicing procedures, net of insured expenses
including unreimbursed payments of property taxes, insurance premiums and other
items incurred by any related sub-servicer and net of reimbursed advances made
by the sub-servicer.
Liquidation Proceeds: All cash amounts (other than Insurance Proceeds)
received and retained in connection with the liquidation of defaulted mortgage
loans, by foreclosure or otherwise, net of unreimbursed liquidation and
foreclosure expenses incurred by any related sub-servicer and net of
unreimbursed advances made by the sub-servicer.
Manufactured Housing Contracts: Conditional sales contracts and
installment sales or loan agreements secured by manufactured housing.
Multifamily Loans: First lien mortgage loans, or participation
interests in the loans, secured by residential properties consisting of five or
more residential units, including cooperative apartment buildings.
Private Label Securities: Mortgage-backed or asset-backed securities
that are not Agency Securities.
REMIC Regulations: Regulations promulgated by the Department of the
Treasury on December 23, 1992 and generally effective for REMICs with start-up
dates on or after November 12, 1991.
Single Family Loans: First lien mortgage loans, or participation
interests in the loans, secured by one- to four-family residential properties.
U.S. Person: Any of the following:
o a citizen or resident of the United States;
158
o a corporation or a partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes)
organized in or under the laws of the United States, or any State
thereof or the District of Columbia (unless in the case of a
partnership Treasury regulations are adopted that provide
otherwise);
o an estate whose income from sources outside the United States is
includible in gross income for federal income tax purposes
regardless of its connection with the conduct of a trade or
business within the United States; or
o 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 U.S. Persons have the authority to control all substantial
decisions of the trust.
In addition, certain trusts which would not qualify as U.S. Persons under the
above definition but which are eligible to and make an election to be treated as
U.S. Persons will also be treated as U.S. Persons.
159
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$286,898,000 (APPROXIMATE)
FIRST FRANKLIN MORTGAGE LOAN TRUST 2002-FFA
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
FAIRBANKS CAPITAL CORP.
SERVICER
ASSET-BACKED CERTIFICATES, SERIES 2002-FFA
_______________________
PROSPECTUS SUPPLEMENT
_______________________
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 Asset-Backed Certificates, Series 2002-FFA in any state
where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Asset-Backed Certificates, Series 2002-FFA and with respect
to their unsold allotments or subscriptions. In addition, all dealers selling
the Asset-Backed Certificates, Series 2002-FFA will be required to deliver a
prospectus supplement and prospectus for ninety days following the date of this
prospectus supplement.
September 23, 2002
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