SUPPLEMENT
(TO PROSPECTUS SUPPLEMENT DATED OCTOBER 28, 2002 TO PROSPECTUS DATED OCTOBER 26,
2001)
$402,914,853
(APPROXIMATE)
BEAR STEARNS ASSET BACKED SECURITIES TRUST 2002-AC5
ISSUER
ASSET-BACKED CERTIFICATES, SERIES 2002-AC5
EMC MORTGAGE CORPORATION
SELLER
WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
The Class II-A1 Original Certificate Principal Balance on the cover
page of the prospectus supplement shall be replaced with $80,000,000.
This supplement may be used to offer or sell the certificates offered
hereby only if accompanied by the prospectus supplement and prospectus.
Until 90 days after the date of this supplement, all dealers effecting
transactions in the Certificates offered hereby, whether or not participating in
this distribution, may be required to deliver a supplement, prospectus
supplement and prospectus. This is in addition to the obligation of dealers to
deliver a supplement, prospectus supplement and prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
BEAR, STEARNS & CO. INC.
The date of this supplement is October 29, 2002
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 26, 2001)
$402,914,853
(APPROXIMATE)
BEAR STEARNS ASSET BACKED SECURITIES TRUST 2002-AC5
ISSUER
ASSET-BACKED CERTIFICATES, SERIES 2002-AC5
EMC MORTGAGE CORPORATION
SELLER
WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
________________
The issuer is offering the following classes of certificates pursuant to this
prospectus supplement and the accompanying prospectus:
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-12 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 3 IN THE PROSPECTUS.
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Bear Stearns Asset Backed Securities, Inc., EMC
Mortgage Corporation, Wells Fargo Bank Minnesota, National Association, Bank
One, National Association, or any of their affiliates.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
ORIGINAL ORIGINAL
CERTIFICATE CERTIFICATE
PRINCIPAL PASS-THROUGH PRINCIPAL PASS-THROUGH
CLASS BALANCE RATE CLASS BALANCE RATE
----- ------- ---- ----- ------- ----
Class I-A1 $ 71,474,000 (1) Class III-A $ 95,793,000 6.50%
Class I-A2 (2) (1) Class III-PO $ 11,328 0.00%(3)
Class I-PO $ 5,804,423 0.00%(3) Class III-X (2) (1)
Class I-X (2) (1) Class BX (2) 6.50%
Class II-X (2) (1) Class B-1 (4) $ 15,457,000 6.50%
Class II-A1 $ 80,00,000 6.00% Class B-2 (4) $ 8,243,000 6.50%
Class II-A2 $ 2,849,850 6.50% Class B-3 (4) $ 5,152,000 6.50%
Class II-A3 $ 49,826,086 8.50% Class R-1 $ 50 6.50%
Class II-A4 $ 57,216,000 5.625% Class R-2 $ 50 6.50%
Class II-A5 $ 10,957,914 5.625% Class R-3 $ 50 6.50%
Class II-PO $ 130,102 0.00%(3)
(1) The pass-through rate on these classes is a variable rate described under
"Summary--Description of the Certificates--Pass-Through Rates" herein.
(2) Notional amount. These classes pay only interest, calculated on a notional
amount described herein.
(3) These classes pay only principal and are not entitled to distributions of
interest.
(4) These classes are subordinate certificates.
The certificates represent interests in a pool of fixed rate, conventional
mortgage loans that are secured by first liens on one- to four-family
residential properties.
Credit enhancement will be provided by subordination of the Class B
Certificates.
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.
Bear, Stearns & Co. Inc., as the underwriter, will offer the certificates listed
above at varying prices to be determined at the time of sale.
The underwriter will deliver to purchasers the Class R Certificates in physical
form, and the remaining certificates set forth above in book-entry form only
through the facilities of The Depository Trust Company, Clearstream and
Euroclear, in each case, on or about October 30, 2002.
BEAR, STEARNS & CO. INC.
The date of the prospectus supplement is October 28, 2002
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
---------------------
SUMMARY.........................................................................................................S-4
RISK FACTORS...................................................................................................S-12
THE MORTGAGE POOL..............................................................................................S-21
SERVICING OF THE MORTGAGE LOANS................................................................................S-28
DESCRIPTION OF THE CERTIFICATES................................................................................S-38
YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS.............................................................................................S-66
USE OF PROCEEDS................................................................................................S-87
FEDERAL INCOME TAX CONSEQUENCES................................................................................S-87
STATE TAXES....................................................................................................S-89
ERISA CONSIDERATIONS...........................................................................................S-90
METHOD OF DISTRIBUTION.........................................................................................S-91
LEGAL MATTERS..................................................................................................S-92
RATINGS........................................................................................................S-93
INDEX OF DEFINED TERMS.........................................................................................S-95
SCHEDULE A......................................................................................................A-1
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES..............................................................................I-1
PROSPECTUS
----------
RISK FACTORS......................................................................................................3
DESCRIPTION OF THE SECURITIES....................................................................................14
THE TRUST FUNDS..................................................................................................19
CREDIT ENHANCEMENT...............................................................................................38
SERVICING OF LOANS...............................................................................................43
THE AGREEMENTS...................................................................................................51
MATERIAL LEGAL ASPECTS OF THE LOANS..............................................................................62
THE DEPOSITOR....................................................................................................75
USE OF PROCEEDS..................................................................................................75
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS................................................................................................76
STATE TAX CONSIDERATIONS........................................................................................104
FASIT SECURITIES................................................................................................104
ERISA CONSIDERATIONS............................................................................................109
LEGAL MATTERS...................................................................................................115
FINANCIAL INFORMATION...........................................................................................116
AVAILABLE INFORMATION...........................................................................................116
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE.................................................................................................116
RATINGS.........................................................................................................117
LEGAL INVESTMENT CONSIDERATIONS.................................................................................118
PLAN OF DISTRIBUTION............................................................................................118
GLOSSARY OF TERMS...............................................................................................118
S-2
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We describe the certificates in two separate documents that provide
varying levels of detail: (a) the accompanying prospectus, which provides
general information, some of which may not apply to your certificates and (b)
this prospectus supplement, which describes the specific terms of your
certificates. If there is conflicting information between this prospectus
supplement and the accompanying prospectus, you should rely on the information
in this prospectus supplement.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further discussions about related topics. The table of contents on page S-2
above provides the pages on which these captions are located.
You can find a listing of the pages where certain capitalized and other
terms used in this prospectus supplement and the accompanying prospectus are
defined under the caption "Glossary" beginning on page S-46 of this prospectus
supplement, "Index of Defined Terms" beginning on page S-95 of this prospectus
supplement or "Glossary of Terms" beginning on page 118 of the prospectus.
S-3
SUMMARY
o This summary highlights selected information from this document
and does not contain all of the information that you need to
consider when making your investment decision. To understand all
of the terms of an offering of the certificates, you should read
this entire document and the accompanying prospectus carefully.
o Certain statements contained in or incorporated by reference in
this prospectus supplement and the accompanying prospectus consist
of forward-looking statements relating to future economic
performance or projections and other financial items. These
statements can be identified by the use of forward-looking words
such as "may," "will," "should," "expects," "believes,"
"anticipates," "estimates," or other comparable words.
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, customer
preferences and various other matters, many of which are beyond
our control. Because we cannot predict the future, what actually
happens may be very different from what is contained in our
forward- looking statements.
THE CERTIFICATES
Asset-Backed Certificates, Series 2002-AC5, represent beneficial ownership
interests in a trust fund that consists primarily of a pool of fixed rate,
conventional mortgage loans that are secured by first liens on one- to four-
family residential properties and certain other assets described in this
prospectus supplement.
ORIGINATORS
The principal originators of the mortgage loans are: Greenpoint Mortgage
Funding, Inc., with respect to approximately 20.23% of the mortgage loans,
Waterfield Mortgage Company, Inc., with respect to approximately 19.49% of the
mortgage loans, National City Mortgage Co., with respect to approximately 18.77%
of the mortgage loans and First National Bank of Nevada, with respect to
approximately 10.65% of the mortgage loans. The remainder of the mortgage loans
were originated by various originators, none of which have originated more than
10% of the mortgage loans.
DEPOSITOR
Bear Stearns Asset Backed Securities, Inc., a Delaware corporation and a limited
purpose finance subsidiary of The Bear Stearns Companies, Inc. and an affiliate
of Bear, Stearns & Co. Inc.
SELLER
EMC Mortgage Corporation, a Delaware corporation and an affiliate of the
depositor and Bear, Stearns & Co. Inc., which will sell the mortgage loans to
the depositor.
MASTER SERVICER
Wells Fargo Bank Minnesota, National Association, a national banking
association.
SECURITIES ADMINISTRATOR
Wells Fargo Bank Minnesota, National Association, a national banking
association.
TRUSTEE
Bank One, National Association.
POOLING AND SERVICING AGREEMENT
The pooling and servicing agreement among the seller, the master servicer, the
depositor, the securities administrator and the trustee, under which the trust
will be formed and will issue the certificates.
S-4
CUT-OFF DATE
The close of business on October 1, 2002.
CLOSING DATE
On or about October 30, 2002.
THE MORTGAGE LOANS
The aggregate principal balance of the mortgage loans as of the cut-off date is
approximately $412,192,891. The mortgage loans are fixed rate mortgage loans
that are secured by first liens on one- to four-family residential properties.
We will divide the mortgage loans into three separate groups based primarily on
whether they have agency conforming balances or whether they have prepayment
penalties. We refer to each group of mortgage loans as a loan group. The
mortgage loans that we have allocated to loan group I have prepayment penalties,
the majority of the mortgage loans that we have allocated to loan group II do
not have agency conforming balances and the mortgage loans that we have
allocated to loan group III have agency conforming balances.
TOTAL POOL
The following table summarizes the approximate characteristics of all of the
mortgage loans in the trust fund as of the cut- off date:
Number of mortgage loans................................................1,856
Aggregate principal balance......................................$412,192,891
Average principal balance........................................... $222,087
Range of principal balances.............................$19,744 to $1,404,084
Range of mortgage rates.....................................6.250% to 11.000%
Weighted average mortgage rate.........................................8.035%
Weighted average loan-to-value ratio...................................81.62%
Weighted average scheduled
remaining term to maturity.....................................344 months
Range of scheduled remaining
terms to maturity................................118 months to 360 months
Type of mortgaged properties
Single-family dwellings............................................69.40%
2-4 family dwellings...............................................11.68%
Planned unit developments..........................................13.42%
Condominiums........................................................5.37%
Manufactured housing................................................0.14%
Owner-occupied.....................................................85.35%
State concentrations
California.........................................................26.46%
New York............................................................8.80%
Florida.............................................................7.96%
Conventional loans................................................100.00%
Balloon loans.......................................................4.30%
LOAN GROUP I
The following table summarizes the approximate characteristics of the mortgage
loans in loan group I as of the cut-off date:
Number of mortgage loans....................................................507
Aggregate principal balance.........................................$85,155,269
Average principal balance..............................................$167,959
Range of principal balances.................................$34,157 to $933,796
Range of mortgage rates.......................................6.250% to 10.875%
Weighted average mortgage rate...........................................8.382%
Weighted average loan-to-value ratio.....................................84.69%
Weighted average scheduled
remaining term to maturity...................................... 332 months
Range of scheduled remaining
terms to maturity..................................175 months to 359 months
Type of mortgaged properties
Single-family dwellings..............................................59.30%
2-4 family dwellings.................................................23.60%
Condominiums..........................................................6.45%
Planned unit developments............................................10.65%
Owner-occupied........................................................71.97%
State concentrations
California...........................................................20.81%
Florida..............................................................13.60%
New York ............................................................11.89%
Conventional loans..................................................100.00%
Balloon loans........................................................12.56%
LOAN GROUP II
The following table summarizes the approximate characteristics of the mortgage
loans in loan group II as of the cut-off date:
Number of mortgage loans....................................................574
Aggregate principal balance........................................$221,467,215
Average principal balance..............................................$385,831
Range of principal balances...............................$39,943 to $1,404,084
Range of mortgage rates.......................................6.375% to 11.000%
Weighted average
mortgage rate........................................................7.748%
Weighted average
loan-to-value ratio..................................................77.10%
Weighted average scheduled
remaining term to maturity.......................................345 months
Range of scheduled remaining
terms to maturity .....................................176 months to 360 months
S-5
Type of mortgaged properties
Single-family dwellings..............................................74.29%
2-4 family dwellings..................................................5.34%
Condominiums..........................................................4.10%
Planned unit developments............................................16.27%
Owner-occupied.......................................................91.18%
State concentrations
California...........................................................34.62%
New York..............................................................9.24%
New Jersey............................................................6.64%
Conventional loans......................................................100.00%
Balloon loans.............................................................2.70%
LOAN GROUP III
The following table summarizes the approximate characteristics of the mortgage
loans in loan group III as of the cut-off date:
Number of mortgage loans....................................................775
Aggregate principal balance........................................$105,570,408
Average principal balance..............................................$136,220
Range of principal balances.................................$19,744 to $413,838
Range of mortgage rates.......................................6.500% to 10.500%
Weighted average mortgage rate...........................................8.358%
Weighted average loan-to-value ratio.....................................88.63%
Weighted average scheduled
remaining term to maturity.......................................350 months
Range of scheduled remaining
terms to maturity .....................................118 months to 360 months
Type of mortgaged properties
Single-family dwellings..............................................67.28%
2-4 family dwellings.................................................15.36%
Condominiums..........................................................7.15%
Planned unit developments.............................................9.67%
Manufactured Housing..................................................0.55%
Owner-occupied.......................................................83.93%
State concentrations
California...........................................................13.89%
New Jersey............................................................8.69%
Florida...............................................................6.93%
Conventional loans......................................................100.00%
Balloon loans.............................................................1.01%
DESCRIPTION OF THE CERTIFICATES
GENERAL
The trust will issue the certificates in three certificate groups. The Class
I-A1, Class I-A2, Class I-PO, Class I-X and Class BX Certificates will represent
interests principally in loan group I, and we sometimes refer to these
Certificates herein as the Group I Certificates. The Class II-A1, Class II-A2,
Class II-A3, Class II-A4, Class II-A5, Class II-PO, Class II-X, Class R-1, Class
R-2 and Class R-3 Certificates will represent interests principally in loan
group II and we sometimes refer to these certificates as the Group II
Certificates. The Class III-A, Class III-X and Class III-PO Certificates will
represent interests principally in loan group III, and we sometimes refer to
these Certificates herein as the Group III Certificates. The Class B-1, Class
B-2 and Class B-3 Certificates will each represent subordinated interests in all
three loan groups.
In addition, the Class R-1, Class R-2 and Class R-3 Certificates (also referred
to herein as the Class R Certificates or the residual certificates) will each
represent the residual interest in a real estate mortgage investment conduit
established by the trust.
The trust will also issue Class XP, Class B-4, Class B-5 and Class B-6
Certificates, which we are not offering by this prospectus supplement. The Class
XP Certificates are not entitled to distributions in respect of interest and
payment of the principal balance thereof will not be made from collections or
advances on the mortgage loans.
The last scheduled distribution date for the offered certificates is November
25, 2032.
RECORD DATE
For each class of offered certificates, other than the Class I-A1 Certificates
and Class I-A2 Certificates, and for any distribution date, the last business
day of the month preceding the month in which such distribution date occurs. For
the Class I-A1 Certificates and Class I-A2 Certificates, the business day
preceding the applicable distribution date so long as the Class I-A1
Certificates and Class I-A2 Certificates remain in book-entry form; and
otherwise the record date shall be the same as for the other classes of offered
certificates.
DENOMINATIONS
For each class of offered certificates, other than the Class R Certificates,
$25,000 and multiples of $1,000 in excess thereof except that one certificate of
each class will be issued
S-6
in the remainder of the class. Each Class R Certificate will be issued as a
single certificate of $50.
REGISTRATION OF OFFERED CERTIFICATES
The trust will issue the offered certificates, other than the Class R
Certificates, initially in book-entry form. Persons acquiring interests in these
offered certificates may elect to hold their beneficial interests through The
Depository Trust Company, in the United States, or Clearstream Luxembourg or
Euroclear, in Europe. The trust will issue the Class R Certificates in
certificated fully- registered form.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES-- BOOK-ENTRY CERTIFICATES" IN
THIS PROSPECTUS SUPPLEMENT.
PASS-THROUGH RATES
The pass-through rate for each class of offered certificates entitled to
distributions of interest (other than the Class I-A1, Class I-A2, Class I-X,
Class II-X and Class III-X Certificates) is the respective per annum fixed rate
set forth on the cover of this prospectus supplement.
The pass-through rate for the Class I-A1, Class I-A2, Class I-X, Class II-X and
Class III-X Certificates may change from distribution date to distribution date.
On any distribution date, the pass-through rate per annum for each such class
will be as follows:
o Class I-A1 Certificates: One-Month LIBOR plus 0.55% per annum, with a
maximum rate of 8.50% per annum and a minimum rate of 0.55% per annum.
o Class I-A2 Certificates: 7.95% per annum minus One-Month LIBOR, with a
maximum rate of 7.95% per annum and a minimum rate of 0.00% per annum.
o Class I-X Certificates: The weighted average of the excess of (a) the net
mortgage rate on each Non-Discount Mortgage Loan in loan group I over (b)
8.50% per annum.
o Class II-X Certificates: The weighted average of the excess of (a) the net
mortgage rate on each Non-Discount Mortgage Loan in loan group II over (b)
6.50% per annum.
o Class III-X Certificates: The weighted average of the excess of (a) the
net mortgage rate on each Non-Discount Mortgage Loan in loan group III
over (b) 6.50% per annum.
The initial pass-through rate for the Class I-A1, Class I-A2, Class I-X, Class
II-X and Class III-X Certificates will be approximately 2.370%, 6.130%, 0.585%,
0.959% and 1.315%, respectively.
DISTRIBUTION DATES
The trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in November 2002 to the appropriate holders of record.
If the 25th day of the month is not a business day, then the trustee will make
distributions on the following business day.
INTEREST PAYMENTS
On each distribution date holders of the offered certificates (other than the
Class I-PO, Class II-PO and Class III-PO Certificates) will be entitled to
receive:
o the interest that has accrued on the certificate principal balance or
notional balance of such certificates at the related pass-through rate
during the related accrual period, and
o any interest due on a prior distribution date that was not paid, less
o interest shortfalls allocated to such certificates.
The accrual period for the offered certificates (other than the Class I-A1
Certificates and Class I-A2 Certificates) will be the calendar month immediately
preceding the calendar month in which a distribution date occurs. The accrual
period for the Class I-A1 Certificates and Class I-A2 Certificates will be the
period from and including the 25th day of the calendar month preceding the month
in which a distribution date occurs to and
S-7
including the 24th day of the calendar month in which that distribution date
occurs. Calculations of interest on the offered certificates will be based on a
360-day year that consists of twelve 30-day months.
The notional balance of the Class I-A2 Certificates for purposes of calculating
accrued interest is equal to the certificate principal balance of the Class I-A1
Certificates.
The notional balance of the Class I-X Certificates for purposes of calculating
accrued interest is the aggregate outstanding principal balance of the
Non-Discount Mortgage Loans in loan group I.
The notional balance of the Class II-X Certificates for purposes of calculating
accrued interest is the aggregate outstanding principal balance of the
Non-Discount Mortgage Loans in loan group II.
The notional balance of the Class III-X Certificates for purposes of calculating
accrued interest is the aggregate outstanding principal balance of the
Non-Discount Mortgage Loans in loan group III.
The notional balance of the Class BX Certificates for purposes of calculating
accrued interest is equal to the product of (a) two multiplied by (b) a
fraction, the numerator of which is the aggregate outstanding principal balance
of the mortgage loans in loan group I minus the aggregate certificate principal
balance of the Class I-A1 Certificates and the Class I-PO Certificates and the
denominator of which is the aggregate certificate principal balance of the Class
B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates times
(c) a fraction, the numerator of which is the aggregate certificate principal
balance of the Class B-1, Class B-2 and Class B-3 Certificates and the
denominator of which is 6.5.
PRINCIPAL PAYMENTS
On each distribution date, holders of the offered certificates, other than the
Class I-A2, Class I-X, Class II-X, Class III-X and Class BX Certificates, will
receive a distribution of principal on their certificates if there is cash
available on that date for the payment of principal. Monthly principal
distributions will generally include principal payments on the mortgage loans in
the related loan group or, in the case of the Class B Certificates, all three
loan groups. The Class I-PO Certificates will receive only a portion of the
principal received in respect of each mortgage loan in loan group I that has a
net mortgage rate of less than 8.50%. The Class II-PO Certificates will receive
only a portion of the principal received in respect of each mortgage loan in
loan group II that has a net mortgage rate of less than 6.50%. The Class III-PO
Certificates will receive only a portion of the principal received in respect of
each mortgage loan in loan group III that has a net mortgage rate of less than
6.50%.
You should review the priority of payments described under "Description of the
Certificates -- Distributions" in this prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancements provide limited protection to holders of specified
certificates against shortfalls in payments received on the mortgage loans. This
transaction employs the following forms of credit enhancement.
SUBORDINATION. By issuing senior certificates and subordinated certificates, the
trust has increased the likelihood that senior certificateholders will receive
regular payments of interest and principal. The Class I-A1, Class I-A2, Class
I-PO, Class I-X, Class II-A1, Class II-A2, Class II-A3, Class II-A4, Class
II-A5, Class II-PO, Class II-X, Class III- A, Class III-PO, Class III-X, Class
BX, Class R-1, Class R-2 and Class R-3 Certificates constitute the senior
certificates, and the Class B-1, Class B-2, Class B-3, Class B-4, Class B- 5 and
Class B-6 Certificates constitute the subordinated certificates.
The certificates designated as senior certificates will have a payment priority
over the certificates designated as subordinated certificates. Among the classes
of subordinated certificates each class of subordinated certificates with a
lower numerical class designation will have payment priority over each class of
subordinated
S-8
certificates with a higher numerical designation.
Subordination provides the holders of certificates having a higher payment
priority with protection against losses realized when the remaining unpaid
principal balance on a mortgage loan exceeds the amount of proceeds recovered
upon the liquidation of that mortgage loan. In general, we accomplish this loss
protection by allocating any realized losses among the certificates, beginning
with the subordinated certificates with the lowest payment priority, until the
principal amount of that subordinated class has been reduced to zero. We then
allocate realized losses to the next most junior class of subordinated
certificates, until the principal balance of each class of subordinated
certificates is reduced to zero. If no subordinated certificates remain
outstanding, realized losses will be allocated among the related senior
certificates in proportion to their remaining certificate principal balance,
subject to the following paragraph.
A portion of realized losses on each mortgage loan in loan group I having a net
mortgage rate of less than 8.50% that are allocated to the related senior
certificates will be allocated first, to the Class I-PO Certificates in an
amount based on the percentage of each such mortgage loan represented by the
Class I-PO Certificates. The remainder of such realized losses will be allocated
as described above.
A portion of realized losses on each mortgage loan in loan group II having a net
mortgage rate of less than 6.50% that are allocated to the related senior
certificates will be allocated first, to the Class II-PO Certificates in an
amount based on the percentage of each such mortgage loan represented by the
Class II-PO Certificates. The remainder of such realized losses will be
allocated as described above.
A portion of realized losses on each mortgage loan in loan group III having a
net mortgage rate of less than 6.50% that are allocated to the related senior
certificates will be allocated first, to the Class III-PO Certificates in an
amount based on the percentage of each such mortgage loan represented by the
Class III-PO Certificates. The remainder of such realized losses will be
allocated as described above. In addition, to extend the period during which the
subordinated certificates remain available as credit enhancement to the senior
certificates, the entire amount of any prepayments and certain other unscheduled
recoveries of principal with respect to the mortgage loans in the related loan
group will be allocated to the senior certificates relating to the related loan
group to the extent described in this prospectus supplement during the first
five years after the cut-off date (with such allocation to be subject to further
reduction over an additional four year period thereafter as described in this
prospectus supplement), unless certain loss and delinquency tests are satisfied.
This will accelerate the amortization of the senior certificates relating to
each loan group as a whole while, in the absence of realized losses in respect
of the mortgage loans in the related loan group, increasing the percentage
interest in the principal balance of the mortgage loans in such loan group the
subordinated certificates evidence.
CROSSCOLLATERALIZATION. The principal payment rules require that after the
senior certificates relating to a loan group are no longer outstanding,
principal payments from the other loan groups otherwise allocable to such senior
certificates will be allocated to the senior certificates relating to the other
loan groups. This feature is called "crosscollateralization."
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES - CROSSCOLLATERALIZATION
PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT.
ADVANCES
Each servicer will make cash advances with respect to delinquent payments of
scheduled interest and principal on the related mortgage loans for which it acts
as servicer in general to the extent that such servicer reasonably believes that
such cash advances can be repaid from future payments on the related mortgage
loans. If the related servicer fails to make any required advances, the master
servicer may be obligated to do so, as described in this prospectus supplement.
These cash advances are only intended to maintain a regular flow of scheduled
interest and principal payments on
S-9
the certificates and are not intended to guarantee or insure against losses.
OPTIONAL TERMINATION
The master servicer may purchase all of the remaining assets in the trust fund
when the principal balance of the mortgage loans and any foreclosed real estate
owned by the trust fund has declined to or below 10% of the principal balance of
the mortgage loans as of the cut-off date. Such a purchase will result in the
early retirement of all the certificates.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the trust will comprise multiple real estate
mortgage investment conduits, organized in a tiered REMIC structure. The
certificates offered by this prospectus supplement, other than the Class R
Certificates, and the Class B-4, Class B-5 and Class B-6 Certificates will
represent beneficial ownership of "regular interests" in the related REMIC
identified in the pooling and servicing agreement.
Each class of Class R Certificates will represent the beneficial ownership of
the sole class of "residual interest" in a REMIC. Certain classes of offered
certificates may be issued with original issue discount for federal income tax
purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THE PROSPECTUS FOR
ADDITIONAL INFORMATION CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS.
LEGAL INVESTMENT
The senior certificates and the Class B-1 Certificates will be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THE PROSPECTUS.
ERISA CONSIDERATIONS
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, so long as a number of 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 "ERISA CONSIDERATIONS" IN
THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS.
RATINGS
The classes of certificates listed below will not be offered unless they receive
the respective ratings set forth below from Moody's Investors Service, Inc.,
which we refer to as "Moody's" and Standard & Poor's Rating Services, a division
of The McGraw- Hill Companies, Inc., which we refer to as "Standard & Poor's".
Moody's Standard &
Class Rating Poor's Rating
I-A1 Aaa AAA
I-A2 Aaa AAA
II-A1 Aaa AAA
II-A2 Aaa AAA
II-A3 Aaa AAA
II-A4 Aaa AAA
II-A5 Aaa AAA
III-A Aaa AAA
I-PO Aaa AAA
II-PO Aaa AAA
III-PO Aaa AAA
I-X Aaa AAA
II-X Aaa AAA
III-X Aaa AAA
BX Aaa AAA
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B-1 -- AA
B-2 -- A
B-3 -- BBB
R-1 -- AAA
R-2 -- AAA
R-3 -- AAA
A rating is not a recommendation to buy, sell or hold securities and either
rating agency can revise or withdraw such ratings at any time. In general,
ratings address credit risk and do not address the likelihood of prepayments.
S-11
RISK FACTORS
IN ADDITION TO THE MATTERS DESCRIBED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE
DECIDING TO PURCHASE A CERTIFICATE.
THE SUBORDINATED
CERTIFICATES HAVE A GREATER
RISK OF LOSS THAN THE SENIOR
CERTIFICATES.............................. When certain classes of certificates provide credit
enhancement for other classes of certificates it is
sometimes referred to as "subordination." For purposes of
this prospectus supplement, "related subordinated
classes" means:
o with respect to the senior certificates: the Class B-1,
Class B-2, Class B-3, Class B-4, Class B-5 and Class
B-6 Certificates;
o with respect to the Class B-1 Certificates: the Class
B-2, Class B-3, Class B-4, Class B-5 and Class B-6
Certificates;
o with respect to the Class B-2 Certificates: the Class
B-3, Class B-4, Class B-5 and Class B-6 Certificates;
o with respect to the Class B-3 Certificates: the Class
B-4, Class B-5 and Class B-6 Certificates;
o with respect to the Class B-4 Certificates: the Class
B-5 Certificates and Class B-6 Certificates; and
o with respect to the Class B-5 Certificates: the Class
B-6 Certificates.
We will provide credit enhancement for the certificates,
first, by the right of the holders of the certificates to
receive certain payments of interest and principal prior to
the related subordinated classes and, second, by the
allocation of realized losses to the related subordinated
classes. This form of credit enhancement uses collections on
the mortgage loans otherwise payable to the holders of the
related subordinated classes to pay amounts due on the more
senior classes. Such collections are the sole source of funds
from which such credit enhancement is provided. Realized
losses are allocated first to the subordinated certificates,
beginning with the subordinated certificates with the lowest
payment priority, until the principal amount of that class
has been reduced to zero. This means that realized losses on
the mortgage loans would first be allocated to the Class B-6
Certificates until the principal balance of the Class B-6
Certificates is reduced to zero. Subsequent realized losses
would be allocated to the next most junior class of
subordinated certificates, until the principal balance of
that class of subordinated certificates is reduced to zero.
Accordingly, if the aggregate principal balance of a
subordinated class
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were to be reduced to zero, delinquencies and defaults on the
mortgage loans would reduce the amount of funds available for
distributions to holders of the remaining subordinated class
or classes and, if the aggregate principal balance of all the
subordinated classes were to be reduced to zero,
delinquencies and defaults on the mortgage loans in a
particular loan group would reduce the amount of funds
available for monthly distributions to holders of the
remaining related senior certificates.
You should fully consider the risks of investing in a
subordinated certificate, including the risk that you may not
fully recover your initial investment as a result of realized
losses.
See "Description of the Certificates" in this prospectus
supplement.
ADDITIONAL RISKS ASSOCIATED
WITH THE SUBORDINATED
CERTIFICATES.............................. The weighted average lives of, and the yields to maturity
on, the Class B Certificates will be progressively more
sensitive, in reverse numerical order, to the rate and
timing of mortgagor defaults and the severity of ensuing
losses on the mortgage loans. If the actual rate and
severity of losses on the mortgage loans is higher than
those assumed by an investor in such certificates, the
actual yield to maturity of such certificates may be lower
than the yield anticipated by such holder based on such
assumption. The timing of losses on the mortgage loans
will also affect an investor's actual yield to maturity, even
if the rate of defaults and severity of losses over the life of
the mortgage 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 will reduce the
certificate principal balance of the Class B Certificates in
reverse numerical order. As a result of such reductions,
less interest will accrue on such class of subordinated
certificates than would otherwise be the case. Once a
realized loss is allocated to a subordinated certificate, no
interest will be distributable with respect to such written
down amount.
In addition, the multiple class structure of the subordinated
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.
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 a class of subordinated
certificates with a
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lower payment priority. Furthermore, the timing of receipt of
principal and interest by the subordinated certificates may
be adversely affected by losses even if such classes of
certificates do not ultimately bear such loss.
PRINCIPAL ONLY AND INTEREST
ONLY CERTIFICATES INVOLVE
ADDITIONAL RISK........................... The Class I-PO Certificates will receive a portion of the
principal payments only on the mortgage loans in loan
group I that have net mortgage rates lower than 8.50%.
The Class II-PO Certificates will receive a portion of the
principal payments only on the mortgage loans in loan
group II that have net mortgage rates lower than 6.50%.
The Class III-PO Certificates will receive a portion of the
principal payments only on the mortgage loans in loan
group III that have net mortgage rates lower than 6.50%.
Therefore, the yield on the Class I-PO, Class II-PO and
Class III-PO Certificates is extremely sensitive to the rate
and timing of principal prepayments and defaults on such
mortgage loans.
Investors in the Class I-PO, Class II-PO and Class III-PO
Certificates should be aware that mortgage loans in the
related loan group with lower interest rates are less likely
to be prepaid than mortgage loans with higher interest rates.
If payments of principal on the mortgage loans in loan group
I that have net mortgage rates lower than 8.50%, mortgage
loans in loan group II that have net mortgage rates lower
than 6.50%, or mortgage loans in loan group III that have net
mortgage rates lower than 6.50% occur at a rate slower than
an investor assumed at the time of purchase, the related
investor's yield may be adversely affected.
If the mortgage loans in loan group I that have net mortgage
rates higher than 8.50% are prepaid at a rate faster than an
investor assumed at the time of purchase, the yield to
investors in the Class I-X Certificates will be adversely
affected. Investors in the Class I-X Certificates should
fully consider the risk that a rapid rate of prepayments on
the mortgage loans in loan group I that have net mortgage
rates higher than 8.50% could result in their failure to
recover their investments.
If the mortgage loans in loan group II that have net mortgage
rates higher than 6.50% are prepaid at a rate faster than an
investor assumed at the time of purchase, the yield to
investors in the Class II-X Certificates will be adversely
affected. Investors in the Class II-X Certificates should
fully consider the risk that a rapid rate of prepayments on
the mortgage loans in loan group II that have net mortgage
rates higher than 6.50% could result in their failure to
recover their investments.
If the mortgage loans in loan group III that have net
mortgage rates higher than 6.50% are prepaid at a rate faster
than an investor assumed at the time of purchase,
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the yield to investors in the Class III-X Certificates will
be adversely affected. Investors in the Class III-X
Certificates should fully consider the risk that a rapid rate
of prepayments on the mortgage loans in loan group III that
have net mortgage rates higher than 6.50% could result in
their failure to recover their investments.
In addition, investors in the Class I-X, Class II-X and Class
III-X Certificates should be aware that mortgage loans with
higher interest rates are more likely to be prepaid than
mortgage loans with lower interest rates. Mortgage loans with
higher interest rates may have higher rates of delinquency
than mortgage loans with lower interest rates, which may
result in losses to certificateholders.
Investors in the Class BX Certificates should be aware that
the yield to such investors may be extremely sensitive to
defaults on the mortgage loans and the rate and timing of
principal prepayments. Because the notional balance of the
Class BX Certificates is based in part on the aggregate
certificate principal balance of the Class B-1, Class B-2 and
Class B-3 Certificates, any reduction in the certificate
principal balance of the Class B-1, Class B-2 and Class B-3
Certificates as a result of the allocation of realized losses
thereto or distributions in respect principal prepayments on
the mortgage loans will result in a reduction in the notional
balance of the Class BX Certificates and thus, reduce the
amount of interest distributable to the holders of the Class
BX Certificates following the allocation of such realized
losses or such distributions in respect of principal
prepayments.
RESIDUAL CERTIFICATES ARE SUBJECT
TO SPECIAL RISKS.......................... Holders of the Class R Certificates are entitled to receive
distributions of principal and interest as described herein,
but the holders of the Class R Certificates are not
expected to receive any distributions after the first
distribution date. In addition, holders of the Class R
Certificates may have tax liabilities with respect to their
certificates during the early years of the REMIC that
substantially exceed the principal and interest payable
thereon.
FLUCTUATIONS IN ONE-MONTH
LIBOR WILL DIRECTLY AFFECT THE
AMOUNT OF INTEREST HOLDERS OF THE
ADJUSTABLE RATE CERTIFICATES
ARE ENTITLED TO RECEIVE ON
A GIVEN DISTRIBUTION DATE................. Interest payable to the Class I-A1 Certificates and Class I-
A2 Certificates is dependent upon the level of One-Month
LIBOR. Therefore, fluctuations in the level of One-Month
LIBOR may increase or decrease the amount of interest
payable on a given distribution date with respect to each
such class.
S-15
In general, since the Class I-A1 Certificates accrue interest
at a rate equal to One-Month LIBOR plus 0.55% an increase in
the level of One-Month LIBOR will increase the amount of
interest payable to such certificates. However, the Class
I-A1 Certificates are subject to a maximum rate of 8.50% per
annum. Therefore, if an increase in One-Month LIBOR causes
the pass-through rate otherwise applicable to the Class I-A1
Certificates to exceed 8.50%, the pass-through rate will be
reduced to the maximum rate.
Conversely, since the Class I-A2 Certificates accrue interest
at a rate equal to 7.95% minus One-Month LIBOR, an increase
in the level of One-Month LIBOR will decrease the amount of
interest payable to the Class I-A2 Certificates and a
decrease in the level of One- Month LIBOR will increase the
amount of interest payable to the Class I-A2 Certificates.
However, the Class I-A2 Certificates are subject to a maximum
rate of 7.95%. Therefore, if a decrease in the level of
One-Month LIBOR causes the pass-through rate otherwise
applicable to the Class I-A2 Certificates to exceed the
maximum rate, the pass-through rate for the Class I-A2
Certificates will be reduced to the maximum rate.
CERTAIN MORTGAGE LOANS
WERE UNDERWRITTEN TO
NONCONFORMING UNDERWRITING
STANDARDS, WHICH MAY RESULT
IN LOSSES OR SHORTFALLS TO BE
INCURRED ON THE OFFERED
CERTIFICATES.............................. Certain mortgage loans were underwritten generally in
accordance with underwriting standards which are
primarily intended to provide for single family "non-
conforming" mortgage loans. A "non-conforming"
mortgage loan means a mortgage loan which is ineligible
for purchase by Fannie Mae or Freddie Mac due to either
credit characteristics of the related mortgagor or
documentation standards in connection with the
underwriting of the related mortgage loan that do not
meet the Fannie Mae or Freddie Mac underwriting
guidelines for "A" credit mortgagors.
These documentation standards may include mortgagors who
provide limited or no documentation in connection with the
underwriting of the related mortgage loan. Accordingly,
mortgage loans underwritten under such non-conforming credit
underwriting standards are likely to experience rates of
delinquency, foreclosure and loss that are higher, and may be
substantially higher, than mortgage loans originated in
accordance with the Fannie Mae or Freddie Mac underwriting
guidelines. Any resulting losses, to the extent not covered
by credit enhancement, may affect the yield to maturity of
the offered certificates.
S-16
DEFAULTS COULD CAUSE PAYMENT
DELAYS AND LOSSES......................... There could be substantial delays in the liquidation of
defaulted mortgage loans and corresponding delays in
your receiving your portion of the proceeds of liquidation.
These delays could last up to several years. Furthermore,
an action to obtain a deficiency judgment is regulated by
statutes and rules, and the amount of a deficiency
judgment may be limited by law. In the event of a default
by a borrower, these restrictions may impede the ability
of the related servicer to foreclose on or to sell the
mortgaged property or to obtain a deficiency judgment. In
addition, liquidation expenses such as legal and appraisal
fees, real estate taxes and maintenance and preservation
expenses, will reduce the amount of security for the
mortgage loans and, in turn, reduce the proceeds payable
to certificateholders.
In the event that the mortgaged properties fail to provide
adequate security for the related mortgage loans, and the
protection provided by the subordination of certain classes
is insufficient to cover any shortfall, you could lose all or
a portion of the money you paid for your certificates.
YOUR YIELD COULD BE
ADVERSELY AFFECTED BY
THE UNPREDICTABILITY
OF PREPAYMENTS ........................... No one can accurately predict the level of prepayments
that the trust will experience. The trust's prepayment
experience may be affected by many factors, including:
o general economic conditions,
o the level of prevailing interest rates,
o the availability of alternative financing, and
o homeowner mobility.
Substantially all of the mortgage loans contain due-on- sale
provisions, and the servicers are required to enforce those
provisions unless doing so is not permitted by applicable law
or the related servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the
mortgaged property in question to assume the related mortgage
loan. In addition, each of the mortgage loans in loan group I
imposed a prepayment charge in connection with voluntary
prepayments made within up to five years after origination,
which charges may discourage prepayments during the
applicable period.
The weighted average lives of the certificates will be
sensitive to the rate and timing of principal payments,
including prepayments, on the mortgage loans, which may
fluctuate significantly from time to time.
S-17
You should note that:
o if you purchase your certificates at a discount and
principal is repaid on the related mortgage loans 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 on the related mortgage loans faster
than you anticipate, then your yield may be lower than
you anticipate;
o since repurchases of mortgage loans as a result of
breaches of representations and warranties and
liquidations of mortgage loans following default have the
same effect as prepayments, your yield may be lower than
you expect if the rate of such repurchases and
liquidations is higher than you expect; and
o you bear the reinvestment risks resulting from a faster
or slower rate of principal payments than you expected.
WE REFER YOU TO "THE MORTGAGE POOL" AND "YIELD, PREPAYMENT
AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND "MATERIAL LEGAL ASPECTS OF THE LOANS -- DUE-ON-SALE
CLAUSES IN MORTGAGE LOANS" IN THE PROSPECTUS FOR A
DESCRIPTION OF CERTAIN PROVISIONS OF THE MORTGAGE LOANS THAT
MAY AFFECT THE PREPAYMENT EXPERIENCE ON THE MORTGAGE LOANS.
A REDUCTION IN CERTIFICATE
RATING COULD HAVE AN
ADVERSE EFFECT ON THE
VALUE OF YOUR CERTIFICATES................ The ratings of each class of offered certificates will
depend primarily on an assessment by the rating agencies
of the related mortgage loans and the subordination
afforded by certain classes of certificates. The ratings by
each of the rating agencies of the offered certificates are
not recommendations to purchase, hold or sell the offered
certificates because such ratings do not address the
market prices of the certificates or suitability for a
particular investor.
The rating agencies may suspend, reduce or withdraw the
ratings on the offered certificates at any time. Any
reduction in, or suspension or withdrawal of, the rating
assigned to a class of offered certificates would probably
reduce the market value of such class of offered certificates
and may affect your ability to sell them.
YOUR DISTRIBUTIONS COULD BE
ADVERSELY AFFECTED BY THE
BANKRUPTCY OR INSOLVENCY
OF CERTAIN PARTIES........................ The seller will treat its transfer of the mortgage loans to
the depositor as a sale of the mortgage loans. However, if
the seller becomes bankrupt, the trustee in bankruptcy
may argue that the mortgage loans were not sold but were
S-18
only pledged to secure a loan to the seller. If that
argument is made, you could experience delays or
reductions in payments on the certificates. If that
argument is successful, the bankruptcy trustee could elect
to sell the mortgage loans and pay down the certificates
early. Thus, you could lose the right to future payments of
interest, and might suffer reinvestment loss in a lower
interest rate environment.
In addition, if the master servicer becomes bankrupt, a
bankruptcy trustee or receiver may have the power to prevent
the appointment of a successor master servicer. Any related
delays in servicing could result in increased delinquencies
or losses on the mortgage loans.
DEVELOPMENTS IN SPECIFIED
STATES COULD HAVE A
DISPROPORTIONATE EFFECT
ON THE MORTGAGE LOANS DUE
TO GEOGRAPHIC CONCENTRATION
OF MORTGAGED PROPERTIES................... Approximately 20.81%, 13.60%, 11.89%, 7.20%, 6.08%
and 3.84% of the loan group I mortgage loans as of the
cut-off date are secured by mortgaged properties that are
located in the states of California, Florida, New York,
Illinois, Georgia and Massachusetts, respectively.
Approximately 34.62%, 9.24%, 6.64%, 6.28% and 4.62%
of the loan group II mortgage loans as of the cut-off date
are secured by mortgaged properties that are located in
the states of California, New York, New Jersey, Florida
and Virginia, respectively. Approximately 13.89%,
8.69%, 6.93%, 6.26%, 6.21% and 5.47% of the loan
group III mortgage loans as of the cut-off date are
secured by mortgaged properties that are located in the
states of California, New Jersey, Florida, Illinois, Texas
and Massachusetts, respectively. Property in certain of
those states, including California, may be more
susceptible than homes located in other parts of the
country to certain types of uninsurable hazards, such as
earthquakes, floods, mudslides and other natural disasters.
In addition,
o economic conditions in the specified states, which may or
may not affect real property values, may affect the
ability of borrowers to repay their loans on time;
o declines in the residential real estate market in the
specified states may reduce the values of properties
located in those states, which would result in an
increase in the loan-to-value ratios;
and
o any increase in the market value of properties located in
the specified states would reduce the loan-to-value
ratios and could, therefore, make alternative sources of
financing available to the borrowers at lower
S-19
interest rates, which could result in an increased rate
of prepayment of the mortgage loans.
YOU MAY HAVE DIFFICULTY
SELLING YOUR CERTIFICATES................. The underwriter intends to make a secondary market in
the offered certificates, but the underwriter has no
obligation to do so. We cannot assure you that a
secondary market will develop or, if it develops, that it
will continue. Consequently, you may not be able to sell
your certificates readily or at prices that will enable you
to realize your desired yield. The market values of the
certificates are likely to fluctuate, and such 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 certificates that are especially
sensitive to prepayment, credit or interest rate risk, or
that have been structured to meet the investment requirements
of limited categories of investors.
THE RETURN ON YOUR CERTIFICATES
COULD BE REDUCED BY SHORTFALLS
DUE TO THE APPLICATION OF THE
SOLDIERS' AND SAILORS' CIVIL RELIEF
ACT....................................... The Soldiers' and Sailors' Civil Relief Act of 1940, or
Relief Act provides relief to borrowers who enter active
military service and to borrowers in reserve status who
are called to active military service after the origination
of their loans. Under the Relief Act the interest rate
applicable to a mortgage loan for which the related
borrower is called to active military service will be
reduced from the percentage stated in the related
mortgage note to 6%. This interest rate reduction will
result in an interest shortfall because neither the related
servicer nor the master servicer will be able to collect
the amount of interest which would otherwise be
payable with respect to such loan if the Relief Act was
not applicable thereto. Such shortfall will not be paid by
the borrower on future due dates or advanced by the
related servicer or the master servicer and will
therefore, reduce the amount available to pay interest to
the certificateholders on subsequent distribution dates.
As of the cut-off date, one mortgage loan in the
mortgage pool representing 0.11% of the aggregate
stated principal balance as of the cut-off date, has had
its interest rate reduced as a result of the Relief Act. As
a result, shortfalls will be allocated to the offered
certificates commencing on the first distribution date.
Any interest shortfalls as a result of the Relief Act will
not be reimbursed by the trust, the related servicer, the
master servicer or any other person.
S-20
THE MORTGAGE POOL
GENERAL
We have provided below and in Schedule A to this prospectus supplement
information with respect to the conventional mortgage loans that we expect to
include in the pool of mortgage loans in the trust fund. Prior to the closing
date of October 30, 2002, we may remove mortgage loans from the mortgage pool
and we may substitute other mortgage loans for the mortgage loans we remove. The
depositor believes that the information set forth herein with respect to the
mortgage pool as presently constituted 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 in the mortgage pool may vary.
Unless we have otherwise indicated, the information we present below and in
Schedule A is expressed as of the cut-off date of October 1, 2002.
Each mortgage loan in the trust fund will bear interest at a fixed
rate, will be secured by a first lien on the related mortgaged property, and
will be assigned to one of the loan groups, each of which constitutes a separate
sub-trust, based primarily on whether the mortgage loan has a prepayment penalty
or whether the mortgage loan has a agency conforming balance. The mortgage loans
allocated to loan group I have prepayment penalties, the majority of the
mortgage loans allocated to loan group II do not have agency conforming
balances, and the mortgage loans allocated to loan group III have agency
conforming balances. A mortgage loan secured by a single family, two-family,
three-family or four-family property with an "agency conforming balance" had a
principal balance at origination of $300,700 or less, $384,900 or less, $465,200
or less, or $578,150 or less, respectively. Each mortgage loan which does not
have an agency conforming balance had a principal balance at origination in
excess of these amounts. All of the mortgage loans we will include in the trust
fund will be fully amortizing or have a balloon payment.
EMC Mortgage Corporation purchased the mortgage loans directly in
privately negotiated transactions. WE REFER YOU TO "SERVICING OF THE MORTGAGE
LOANS" AND "THE MORTGAGE POOL -UNDERWRITING GUIDELINES" FOR FURTHER INFORMATION
REGARDING THE MORTGAGE LOANS.
Scheduled monthly payments made by the mortgagors on the mortgage loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. The mortgage notes generally provide for a grace period for
monthly payments. Any mortgage loan may be prepaid in full or in part at any
time. However, each of the mortgage loans in loan group I and certain of the
mortgage loans in loan group III provided at origination for the payment by the
borrower of a prepayment charge on voluntary prepayments typically made up to
the first five years from the date of execution of the related mortgage note.
The holders of the Class XP Certificates will be entitled to all prepayment
charges received on such mortgage loans, and these amounts will not be available
for distribution on the other classes of certificates. There can be no assurance
that the prepayment charges will have any effect on the prepayment performance
of the mortgage loans in loan group I or loan group III.
The cut-off date pool principal balance is approximately $412,192,891,
which is equal to the aggregate stated principal balance of the mortgage loans
as of the cut-off date. The mortgage loans to be transferred by the depositor to
the trust fund on the closing date will consist of 1,856 mortgage loans, of
which 507 loans are in loan group I, 574 loans are in loan group II and 775
loans are in loan group III. As of the Cut-off Date, no scheduled monthly
payment on any mortgage loan is more than 31 days past due.
LOAN-TO-VALUE RATIO. The loan-to-value ratio of a mortgage loan is
equal to the principal balance of such mortgage loan at the date of origination,
divided by the collateral value of the related mortgaged property.
S-21
The "collateral value" of a mortgaged property is the lesser of
o the appraised value based on an appraisal made by an
independent fee appraiser at the time of the origination of
the related mortgage loan, and
o the sales price of that mortgaged property at the time of
origination.
With respect to a mortgage loan the proceeds of which were used to
refinance an existing mortgage loan, the collateral value is the appraised value
of the mortgaged property based upon the appraisal obtained at the time of
refinancing. No assurance can be given that the values of the mortgaged
properties have remained or will remain at their levels as of the dates of
origination of the related mortgage loans.
CREDIT SCORES. Many lenders obtain credit scores in connection with
mortgage loan applications to help them assess a borrower's creditworthiness.
They obtain credit scores from credit reports provided by various credit
reporting organizations, each of which may employ differing computer models and
methodologies. The credit score is designed to assess a borrower's credit
history at a single point, using objective information currently on file for the
borrower at a particular credit reporting organization. Information utilized to
create a credit score may include, among other things, payment history,
delinquencies on accounts, level of outstanding indebtedness, length of credit
history, types of credit, and bankruptcy experience. Credit scores range from
approximately 350 to approximately 840, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a credit score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender, that is, a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be noted that
credit scores were developed to indicate a level of default probability over a
two-year period, which does not correspond to the life of a mortgage loan.
Furthermore, credit scores were not developed specifically for use in connection
with mortgage loans, but for consumer loans in general, and assess only the
borrower's past credit history. Therefore, a credit score does not take into
consideration the differences between mortgage loans and consumer loans
generally or the specific characteristics of the related mortgage loan
including, for example, the loan-to-value ratio, the collateral for the mortgage
loan, or the debt to income ratio. We cannot assure you that the credit scores
of the mortgagors will be an accurate predictor of the likelihood of repayment
of the related mortgage loans.
MORTGAGE LOAN STATISTICAL DATA
Schedule A to this prospectus supplement sets forth in tabular format
certain information, as of the cut-off date, about the mortgage loans in the
aggregate and about the mortgage loans in each loan group. Other than with
respect to rates of interest, percentages are approximate and are stated by
cut-off date principal balance of all of the mortgage loans, or of mortgage
loans in the related loan group, as applicable. The sum of the respective
columns may not equal the total indicated due to rounding.
ASSIGNMENT OF THE MORTGAGE LOANS; REPURCHASE
At the time of issuance of the certificates, the depositor will cause
the mortgage loans, together with all principal and interest due with respect to
such mortgage loans after the cut-off date to be sold to the trust. The mortgage
loans in each of the loan groups will be identified in a schedule appearing as
an exhibit to the pooling and servicing agreement with each loan group
separately identified. Such schedule will include information as to the
principal balance of each mortgage loan as of the cut-off date, as well as
information including, among other things, the mortgage rate, the borrower's
monthly payment and the maturity date of each mortgage note.
In addition, the depositor will deposit with Wells Fargo Bank
Minnesota, National Association, as custodian and agent for the trustee, the
following documents with respect to each mortgage loan:
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(a) the original mortgage note, endorsed without recourse in
the following form: "Pay to the order of Bank One, National
Association, as trustee for certificateholders of Bear Stearns Asset
Backed Securities, Inc., Asset-Backed Certificates, Series 2002-AC5,
without recourse," with all intervening endorsements that show a
complete chain of endorsement from the originator to the seller or, if
the original mortgage note is unavailable to the depositor, a photocopy
thereof, if available, together with a lost note affidavit;
(b) the original recorded mortgage or a photocopy thereof;
(c) a duly executed assignment of the mortgage to "Bank One,
National Association, as trustee for certificateholders of Bear Stearns
Asset Backed Securities, Inc., Asset-Backed Certificates, Series
2002-AC5, without recourse"; in recordable form or, for each mortgage
loan subject to the Mortgage Electronic Registration Systems, Inc. (the
"MERS(R) System"), evidence that the mortgage is held for the trustee
as described in the pooling and servicing agreement;
(d) all interim recorded assignments of such mortgage, if any
and if available to the depositor; and
(e) the original or duplicate original lender's title policy
or, in the event such original title policy has not been received from
the insurer, such original or duplicate original lender's title policy
shall be delivered within one year of the closing date or, in the event
such original lender's title policy is unavailable, a photocopy of such
title policy or, in lieu thereof, a current lien search on the related
property.
With respect to each mortgage loan subject to the MERS(R) System, in
accordance with the rules of membership of Merscorp, Inc. and/or Mortgage
Electronic Registration Systems, Inc. ("MERS"), the assignment of the mortgage
related to each such mortgage loan shall be registered electronically through
the MERS(R) System and MERS shall serve as mortgagee of record solely as nominee
in an administrative capacity on behalf of the trustee and shall not have any
interest in such mortgage loans.
Assignments of the mortgage loans provided to the custodian on behalf
of the trustee will be recorded in the appropriate public office for real
property records, except (i) in states as to which an opinion of counsel is
delivered to the effect that such recording is not required to protect the
trustee's interests in the mortgage loan against the claim of any subsequent
transferee or any successor to or creditor of the depositor or the seller, or
(ii) with respect to any mortgage loan electronically registered through the
MERS(R) System. The seller shall be responsible for the recordation of such
assignments and the costs incurred in connection therewith.
The custodian on behalf of the trustee will perform a limited review of
the mortgage loan documents on or prior to the closing date or in the case of
any document permitted to be delivered after the closing date, promptly after
the custodian's receipt of such documents and will hold such documents in trust
for the benefit of the holders of the certificates.
In addition, the seller will make representations and warranties in the
pooling and servicing agreement as of the cut-off date in respect of the
mortgage loans. The depositor will file the pooling and servicing agreement
containing such representations and warranties with the Securities and Exchange
Commission in a report on Form 8-K within 15 days of the closing date.
After the closing date, if any document is found to be missing or
defective in any material respect, or if a representation or warranty with
respect to any mortgage loan is breached and such breach materially and
adversely affects the interests of the holders of the certificates in such
mortgage loan, the trustee is required to notify the seller in writing. If the
seller cannot or does not cure such omission, defect or breach within 60 days of
its receipt of notice from the custodian, the seller is required to repurchase
the related mortgage loan from the trust fund at a price equal to 100% of the
stated principal balance thereof as of the date of repurchase plus accrued and
unpaid interest
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thereon at the Mortgage Rate to the first day of the month following the month
of repurchase. Rather than repurchase the mortgage loan as provided above, the
seller may remove such mortgage loan from the trust fund and substitute in its
place another mortgage loan of like characteristics; however, such substitution
is only permitted within two years after the closing date.
With respect to any repurchase or substitution of a mortgage loan that
is not in default or as to which a default is not imminent, the trustee must
have received a satisfactory opinion of counsel that such repurchase or
substitution will not cause the trust fund to lose the status of its REMIC
elections or otherwise subject the trust to a prohibited transaction tax. The
obligation to cure, repurchase or substitute as described above constitutes the
sole remedy available to the certificateholders, the trustee or the depositor
for omission of, or a material defect in, a mortgage loan document or for a
breach of representation or warranty by the seller with respect to a mortgage
loan.
THE ORIGINATORS
The principal originators of the mortgage loans are: Greenpoint
Mortgage Funding, Inc., with respect to approximately 20.23% of the mortgage
loans, Waterfield Mortgage Company, Inc., with respect to approximately 19.49%
of the mortgage loans, National City Mortgage Co., with respect to approximately
18.77% of the mortgage loans and First National Bank of Nevada, with respect to
approximately 10.65% of the mortgage loans. The remainder of the mortgage loans
were originated by various originators, none of which have originated more than
10% of the mortgage loans.
GREENPOINT MORTGAGE FUNDING, INC.
GreenPoint Mortgage Funding, Inc. ("GreenPoint"), a New York
corporation, is a wholly owned subsidiary of GreenPoint Financial Corp., a
national specialty housing finance company. GreenPoint is engaged in the
mortgage banking business, which consists of the origination, acquisition, sale
and servicing of residential mortgage loans secured primarily by one to
four-unit family residences, and the purchase and sale of mortgage servicing
rights. GreenPoint originates loans through a nationwide network of production
branches. Loans are originated primarily through GreenPoint's wholesale
division, through a network of independent mortgage loan brokers approved by
GreenPoint, and also through its retail lending division and correspondent
lending division.
GreenPoint's present business operations were formed through the
transfer to GreenPoint effective October 1, 1999 of the assets and liabilities
of Headlands Mortgage Company. Simultaneously with the transfer, GreenPoint
Mortgage Corp., a subsidiary of GreenPoint Financial Corp. specializing in
non-conforming, no documentation loans, was merged into GreenPoint. All of the
mortgage operations of GreenPoint Financial Corp. are now conducted through
GreenPoint.
GreenPoint is headquartered in northern California, and has production
branches in California, Washington, Oregon, New Mexico, Virginia, Pennsylvania,
Idaho, Florida, New Jersey and Arizona. Loans are originated primarily on a
wholesale basis, through a network of independent mortgage loan brokers approved
by GreenPoint. GreenPoint's executive offices are located at 900 Larkspur Circle
Suite 105, Larkspur CA 94939.
WATERFIELD MORTGAGE COMPANY, INC.
Waterfield Mortgage Company, Inc. ("Waterfield") was founded in 1928
and is the holding company of the Waterfield Group, which is based in Fort
Wayne, Indiana. Waterfield Financial Corp. is a wholly owned subsidiary of Union
Federal Bank of Indianapolis ("Union Federal Bank"), which is a wholly owned
subsidiary of Waterfield.
Waterfield Financial Corp. is a one-to-four family residential mortgage
loan origination company with retail and wholesale operations throughout the
United States. Waterfield Financial Corp.'s retail operation comprises more than
30 branch offices and 225 loan officers located throughout Arizona, California,
Colorado, Indiana, Maine, Maryland, Michigan, Nevada, New
S-24
Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania,
Texas and Virginia.
Union Federal Wholesale is a division of Waterfield Financial Corp. and
is located in Fort Wayne, Indiana. Union Federal Wholesale was formed in 1996 to
participate in a rapidly expanding wholesale market, specializing in Government
insured, Conforming, and Alt-A mortgage products.
All of Union Federal Wholesale's and Waterfield Financial Corp.'s loan
production is funded in the name of Union Federal Bank. Combined retail and
wholesale originations in 2001 totaled $6.5 billion, with the Union Federal
Wholesale division accounting for 45% of that total, or $2.9 billion.
Waterfield is a licensed seller/servicer approved by Fannie Mae,
Freddie Mac, and Ginnie Mae. Waterfield's servicing portfolio at the end of 2001
totaled $13.3 billion, ranking it among the top 50 mortgage companies
nationwide.
NATIONAL CITY MORTGAGE CO.
National City Mortgage Co. ("NCM") is a full-service residential
mortgage banking company headquartered in Miamisburg, Ohio, a southern suburb of
Dayton, Ohio. As of September 30, 2002, NCM serviced 917,499 loans, totaling
$111.5 billion, 88.28% of which are serviced for secondary market investors. The
NCM servicing portfolio currently ranks in the top 20 mortgage companies in the
country.
The predecessor of NCM, North Central Mortgage Corporation, was founded
in 1955 as the lending arm of a local building supply firm. In 1981, Third
National Bank & Trust Co. of Dayton acquired North Central Mortgage Corporation.
At that time, the company was servicing approximately $350 million of mortgage
loans. In 1984, Third National Bank & Trust Co., along with North Central
Mortgage Corporation, was acquired by Society Corporation of Cleveland. This
acquisition boosted the servicing portfolio of North Central Mortgage
Corporation to approximately $1 billion.
In December 1985, Shawmut Bank of Boston purchased North Central
Mortgage Corporation from Society Corporation of Cleveland. The name was then
changed to Shawmut Mortgage Corporation and the servicing portfolio had grown to
$1.6 billion.
In 1989, Shawmut Bank of Boston sold Shawmut Mortgage Corporation to
National City Corporation ("NCC"). The name was changed to National City
Mortgage Co. and the servicing portfolio had grown to 55,000 loans totaling $2.7
billion.
Since the acquisition by NCC, NCM has grown through the consolidation
of the residential mortgage loan servicing of all NCC mortgage banking and
commercial banking affiliates, as well as through direct originations.
FIRST NATIONAL BANK OF NEVADA
First National Bank of Nevada is a national banking association engaged
in the business of originating, purchasing and selling, on a whole loan basis
for cash, non-conforming and, to a lesser extent, conforming, residential
mortgage loans secured by one-to-four family residences. The term
"non-conforming loans" as used herein means (i) non-conforming loan products for
primarily high credit borrowers whose credit scores equal or exceed levels
required for the sale of their mortgage loans to Fannie Mae or Freddie Mac, but
where the loan itself fails to meet conventional mortgage guidelines, such as
the principal balance exceeds the maximum loan limit or the loan structure
documentation does not conform to agency requirements; and (ii) sub-prime loans,
which are loans made to borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources, whether for reasons of credit
impairment, income qualification, credit history or desire to receive funding on
an expedited basis. First National Bank of Nevada's loans are made
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primarily to refinance existing mortgages, consolidate other debt, finance home
improvements, and to a lesser extent, to purchase single-family residences.
First National Bank of Nevada currently sells all of its mortgage loans
to institutional purchasers such as investment banks, real estate investment
trusts and other large mortgage bankers for cash through whole loan sales.
First National Bank of Nevada has ten branches in Las Vegas, Carson
City and Reno, as well as an exclusive for the Super Walmart banking branches in
the State of Nevada. The bank has $221 million in assets and a net worth of
$17.5 million as of December 31, 2001. The First National Bank of Nevada is part
of the First National Bank of Nevada Holding Company.
First National Bank of Nevada's executive offices are located at 14635
E. Kirkland Blvd., Suite 201 Scottsdale, AZ 85254.
UNDERWRITING GUIDELINES
All of the mortgage loans are "conventional non-conforming mortgage
loans" (i.e., loans that are not insured by the Federal Housing Authority
("FHA") or partially guaranteed by the Veterans Administration ("VA") or which
do not qualify for sale to Fannie Mae or Freddie Mac) and are secured by first
liens on one-to four-family residential properties. These loans typically differ
from those underwritten to the guidelines established by Fannie Mae and Freddie
Mac primarily with respect to the original principal balances, loan-to-value
ratios, borrower income, required documentation, interest rates, borrower
occupancy of the mortgaged property, property types and/or mortgage loans with
loan-to-value ratios over 80% that do not have primary mortgage insurance. The
mortgage loans have either been originated or purchased by an originator and
were generally underwritten in accordance with the standards described herein.
Such underwriting standards are applied to evaluate the prospective
borrower's credit standing and repayment ability and the value and adequacy of
the mortgaged property as collateral. These standards are applied in accordance
with the applicable federal and state laws and regulations. Exceptions to the
underwriting standards are permitted where compensating factors are present.
Generally, each mortgagor will have been required to complete an
application designed to provide to the lender pertinent credit information
concerning the mortgagor. The mortgagor will have given information with respect
to its assets, liabilities, income (except as described below), credit history,
employment history and personal information, and will have furnished the lender
with authorization to obtain a credit report which summarizes the mortgagor's
credit history. In the case of investment properties and two- to four-unit
dwellings, income derived from the mortgaged property may have been considered
for underwriting purposes, in addition to the income of the mortgagor from other
sources. With respect to second homes or vacation properties, no income derived
from the property will have been considered for underwriting purposes.
With respect to purchase money or rate/term refinance loans secured by
single family residences, loan-to-value ratios at origination of up to 97% for
mortgage loans with original principal balances of up to $400,000, up to 95% for
mortgage loans secured by one-to-two family, primary residences with original
principal balances of up to $400,000, up to 90% for mortgage loans secured by
one-to-four family, primary residences with original principal balances of up to
$650,000 are generally allowed. Mortgage loans with principal balances up to
$1,000,000 ("super jumbos") are allowed if the loan is secured by the borrower's
primary residence. The loan-to-value ratio for super jumbos generally may not
exceed 80%. For cash out refinance loans, the maximum loan-to- value ratio
generally is 90% and the maximum "cash out" amount permitted is based in part on
the original amount of the related mortgage loan.
With respect to mortgage loans secured by investment properties,
loan-to-value ratios at origination of up to 90% for mortgage loans with
original principal balances up to $300,000 are permitted. Mortgage loans secured
by investment properties may have higher original principal
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balances if they have lower loan-to-value ratios at origination. For cash out
refinance loans, the maximum loan-to-value ratio generally is 85% and the
maximum "cash out" amount permitted is based in part on the original amount of
the related mortgage loan.
Except for approximately 3.39% of the mortgage loans included in the
mortgage pool with loan-to-value ratios at origination in excess of 80%, for
each mortgage loan with a loan-to-value ratio at origination exceeding 80%, a
primary mortgage insurance policy insuring a portion of the balance of the
mortgage loan at least equal to the product of the original principal balance of
the mortgage loan and a fraction, the numerator of which is the excess of the
original principal balance of such mortgage loan over 75% of the lesser of the
appraised value and the selling price of the related mortgaged property and the
denominator of which is the original principal balance of the related mortgage
loan plus accrued interest thereon and related foreclosure expenses is generally
required. No such primary mortgage insurance policy will be required with
respect to any such mortgage loan after the date on which the related
loan-to-value ratio decreases to 80% or less or, based upon new appraisal, the
principal balance of such mortgage loan represents 80% or less of the new
appraised value. All of the insurers that have issued primary mortgage insurance
policies with respect to the Mortgage Loans meet Fannie Mae's or Freddie Mac's
standard or are acceptable to the Rating Agencies.
In determining whether a prospective borrower has sufficient monthly
income available (i) to meet the borrower's monthly obligation on their proposed
mortgage loan and (ii) to meet the monthly housing expenses and other financial
obligation on the proposed mortgage loan, each lender generally considers, when
required by the applicable documentation program, the ratio of such amounts to
the proposed borrower's acceptable stable monthly gross income. Such ratios vary
depending on a number of underwriting criteria, including loan-to-value ratios,
and are determined on a loan-by-loan basis.
Each lender also examines a prospective borrower's credit report.
Generally, each credit report provides a credit score for the borrower. Credit
scores generally range from 350 to 840 and are available from three major credit
bureaus: Experian (formerly TRW Information Systems and Services), Equifax and
Trans Union. If three credit scores are obtained, the originator applies the
middle score of the primary wage earner. Credit scores are empirically derived
from historical credit bureau data and represent a numerical weighing of a
borrower's credit characteristics over a two-year period. A credit score is
generated through the statistical analysis of a number of credit-related
characteristics or variables. Common characteristics include number of credit
lines (trade lines), payment history, past delinquencies, severity of
delinquencies, current levels of indebtedness, types of credit and length of
credit history. Attributes are the specific values of each characteristic. A
scorecard (the model) is created with weights or points assigned to each
attribute. An individual loan applicant's credit score is derived by summing
together the attribute weights for that applicant.
The mortgage loans have been underwritten under one of the following
documentation programs: full/alternative documentation, stated income
documentation, no ratio documentation, and no income/no asset documentation.
Under full/alternative documentation, the prospective borrower's
employment, income and assets are verified through written and telephonic
communications. Under a stated income documentation program, more emphasis is
placed on the value and adequacy of the mortgaged property as collateral, credit
history and other assets of the borrower than on a verified income of the
borrower. Although the income is not verified, the originators obtain a
telephonic verification of the borrower's employment without reference to
income. Borrower's assets are verified.
Under the no ratio documentation program the borrower's income is not
stated and no ratios are calculated. Although the income is not stated nor
verified, lenders obtain a telephonic verification of the borrower's employment
without reference to income. Borrower's assets are verified.
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Under the no income/no asset documentation program, the borrower's
income and assets are stated but not verified. The underwriting of such mortgage
loans may be based entirely on the adequacy of the mortgaged property as
collateral and on the credit history of the borrower.
Each mortgaged property has been appraised by a qualified independent
appraiser who is approved by each lender. All appraisals are required to conform
to the Uniform Standards of Professional Appraisal Practice adopted by the
Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet
the requirements of Fannie Mae and Freddie Mac. The requirements of Fannie Mae
and Freddie Mac require, among other things, that the appraiser, or its agent on
its behalf, personally inspect the property inside and out, verify whether the
property was in good condition and verify that construction, if new, had been
substantially completed. The appraisal generally will have been based on prices
obtained on recent sales of comparable properties, determined in accordance with
Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on
income generated from the property or a replacement cost analysis based on the
current cost of constructing or purchasing a similar property may be used.
SERVICING OF THE MORTGAGE LOANS
GENERAL
Wells Fargo Bank Minnesota, National Association ("Wells Fargo" or the
"Master Servicer") will act as the master servicer of the mortgage loans
pursuant to the pooling and servicing agreement, dated as of October 1, 2002
(the "Agreement"), among the depositor, the seller, the master servicer, the
securities administrator and the trustee. Wells Fargo is a national banking
association, with its master servicing offices located at 9062 Old Annapolis
Road, Columbia, Maryland 21045. Wells Fargo is in the business of master
servicing single family residential mortgage loans secured by properties located
in all 50 states and the District of Columbia.
EMC Mortgage Corporation ("EMC"), a Delaware corporation having its
principal executive office at 909 Hidden Ridge Drive, Irving, Texas 75038, will
act as servicer with respect to approximately 81.23% of the mortgage loans
pursuant to the pooling and servicing agreement.
Approximately 18.77% of the mortgage loans (the "NCM Loans") will be
serviced by National City Mortgage Co. ("NCM") in accordance with the Purchase,
Warranties and Servicing Agreement (the "NCM Servicing Agreement"), dated as of
October 1, 2001 between EMC and NCM which will be assigned to the trust pursuant
to an Assignment, Assumption and Recognition Agreement among NCM, EMC and the
trustee on behalf of the certificateholders, except for the rights to enforce
the representations and warranties with respect to the related mortgage loans,
which will be retained by EMC in its capacity as seller of such mortgage loans
to the trust.
Pursuant to the pooling and servicing agreement the master servicer
will be required to monitor the related servicer's performance. In the event of
a default by EMC under the pooling and servicing agreement or NCM under the NCM
Servicing Agreement, the master servicer will be required to enforce any
remedies against the related servicer and shall either find a successor servicer
or shall assume the primary servicing obligations for the related mortgage loans
itself.
EMC
EMC, a wholly-owned subsidiary of The Bear Stearns Companies Inc., was
established as a full-line mortgage banking company to facilitate the purchase
and servicing of whole loan portfolios containing various levels of quality from
"investment grade" to varying degrees of "non-investment grade" up to and
including mortgaged properties acquired through foreclosure or deed-in-lieu of
foreclosure. EMC was incorporated in the State of Delaware on September 26, 1990
and commenced operation in Texas on October 9, 1990.
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The principal business of EMC has been the resolution of non-performing
residential mortgage loan portfolios acquired from Resolution Trust Corporation,
from private investors and from the Department of Housing and Urban Development
through its auctions of defaulted Federal Housing Authority mortgage loans.
EMC's servicing portfolio consists primarily of two categories:
o performing investment-quality loans serviced for EMC's own
account or the account of Fannie Mae, Freddie Mac, private
mortgage conduits and various institutional investors; and
o non-investment grade, sub-performing loans, non-performing
loans and REO properties serviced for EMC's own account and
for the account of investors in securitized performing and
non-performing collateral transactions.
EMC's operations resemble those of most mortgage banking companies,
except that significant emphasis is placed on the collection and due diligence
areas, due to the nature of the mortgage portfolios purchased. As of August 31,
2002, EMC was servicing approximately $10.70 billion of mortgage loans and REO
property.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF EMC
The following table sets forth the delinquency and foreclosure
experience of mortgage loans serviced by EMC as of the dates indicated. EMC's
portfolio of mortgage loans may differ significantly from the mortgage loans
backing the certificates in terms of underwriting standards, interest rates,
principal balances, geographic distribution, types of properties and other
possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the mortgage loans backing the certificates will be similar to that
reflected in the table below, nor is any representation made as to the rate at
which losses may be experienced on liquidation of defaulted mortgage loans. The
actual delinquency experience on the mortgage loans will depend, among other
things, upon the value of the real estate securing such mortgage loans and the
ability of borrowers to make required payments.
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DELINQUENCY AND FORECLOSURE EXPERIENCE(1)
As of June 30, 1999 As of June 30, 2000
------------------- -------------------
% by % by
No. of Principal Principal No. of Principal Principal
Loans Balance(2) Balance Loans Balance(2) Balance
----- ---------- ------- ----- ---------- -------
Current Loans................ 30,514 $2,172,839,680 68.55% 40,957 2,773,375,021 69.53%
Period of Delinquency(3).....
30-59 Days................. 4,450 292,369,887 9.22 5,116 335,858,515 8.42
60-89 Days................. 1,404 90,314,938 2.85 1,763 124,260,172 3.12
90 Days or more............ 1,576 116,479,156 3.67 2,490 175,071,236 4.39
Foreclosure/bankruptcies(4).. 5,318 408,881,120 12.90 6,784 498,486,846 12.50
Real Estate Owned............ 1,170 88,642,865 2.80 1,045 81,915,418 2.05
------ -------------- ------ ------ ------------- ------
Total Portfolio.............. 44,432 $3,169,527,646 100.00% 58,155 3,988,967,208 100.00%
====== ============== ====== ====== ============= ======
As of June 30, 2001 As of August 31, 2002
------------------- ---------------------
% by % by
No. of Principal Principal No. of Principal Principal
Loans Balance(2) Balance Loans Balance(2) Balance
----- ---------- ------- ----- ---------- -------
Current Loans............... 79,311 $4,223,226,737 61.84% 105,152 $ 6,590,653,833 61.58%
Period of Delinquency.......
30-59 Days................ 14,471 754,951,472 11.05 17,316 1,045,693,655 9.77
60-89 Days................ 4,464 238,807,252 3.50 5,895 383,595,122 3.58
90 Days or more........... 8,791 408,757,577 5.99 13,184 659,408,502 6.16
Foreclosure/bankruptcies(4). 16,623 975,126,313 14.28 24,987 1,690,394,192 15.80
Real Estate Owned........... 3,986 228,805,987 3.35 5,195 333,113,775 3.11
------- -------------- ------ ------- --------------- ------
Total Portfolio............. 127,646 $6,829,675,336 100.00% 171,729 $10,702,859,079 100.00%
======= ============== ====== ======= =============== ======
__________
(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 REO properties, the principal balance is at the time of
foreclosure.
(3) No mortgage loan is included in this table as delinquent until it is 30
days past due.
(4) Exclusive of the number of loans and principal balance shown in the
period of delinquency.
Since the mortgage loans were originated by various originators at
different times, it is unlikely that the delinquency and foreclosure experience
set forth above will be representative of the actual delinquency and foreclosure
experience on the mortgage loans in the trust fund or even representative of the
mortgage loans in the trust fund being serviced by EMC. There can be no
assurance that factors beyond EMC's control, such as national or local economic
conditions or downturn in the real estate markets in which the mortgaged
properties are located, will not result in increased rates of delinquencies and
foreclosure losses in the future.
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DELINQUENCY AND FORECLOSURE EXPERIENCE OF NCM
The following table sets forth the delinquency and foreclosure
experience of mortgage loans serviced by NCM as of the dates indicated. NCM's
portfolio of mortgage loans may differ significantly from the mortgage loans
backing the certificates in terms of underwriting standards, interest rates,
principal balances, geographic distribution, types of properties and other
possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the mortgage loans backing the certificates will be similar to that
reflected in the table below, nor is any representation made as to the rate at
which losses may be experienced on liquidation of defaulted mortgage loans. The
actual delinquency experience on the mortgage loans will depend, among other
things, upon the value of the real estate securing such mortgage loans and the
ability of borrowers to make required payments.
As of December 31, 1999 As of December 31, 2000
----------------------- -----------------------
% by No. of % by
No. of Principal Principal Loans Principal Principal
Loans Balance Balance Loans Balance Balance
----- ------- ------- ----- ------- -------
Count/Balance................ 620,907 $53,763,282 666,104 $62,980,773
30-59 Days................. 15,020 $ 1,123,758 2.09% 23,653 $ 2,024,628 3.21%
60-89 Days................. 3,154 $ 225,976 0.42% 5,352 $ 429,636 0.68%
90 Days or more............ 2,374 $ 169,992 0.32% 5,556 $ 463,419 0.74%
Delinquent Bankruptcies...... 1,757 $ 119,047 0.22% 2,332 $ 178,217 0.28%
Total Delinquency............ 22,305 $ 1,638,773 3.05% 36,893 $ 3,095,900 4.92%
Foreclosures Pending......... 3,177 $ 225,696 0.42% 3,359 $ 259,647 0.41%
Percent Government........... 23% 20% 28% 22%
As of December 31, 2001 As of September 30, 2002
----------------------- ------------------------
% by % by
No. of Principal Principal No. of Principal Principal
Loans Balance Balance Loans Balance Balance
----- ------- ------- ----- ------- -------
Count/Balance............... 800,450 $88,386,490 910,566 $110,767,170
30-59 Days................ 27,122 $ 2,598,563 2.94% 26,364 2,724,872 2.46%
60-89 Days................ 6,987 $ 645,221 0.73% 6,130 598,142 0.54%
90 Days or more........... 5,523 $ 512,641 0.58% 4,167 420,915 0.38%
Delinquent/Bankruptcies..... 3,364 $ 282,837 0.32% 4,011 376,608 0.34%
Total Delinquency........... 42,996 $ 4,039,262 4.57% 40,672 4,120,537 3.72%
======= =========== ==== ======= ============ ====
Foreclosures Pending........ 6,461 $ 583,351 0.66% 6,681 642,450 0.58%
Percent Government.......... 25% 22% 26% 19%
S-31
COLLECTION AND OTHER SERVICING PROCEDURES
The servicers will use reasonable efforts to ensure that all payments
required under the terms and provisions of the mortgage loans are collected, and
shall follow collection procedures comparable to the collection procedures of
prudent mortgage lenders servicing mortgage loans for their own account, to the
extent such procedures shall be consistent with the pooling and servicing
agreement or the servicing agreements as applicable. Consistent with the
foregoing, the servicers may in their discretion waive, modify or vary or permit
to be waived, modified or varied, any term of any mortgage loan including, in
certain instances, changing the mortgage interest rate or extending the final
maturity.
If a mortgaged property has been or is about to be conveyed by the
mortgagor and the related servicer has knowledge thereof, the related servicer
will accelerate the maturity of the mortgage loan, to the extent permitted by
the terms of the related mortgage note and applicable law. If it reasonably
believes that the due-on-sale clause cannot be enforced under applicable law, or
would otherwise potentially impair any recovery under a primary mortgage
insurance policy, if applicable, the related servicer in some cases with the
prior consent of the trustee (not to be unreasonably withheld) may enter into an
assumption agreement with the person to whom such property has been or is about
to be conveyed, pursuant to which such person becomes liable under the mortgage
note and the mortgagor, to the extent permitted by applicable law, remains
liable thereon. The related servicer will retain any fee collected for entering
into assumption agreements as additional servicing compensation. In regard to
circumstances in which the related servicer may be unable to enforce due-on-sale
clauses, we refer you to "Material Legal Aspects of the Loans -- Due-on-Sale
Clauses in Mortgage Loans" in the prospectus. In connection with any such
assumption, the interest rate borne by the related mortgage note may not be
changed.
The servicers will establish and maintain, in addition to the protected
accounts described below under "--Protected Accounts," one or more servicing
accounts in a depository institution the deposits of which are insured by the
FDIC to the maximum extent permitted by law. The servicers will deposit and
retain therein all collections from the mortgagors for the payment of taxes,
assessments, insurance premiums, or comparable items as agent of the mortgagors
as provided in the related servicing agreement or the pooling and servicing
agreement, as applicable. Each servicing account and the investment of deposits
therein shall comply with the requirements of the related servicing agreement or
the pooling and servicing agreement, as applicable and shall meet the
requirements of the rating agencies. Withdrawals of amounts from the servicing
accounts may be made only to effect timely payment of taxes, assessments,
insurance premiums, or comparable items, to reimburse the related servicer or
master servicer for any advances made with respect to such items, to refund to
any mortgagors any sums as may be determined to be overages, to pay interest, if
required, to mortgagors on balances in the servicing accounts, to pay earnings
not required to be paid to mortgagors to the master servicer or the related
servicer, or to clear and terminate the servicing accounts at or at any time
after the termination of the related servicing agreement or the pooling and
servicing agreement, as applicable.
The servicers will maintain errors and omissions insurance and fidelity
bonds in certain specified amounts to the extent required under the related
servicing agreement or the pooling and servicing agreement, as applicable.
HAZARD INSURANCE
The servicers will maintain and keep, or cause to be maintained and
kept, with respect to each mortgage loan, in full force and effect for each
mortgaged property a hazard insurance policy with extended coverage customary in
the area where the mortgaged property is located in an amount equal to the
amounts required in the related servicing agreement or the pooling and servicing
agreement, as applicable, or in general equal to at least the lesser of the
outstanding principal balance of the mortgage loan or the maximum insurable
value of the improvements securing such mortgage loan and containing a standard
mortgagee clause; but no less than the amount necessary to prevent loss due to
the application of any co-insurance provision of the related policy. Any amounts
collected by the related servicer under any such hazard insurance policy, other
than amounts to be applied to the restoration or
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repair of the mortgaged property or amounts released to the mortgagor in
accordance with normal servicing procedures, shall be deposited in a protected
account. Any cost incurred in maintaining any such hazard insurance policy shall
not be added to the amount owing under the mortgage loan for the purpose of
calculating monthly distributions to certificateholders, notwithstanding that
the terms of the mortgage loan so permit. Such costs shall be recoverable by the
related servicer out of related late payments by the mortgagor or out of
insurance proceeds or liquidation proceeds or any other amounts in the related
protected account. The right of the related servicer to reimbursement for such
costs incurred will be prior to the right of the master servicer to receive any
related insurance proceeds or liquidation proceeds or any other amounts in the
related protected account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
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 and malicious mischief. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive.
Hazard insurance policies covering properties similar to the mortgaged
properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage generally at least 80% of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation, or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance to be maintained on the
improvements securing the mortgage loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property.
Where the property securing a mortgage loan is located at the time of
origination in a federally designated flood area, the related servicer will
cause with respect to such mortgage loan flood insurance to the extent available
and in accordance with industry practices to be maintained. Such flood insurance
will generally be in an amount equal to the lesser of (i) the outstanding
principal balance of the related mortgage loan, (ii) either (a) the minimum
amount required under the terms of coverage to compensate for any damage or loss
on a replacement cost basis, or (b) the maximum insurable value of the
improvements securing such mortgage loan, and (iii) the maximum amount of such
insurance available for the related mortgaged property under either the regular
or emergency programs of the National Flood Insurance Program, assuming that the
area in which such mortgaged property is located is participating in such
program.
The servicers, on behalf of the trustee and certificateholders, will
present claims to the insurer under any applicable hazard insurance policy. As
set forth above, all collections under such policies that are not applied to the
restoration or repair of the related mortgaged property or released to the
mortgagor in accordance with normal servicing procedures are to be deposited in
a protected account. The servicers are required to deposit in a protected
account the amount of any deductible under a blanket hazard insurance policy, if
applicable.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicers will take such action either as such deems to be in the
best interest of the trust, or as is consistent with accepted servicing
practices or in accordance with established practices for other
S-33
mortgage loans serviced by the servicers with respect to defaulted mortgage
loans and foreclose upon or otherwise comparably convert the ownership of
properties securing defaulted mortgage loans as to which no satisfactory
collection arrangements can be made. To the extent set forth in the related
servicing agreement and the pooling and servicing agreement, the related
servicer will service the property acquired by the trust through foreclosure or
deed-in-lieu of foreclosure in accordance with procedures that the related
servicer employs and exercises in servicing and administering mortgage loans for
its own account and which are in accordance with accepted mortgage servicing
practices of prudent lending institutions and Fannie Mae guidelines. The related
servicer will not be required to expend its own moneys with respect to the
restoration or to make servicing advances with respect to such mortgaged
properties unless such entity has determined that (i) such amounts would be
recovered, and (ii) it believes such restoration will increase proceeds to the
trust following the mortgaged property's eventual liquidation.
Since insurance proceeds received in connection with a mortgage loan
cannot exceed deficiency claims and certain expenses incurred by the related
servicer, no insurance payments will result in a recovery to certificateholders
which exceeds the principal balance of the defaulted mortgage loan together with
accrued interest thereon at its applicable net mortgage rate.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Each of the master servicer and the related servicer will be entitled
to receive a fee as compensation for its activities under the pooling and
servicing agreement or the related servicing agreement, as applicable. The
master servicer shall be entitled to the master servicing fee rate multiplied by
the stated principal balance of the mortgage loans. Each servicer will be
entitled to the servicing fee rate multiplied by the stated principal balance of
each mortgage loan serviced by such entity as of the due date in the month
preceding the month in which such distribution date occurs. The master servicing
fee rate will be 0.02% per annum. The servicing fee rate will be 0.25% per
annum. Interest shortfalls on the mortgage loans resulting from prepayments in
full in any calendar month will be offset by the related servicer on the
distribution date in the following calendar month to the extent of compensating
interest payments as described herein. The master servicer will be obligated to
make such compensating interest payments in the event that the related servicer
fails to do so.
In addition to the primary compensation described above, the related
servicer will retain all assumption fees, tax service fees, fees for statements
of account payoff and late payment charges, all to the extent collected from
mortgagors.
The related servicer will pay all related expenses incurred in
connection with its servicing responsibilities, subject to limited reimbursement
as described herein.
PROTECTED ACCOUNTS
The servicers will establish and maintain one or more custodial
accounts (referred to herein as protected accounts) into which they will deposit
daily or at such other time specified in the applicable servicing agreement or
the pooling and servicing agreement, as applicable all collections of principal
and interest on any mortgage loans, including principal prepayments, insurance
proceeds, liquidation proceeds, the repurchase price for any mortgage loans
repurchased, and advances made from the servicer's own funds, less the
applicable servicing fee. All protected accounts and amounts at any time
credited thereto shall comply with the requirements of the pooling and servicing
agreement and the related servicing agreement and shall meet the requirements of
the rating agencies.
On the date specified in the pooling and servicing agreement or the
applicable servicing agreement, as the case may be, the related servicer will
withdraw from its protected account amounts on deposit therein and will remit
them to the master servicer for deposit in the Master Servicer Collection
Account.
S-34
THE MASTER SERVICER COLLECTION ACCOUNT
The master servicer shall establish and maintain in the name of the
trustee, for the benefit of the certificateholders, an account (the "Master
Servicer Collection Account") into which it will deposit amounts received from
each servicer and advances (to the extent required to make advances) made from
the master servicer's own funds (less the master servicer's expenses, as
provided in the pooling and servicing agreement). The Master Servicer Collection
Account and amounts at any time credited thereto shall comply with the
requirements of the pooling and servicing agreement and shall meet the
requirements of the rating agencies. The amount at any time credited to the
Master Servicer Collection Account may be invested in the name of the trustee in
such permitted investments selected by the master servicer as set forth in the
pooling and servicing agreement. The master servicer shall be entitled to any
amounts earned and will be liable for any losses in permitted investments in the
Master Servicer Collection Account. The master servicer will deposit in the
Master Servicer Collection Account, as received, the following amounts:
(i) Any amounts withdrawn from a protected account or other
permitted account;
(ii) Any advance and compensating interest payments;
(iii) Any Insurance Proceeds or Liquidation Proceeds received
by the master servicer which were not deposited in a protected account
or other permitted account;
(iv) The repurchase price with respect to any mortgage loans
repurchased and all proceeds of any Mortgage Loans or property acquired
in connection with the optional termination of the trust;
(v) Any amounts required to be deposited with respect to
losses on permitted investments; and
(vi) Any other amounts received by or on behalf of the master
servicer or the trustee and required to be deposited in the Master
Servicer Collection Account pursuant to the pooling and servicing
agreement.
DISTRIBUTION ACCOUNT
The Trustee shall establish and maintain in the name of the Trustee,
for the benefit of the certificateholders, an account (the "Distribution
Account"), into which on the day prior to each distribution date it will deposit
all amounts transferred to it by the master servicer from the Master Servicer
Collection Account. All amounts deposited to the Distribution Account shall be
held in the name of the trustee in trust for the benefit of the
certificateholders in accordance with the terms and provisions of the pooling
and servicing agreement. The amount at any time credited to the Distribution
Account may be invested in the name of the trustee, in such permitted
investments selected by the master servicer as set forth in the pooling and
servicing agreement. The master servicer will be entitled to any amounts earned
and will be liable for any losses on permitted investments in the Distribution
Account.
On each Distribution Date, the Trustee will withdraw available funds
from the Distribution Account and make payments to the certificateholders in
accordance with the provisions set forth under "Description of the
Certificates-- Distributions" in this prospectus supplement. Each of the Trustee
and the Securities Administrator will be entitled to compensation for its
services under the pooling and servicing agreement which shall be paid by the
master servicer. The Trustee and the Securities Administrator will also be
entitled to be reimbursed for their expenses, costs and liabilities incurred by
or reimbursable to them pursuant to the pooling and servicing agreement prior to
the distribution of the available funds.
S-35
PREPAYMENT INTEREST SHORTFALLS AND COMPENSATING INTEREST
When a borrower prepays all or a portion of a mortgage loan between due
dates, the borrower pays interest on the amount prepaid only to the date of
prepayment. Accordingly, an interest shortfall will result equal to the
difference between the amount of interest collected and the amount of interest
that would have been due absent such prepayment. We refer to this interest
shortfall as a "Prepayment Interest Shortfall." In order to mitigate the effect
of any such shortfall in interest distributions to holders of the offered
certificates on any distribution date, generally, the amount of the servicing
fee otherwise payable to the servicer for such month shall, to the extent of
such shortfall, be remitted by the related servicer to the master servicer for
deposit in the Master Servicer Collection Account. We refer to such deposited
amounts as "Compensating Interest." In the event the related servicer fails to
remit such compensating interest payments, the master servicer will be required
to do so to the extent described in the pooling and servicing agreement. Any
such deposit or remittance by the master servicer or the related servicer will
be reflected in the distributions to holders of the offered certificates
entitled thereto made on the distribution date on which the principal prepayment
received would be distributed.
ADVANCES
If the scheduled payment on a mortgage loan which was due on a related
due date is delinquent other than for certain reasons as set forth in the
applicable servicing agreement or the pooling and servicing agreement, as a
result of application of the Relief Act, the related servicer will remit to the
master servicer for deposit in the Master Servicer Collection Account within the
number of days prior to the related distribution date set forth in the related
servicing agreement or the pooling and servicing agreement, as applicable, an
amount equal to such delinquency, net of the related servicing fee rate except
to the extent the related servicer determines any such advance to be
nonrecoverable from Liquidation Proceeds, Insurance Proceeds or from future
payments on the mortgage loan for which such advance was made. Subject to the
foregoing, such advances will be made by the related servicer until the
liquidation of the related mortgage loan property. Failure by the related
servicer to remit any required advance, which failure goes unremedied for the
number of days specified in the pooling and servicing agreement or the related
servicing agreement, as applicable, would constitute an event of default under
such agreements. Such event of default by the related servicer shall then
obligate the master servicer to advance such amounts to the Distribution Account
to the extent provided in the pooling and servicing agreement. Any failure of
the master servicer to make such advances would constitute an event of default
as discussed under "Description of the Certificates--Events of Default" in this
prospectus supplement.
EVIDENCE AS TO COMPLIANCE
The pooling and servicing agreement will provide that, in the event
that during the course of any fiscal year the master servicer has directly
serviced any of the mortgage loans, on or before a specified date in each year,
a firm of independent public accountants will furnish a statement to the trustee
to the effect that, on the basis of the examination by such firm conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for Freddie Mac,
the servicing by the master servicer of such mortgage loans or private asset
backed securities, or under pooling and servicing agreements substantially
similar to each other, including the pooling and servicing agreement, was
conducted in compliance with such agreements, the Audit Program for Mortgages
serviced for Freddie Mac, or the Uniform Single Attestation Program for Mortgage
Bankers, except for any significant exceptions or errors in records that, in the
opinion of the firm it is required to report. In rendering its statement such
firm may rely, as to matters relating to the direct servicing of mortgage loans
by the related servicer, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for Freddie Mac
(rendered within one year of such statement) of firms of independent public
accountants with respect to the related servicer.
The pooling and servicing agreement will also provide for delivery to
the trustee, on or before a specified date in each year, of an annual statement
signed by officers of the master servicer to the effect
S-36
that the master servicer has fulfilled its obligations under the pooling and
servicing agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by certificateholders without
charge upon written request to the master servicer at the address of the master
servicer set forth above.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The pooling and servicing agreement will provide that the master
servicer may not resign from its obligations and duties under the pooling and
servicing agreement except upon a determination, evidenced by an opinion of
counsel to such effect, that its duties thereunder are no longer permissible
under applicable law. No such resignation shall become effective unless:
o the trustee or a successor master servicer has assumed the
obligations and duties of the master servicer to the extent
required in the pooling and servicing agreement;
o the proposed successor is qualified to service mortgage loans
on behalf of Fannie Mae or Freddie Mac; and
o the trustee has received written confirmation from each rating
agency that the appointment of such successor will not cause
that rating agency to reduce, qualify or withdraw its
then-current ratings assigned to any class of offered
certificates.
Notwithstanding the foregoing, the master servicer, however, has the
right, with the written consent of the trustee (which consent will not be
unreasonably withheld), to assign, sell or transfer its rights and delegate its
duties and obligations under the pooling and servicing agreement; provided that
the purchaser or transferee accepting such assignment, sale, transfer or
delegation is qualified to service mortgage loans for Fannie Mae or Freddie Mac
and shall satisfy the other requirements listed in the pooling and servicing
agreement with respect to the qualifications of such purchaser or transferee.
The pooling and servicing agreement will further provide that neither
the master servicer, the depositor, the seller nor any director, officer,
employee, or agent of the master servicer, the depositor or the seller will be
under any liability to the trust fund or certificateholders for any action taken
or for refraining from the taking of any action in good faith pursuant to the
pooling and servicing agreement, or for errors in judgment; provided, however,
that neither the master servicer, the depositor, the seller nor any such person
will be protected against any breach of its representations and warranties in
the pooling and servicing agreement or any liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder.
In addition, the pooling and servicing agreement will provide that
neither the master servicer, the depositor nor the seller will be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the pooling and servicing
agreement and which in its opinion may involve it in any expense or liability.
The master servicer may, however, in its discretion undertake any such action
which it may deem necessary or desirable with respect to the pooling and
servicing agreement and the rights and duties of the parties thereto and the
interests of the certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the trust fund, and the master servicer will
be entitled to be reimbursed therefor out of funds otherwise distributable to
certificateholders.
Any person into which either the master servicer or the seller may be
merged or consolidated, or any person resulting from any merger or consolidation
to which the master servicer or the seller is a party, or any person succeeding
to the business of the master servicer or the seller, will be the successor of
the master servicer or the seller, as applicable under the pooling and servicing
agreement, provided that such person is qualified to service mortgage loans on
behalf of Fannie Mae or Freddie Mac and
S-37
further provided that such merger, consolidation or succession does not
adversely affect the then- current ratings of any class of offered certificates.
EMC will have certain rights with respect to the pooling and servicing
agreement in respect of the master servicer, including the selection of a new
master servicer in the event of a default by Wells Fargo. EMC may also terminate
the master servicer without cause, upon payment of a termination fee from EMC's
own funds, provided that a successor master servicer has been appointed pursuant
to the pooling and servicing agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The trust will issue the certificates pursuant to the pooling and
servicing agreement. The certificates consist of the classes of certificates
reflected on the cover of this prospectus supplement, which we refer to as the
offered certificates, the Class XP, Class B-4, the Class B-5 and the Class B-6
Certificates, which we are not offering by this prospectus supplement. We refer
to the Class I-A1, Class I-A2, Class I-PO, Class I-X, Class II-A1, Class II-A2,
Class II-A3, Class II-A4, Class II-A5, Class II- PO, Class II-X, Class III-A,
Class III-PO, Class III-X, Class BX, Class XP, Class R-1, Class R-2 and Class
R-3 Certificates, collectively, as the senior certificates, and we refer to the
Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6
Certificates, collectively, as the subordinated certificates. In addition, we
sometimes refer to the Class I-A1, Class I-A2, Class BX, Class I-PO and Class
I-X Certificates, collectively, as the Group I Certificates, the Class II-A1,
Class II-A2, Class II- A3, Class II-A4, Class II-A5, Class II-PO, Class II-X,
Class R-1, Class R-2 and Class R-3 Certificates, collectively, as the Group II
Certificates and the Class III-A, Class III-PO and Class III-X Certificates,
collectively, as the Group III Certificates. We refer to the Class R-1, Class
R-2 and Class R-3 Certificates, collectively, as the residual certificates.
The Class I-A2, Class I-X, Class II-X, Class III-X and Class BX
Certificates are interest-only certificates issued with notional balances. The
Class I-PO, Class II-PO and Class III-PO Certificates are principal-only
certificates and are not entitled to any distributions in respect of interest.
The Class XP Certificates will have an initial certificate principal balance of
$100 and will be entitled to all prepayment charges received in respect of the
mortgage loans in loan group I and loan group III. Distributions on the Group I
Certificates will be based primarily on amounts available for distribution in
respect of loan group I. Distributions on the Group II Certificates will be
based primarily on amounts available for distribution in respect of loan group
II. Distributions on the Group III Certificates will be based primarily on
amounts available for distribution in respect of loan group III. In certain
instances, as described under " --Distributions-- Allocation of Payments on the
Mortgage Loans" below, amounts available for distribution with respect to a loan
group will be distributed with respect to the senior certificates from the other
loan groups. Distributions on the subordinated certificates will be based on a
subordinated basis on amounts available for distribution in respect of loan
group I, loan group II and loan group III.
The trust will issue the offered certificates (other than the Class R
Certificates) in book-entry form as described below, in minimum dollar
denominations of $25,000 and integral multiples of $1,000 in excess thereof,
except that one certificate of each class may be issued in the remainder of the
class. Each of the Class R Certificates will be issued as a single certificate
of $50.00 in fully-registered definitive form.
BOOK-ENTRY REGISTRATION
The offered certificates (other than the Class R Certificates) will be
issued in book-entry form. Persons acquiring beneficial ownership interests in
the book-entry securities will hold their securities through The Depository
Trust Company in the United States and through Clearstream, Luxembourg or the
Euroclear System in Europe, if they are participants of any of such systems, or
indirectly through organizations which are participants. The Depository Trust
Company is referred to as "DTC".
S-38
Clearstream, Luxembourg is referred to as "Clearstream". The Euroclear System is
referred to as "Euroclear". The book-entry securities will be issued in one or
more certificates that equal the aggregate principal balance of the applicable
class or classes of securities 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 that in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank N.A. will act
as the relevant depositary for Clearstream and JPMorgan Chase Bank will act as
the relevant depositary for Euroclear. Except as described below, no person
acquiring a book-entry security will be entitled to receive a physical
certificate representing such security. Unless and until physical securities are
issued, it is anticipated that the only "securityholder" with respect to a
book-entry security will be Cede & Co., as nominee of DTC. Beneficial owners are
only permitted to exercise their rights indirectly through participants and DTC.
An Owner's ownership of a book-entry security will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such book-entry security will be recorded on the records of DTC (or
of a DTC participant that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
Clearstream or Euroclear, as appropriate).
Beneficial owners will receive all distributions allocable to principal
and interest with respect to the book-entry securities from the trustee through
DTC and DTC participants. While the book-entry securities are outstanding
(except under the circumstances described below), under the rules, regulations
and procedures creating, governing and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among participants on
whose behalf it acts with respect to the securities. DTC is required to receive
and transmit distributions allocable to principal and interest with respect to
the securities. Participants and Financial Intermediaries with whom beneficial
owners have accounts with respect to securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective beneficial owners. Accordingly, although beneficial owners will
not possess physical certificates, the Rules provide a mechanism by which
beneficial owners will receive distributions and will be able to transfer their
beneficial ownership interests in the securities.
Beneficial owners will not receive or be entitled to receive Definitive
Securities, except under the limited circumstances described below. Unless and
until Definitive Securities are issued, beneficial owners who are not
participants may transfer ownership of securities only through participants and
Financial Intermediaries by instructing such participants and Financial
Intermediaries to transfer beneficial ownership interests in the securities by
book-entry transfer through DTC for the account of the purchasers of such
securities, which account is maintained with their respective participants or
Financial Intermediaries. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of securities will be executed through DTC
and the accounts of the respective participants at DTC will be debited and
credited. Similarly, the participants and Financial Intermediaries will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing beneficial owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream participants on such business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
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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 relevant depositaries.
DTC is a New York-chartered limited purpose trust company that performs
services for its 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 securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry securities will be subject to the Rules as in
effect from time to time.
Clearstream, has advised that it is incorporated under the laws of the
Grand Duchy of Luxembourg as a professional depository. Clearstream holds
securities for its participating organizations or participants. Clearstream
facilitates the clearance and settlement of securities transactions between
Clearstream participants through electronic book-entry changes in account of
Clearstream participants, eliminating the need for physical movement of
securities.
Clearstream provides to Clearstream participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Commission for the Supervision of the Financial Sector (the "CSSF"). Clearstream
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Clearstream is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream
participant, either directly or indirectly.
Distributions, to the extent received by the Relevant Depository for
Clearstream, with respect to the securities held beneficially through
Clearstream will be credited to cash accounts of Clearstream participants in
accordance with its rules and procedures.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for movement of physical securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear provides
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 Euroclear Bank S.A./NV under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation. Euroclear Bank S.A./NV conducts
all operations. All Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with Euroclear Bank S.A./NV, not Euroclear Clearance
Systems S.C. Euroclear Clearance Systems S.C. 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.
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Euroclear Bank S.A./NV has advised us that it is licensed by the
Belgian Banking and Finance Commission to carry out banking activities on a
global basis. As a Belgian bank, it is regulated and examined by the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with Euroclear Bank
S.A./NV are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. These terms and conditions, operating procedures and laws 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. Euroclear Bank
S.A./NV 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.
The trustee will make distributions on the book-entry securities on
each distribution date to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners 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
beneficial owners that it represents.
Under a book-entry format, beneficial owners may experience some delay
in their receipt of payments, since the trustee will forward such payments to
Cede & Co. Distributions with respect to securities 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. Because DTC can only act on behalf of
DTC participants that in turn can only act on behalf of Financial
Intermediaries, the ability of an Owner to pledge book-entry securities to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such book-entry securities, may be limited due to the lack
of physical certificates for such book-entry securities. In addition, issuance
of the book-entry securities in book-entry form may reduce the liquidity of such
securities in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the applicable trust fund will be
provided to Cede & Co., as nominee of DTC, and Cede & Co may make such reports
available to beneficial owners upon request, in accordance with the Rules, and
to the DTC participants to whose DTC accounts the book-entry securities of such
beneficial owners are credited directly or are credited indirectly through
Financial Intermediaries.
DTC has advised the trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the book-entry securities under the pooling and servicing agreement
only at the direction of one or more DTC participants to whose DTC accounts the
book-entry securities are credited, to the extent that such actions are taken on
behalf of such participants whose holdings include such book-entry securities.
Clearstream or Euroclear Bank S.A./NV, as the case may be, will take any other
action permitted to be taken by a holder under the pooling and servicing
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 participants, with respect to
some securities which conflict with actions taken with respect to other
securities.
Except with respect to the residual certificates, physical certificates
representing a security will be issued to beneficial owners only upon the events
specified in the pooling and servicing agreement. Such events may include the
following:
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o we advise the trustee in writing that DTC is no longer willing
or able to properly discharge its responsibilities as
depository with respect to the securities, and that we or the
trustee is unable to locate a qualified successor,
o at our option, we elect to terminate the book-entry system
through DTC, or
o after the occurrence of an event of default, securityholders
representing not less than 50% of the aggregate current
principal amount or notional amount, as applicable, of the
applicable securities advise the trustee and DTC through
participants in writing that the continuation of a book-entry
system through DTC (or a successor thereto) is no longer in
the best interest of the securityholders.
Upon the occurrence of any of the events specified in the pooling and
servicing agreement, DTC will be required to notify all participants of the
availability through DTC of physical certificates. Upon surrender by DTC of the
certificates representing the securities and instruction for re-registration,
the trustee will issue the securities in the form of physical certificates, and
thereafter the trustee will recognize the holders of such physical certificates
as securityholders. Thereafter, payments of principal of and interest on the
securities will be made by the trustee directly to securityholders in accordance
with the procedures listed in this prospectus supplement and in the pooling and
servicing agreement. The final distribution of any security (whether physical
certificates or securities registered in the name of Cede & Co.), however, will
be made only upon presentation and surrender of such securities on the final
distribution date at such office or agency as is specified in the notice of
final payment to securityholders.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures to facilitate transfers of securities among 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 trust, the securities administrator or the trustee will not
have any responsibility for any aspect of the records relating to or payments
made on account of beneficial ownership interests of the book-entry securities
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DISTRIBUTIONS
GENERAL. On each distribution date, the trustee will make distributions
on the certificates to the persons in whose names such certificates are
registered at the related record date.
The trustee will make distributions on each distribution date by wire
transfer in immediately available funds to the account of a certificateholder at
a bank or other depository institution having appropriate wire transfer
facilities as instructed by a certificateholder in writing in accordance with
the pooling and servicing agreement. If no such instructions are given to the
trustee, then the trustee will make such distributions by check mailed to the
address of the person entitled thereto as it appears on the certificate
register; provided, however, that the final distribution in retirement of the
certificates will be made only upon presentation and surrender of such
certificates at the offices of the trustee designated for such purposes. As of
the closing date, the trustee designates its offices located at 1 Bank One
Plaza, Mail Suite IL1-0126, Chicago, IL 60670, and at 55 Water Street, 15th
Floor, New York, New York 10041 for purposes of surrender, transfer and
exchange. On each distribution date, a holder of a certificate will receive such
holder's percentage interest of the amounts required to be distributed with
respect to the applicable class of certificates. The percentage interest
evidenced by a certificate will equal the percentage derived by dividing the
denomination of such certificate by the aggregate denominations of all
certificates of the applicable class.
ALLOCATION OF PAYMENTS ON THE MORTGAGE LOANS. On each distribution
date, the available funds with respect to loan group I, loan group II and loan
group III ("Group I Available Funds," "Group II
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Available Funds" and "Group III Available Funds" respectively, and each a "Group
Available Funds") for such distribution date will be distributed as follows:
(A) on each distribution date, the Group I Available Funds will be
distributed to the Group I Certificates as follows:
FIRST, to the Class I-A1, Class I-A2, Class I-X and Class BX
Certificates, on a pro rata basis, the Accrued Certificate Interest on
each such Class for such distribution date. As described below, Accrued
Certificate Interest on the Class I-A1, Class I-A2, Class I-X and Class
BX Certificates is subject to reduction in the event of certain Net
Interest Shortfalls allocable thereto. Any Net Interest Shortfalls
shall be allocated among such classes as described below;
SECOND, to the Class I-A1, Class I-A2, Class I-X and Class BX
Certificates, on a pro rata basis, any Accrued Certificate Interest
thereon remaining undistributed from previous distribution dates, to
the extent of remaining Group I Available Funds;
THIRD, (i) to the Class I-A1 Certificates, in reduction of the
certificate principal balance thereof, the Group I Senior Optimal
Principal Amount for such distribution date and (ii) to the Class I-PO
Certificates, the Class I-PO Certificate Principal Distribution Amount
for such distribution date, in each case, to the extent of remaining
Group I Available Funds, until the certificate principal balance of
each such class has been reduced to zero; and
FOURTH, the related Class PO Certificate Deferred Amount to
the Class I-PO Certificates, provided, that (i) on any distribution
date, distributions pursuant to this priority FOURTH shall not exceed
the excess, if any, of (x) Group I Available Funds remaining after
giving effect to distributions pursuant to priority FIRST through THIRD
above over (y) the sum of the amount of Accrued Certificate Interest
for such distribution date and Accrued Certificate Interest remaining
undistributed from previous distribution dates on all classes of
subordinated certificates then outstanding, (ii) such distributions
shall not reduce the Certificate Principal Balance of the Class I-PO
Certificates and (iii) no distribution will be made in respect of the
related Class PO Certificate Deferred Amount on or after the Cross-over
Date.
(B) On each distribution date, the Group II Available Funds will be
distributed to the Group II Certificates as follows:
FIRST, to the Group II Certificates (other than the Class
II-PO Certificates), on a pro rata basis, the Accrued Certificate
Interest on each such class for such distribution date. As described
below, Accrued Certificate Interest on the Group II Certificates (other
than the Class II-PO Certificates) is subject to reduction in the event
of certain Net Interest Shortfalls allocable thereto;
SECOND, to the Group II Certificates (other than the Class
II-PO Certificates), on a pro rata basis, any Accrued Certificate
Interest thereon remaining undistributed from previous distribution
dates, to the extent of remaining Group II Available Funds;
THIRD, to the Class R-1, Class R-2 and Class R-3 Certificates,
on a pro rata basis, in reduction of the certificate principal balances
thereof, the Group II Senior Optimal Principal Amount for such
distribution date, in each case, to the extent of remaining Group II
Available Funds, until the certificate principal balance of each such
class has been reduced to zero;
FOURTH, concurrently, (i) to the Class II-A1 Certificates, in
reduction of the certificate principal balance thereof, 40.40404040404%
of the remaining Group II Senior Optimal Principal Amount for such
distribution date, (ii) to the Class II-A3 Certificates, in reduction
of the certificate principal balance thereof, 25.16468989899% of the
remaining Group II Senior Optimal
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Principal Amount for such distribution date, (iii) sequentially, in the
following order, to the Class II-A4 Certificates and Class II-A5
Certificates, in reduction of the certificate principal balances
thereof, 34.43126969697% of the remaining Group II Senior Optimal
Principal Amount for such distribution date and (iv) to the Class II-PO
Certificates, the Class II- PO Certificate Principal Distribution
Amount for such distribution date, in each case, to the extent of
remaining Group II Available Funds, until the certificate principal
balance of each such class has been reduced to zero;
FIFTH, to the Class II-A2 Certificates, in reduction of the
certificate principal balance thereof, the remaining Group II Senior
Optimal Principal Amount for such distribution date to the extent of
remaining Group II Available Funds, until the certificate principal
balance thereof has been reduced to zero; and
SIXTH, the related Class PO Certificate Deferred Amount to the
Class II-PO Certificates, provided, that (i) on any distribution date,
distributions pursuant to this priority SIXTH shall not exceed the
excess, if any, of (x) Group II Available Funds remaining after giving
effect to distributions pursuant to priority FIRST through FIFTH above
over (y) the sum of the amount of Accrued Certificate Interest for such
distribution date and Accrued Certificate Interest remaining
undistributed from previous distribution dates on all classes of
subordinated certificates then outstanding, (ii) such distributions
shall not reduce the Certificate Principal Balance of the Class II-PO
Certificates and (iii) no distribution will be made in respect of the
related Class PO Certificate Deferred Amount on or after the Cross-over
Date.
(C) on each distribution date, the Group III Available Funds will be
distributed to the Group III Certificates as follows:
FIRST, to the Class III-A Certificates and Class III-X
Certificates, on a pro rata basis, the Accrued Certificate Interest on
each such Class for such distribution date. As described below, Accrued
Certificate Interest on the Class III-A Certificates and Class III-X
Certificates is subject to reduction in the event of certain Net
Interest Shortfalls allocable thereto. Any Net Interest Shortfalls
shall be allocated among such classes as described below;
SECOND, to the Class III-A Certificates and Class III-X
Certificates, on a pro rata basis, any Accrued Certificate Interest
thereon remaining undistributed from previous distribution dates, to
the extent of remaining Group III Available Funds;
THIRD, (i) to the Class III-A Certificates, in reduction of
the certificate principal balance thereof, the Group III Senior Optimal
Principal Amount for such distribution date and (ii) to the Class
III-PO Certificates, the Class III-PO Certificate Principal
Distribution Amount for such distribution date, in each case, to the
extent of remaining Group III Available Funds, until the certificate
principal balance of each such class has been reduced to zero; and
FOURTH, the related Class PO Certificate Deferred Amount to
the Class III-PO Certificates, provided, that (i) on any distribution
date, distributions pursuant to this priority FOURTH shall not exceed
the excess, if any, of (x) Group III Available Funds remaining after
giving effect to distributions pursuant to priority FIRST through THIRD
above over (y) the sum of the amount of Accrued Certificate Interest
for such distribution date and Accrued Certificate Interest remaining
undistributed from previous distribution dates on all classes of
subordinated certificates then outstanding, (ii) such distributions
shall not reduce the Certificate Principal Balance of the Class III-PO
Certificates and (iii) no distribution will be made in respect of the
related Class PO Certificate Deferred Amount on or after the Cross-over
Date.
(D) Except as provided in paragraphs (E) and (F) below, on each
distribution date on or prior to the Cross-Over Date, an amount equal to the sum
of the remaining Group I, Group II and Group III Available Funds after the
distributions in (A), (B) and (C) above will be distributed sequentially, in the
following order, to the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5
and Class B-6 Certificates, in each case up to an amount equal to and in the
following order: (a) the Accrued Certificate Interest thereon for such
distribution date, (b) any Accrued Certificate Interest thereon remaining
undistributed from previous distribution dates and (c) such Class's Allocable
Share, if any,
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for such distribution date, in each case, to the extent of the sum of the
remaining Group I, Group II and Group III Available Funds.
(E) On each distribution date prior to the distribution date on which
the certificate principal balances of the subordinated certificates are reduced
to zero (the "Cross-Over Date") but after the reduction of the certificate
principal balance of any of the Group I Certificates (other than the Class I-A2,
Class I-X and Class BX Certificates), Group II Certificates (other than the
Class II-X Certificates) or Group III Certificates (other than the Class III-X
Certificates) to zero, the remaining class or classes of senior certificates
(other than the Class I-A2, Class I-X, Class II-X, Class III-X, Class BX, Class
I- PO, Class II-PO and Class III-PO Certificates) will be entitled to receive in
reduction of their certificate principal balances, pro rata based upon their
certificate principal balances immediately prior to such distribution date, in
addition to any Principal Prepayments related to such remaining senior
certificates' respective loan group allocated to such senior certificates, 100%
of the applicable Non-PO Percentage of the Principal Prepayments on any mortgage
loan in the loan group relating to the fully repaid class or classes of senior
certificates; provided, however, that if (a) the weighted average Subordinate
Percentage equals or exceeds approximately 18.77% on such distribution date and
(b) the aggregate Stated Principal Balance of the mortgage loans delinquent 60
days or more (including for this purpose any such mortgage loans in foreclosure
and mortgage loans with respect to which the related mortgaged property has been
acquired by the trust), averaged over the last six months, as a percentage of
the sum of the aggregate certificate principal balance of the subordinated
certificates does not exceed 100%, then the additional allocation of Principal
Prepayments to the senior certificates in accordance with this clause (E) will
not be made.
(F) If on any distribution date on which the aggregate certificate
principal balance of any class or classes of senior certificates (other than
Class I-PO, Class II-PO and Class III-PO Certificates) would be greater than the
aggregate Stated Principal Balance of the mortgage loans in its related loan
group (other than the applicable PO Percentage of the related Discount Mortgage
Loans) and any subordinated certificates are still outstanding in each case
after giving effect to distributions to be made on such distribution date, (i)
100% of amounts otherwise allocable to the subordinated certificates in respect
of principal will be distributed to such class or classes of senior certificates
in reduction of the certificate principal balance thereof, until the aggregate
certificate principal balance of such class or classes of senior certificates is
an amount equal to the aggregate Stated Principal Balance of the mortgage loans
in its related loan group (other than the applicable PO Percentage of the
related Discount Mortgage Loans), and (ii) the Accrued Certificate Interest
otherwise allocable to the subordinated certificates on such distribution date
will be reduced, if necessary, and distributed to such class or classes of
senior certificates in an amount equal to the Accrued Certificate Interest for
such distribution date on the excess of (x) the aggregate certificate principal
balance of such class or classes of senior certificates over (y) the aggregate
Stated Principal Balance of the mortgage loans in the related loan group (other
than the applicable PO Percentage of the related Discount Mortgage Loans). Any
such reduction in the Accrued Certificate Interest on the subordinated
certificates will be allocated in reverse order of the subordinated certificates
numerical designations, commencing with the Class B- 6 Certificates.
If, after distributions have been made pursuant to priorities FIRST and
SECOND of clause (A), clause (B) or clause (C) above on any distribution date,
the remaining Group I, Group II or Group III Available Funds are less than the
sum of the Group I Senior Optimal Principal Amount and the Class I- PO
Certificate Principal Distribution Amount, the sum of the Group II Senior
Optimal Principal Amount and the Class II-PO Certificate Principal Distribution
Amount or the sum of the Group III Senior Optimal Principal Amount and the Class
III-PO Certificate Principal Distribution Amount, respectively, such amounts
shall be proportionately reduced, and such remaining available funds will be
distributed to the Class I-A1 and Class I-PO Certificates, the Class II-A1,
Class II-A2, Class II-A3, Class II-A4, Class II-A-5 and Class II-PO
Certificates, and the Class III-A and Class III-PO Certificates, as applicable,
on the basis of such reduced amount. Notwithstanding any reduction in principal
distributable to the Class I-PO, Class II-PO or Class III-PO Certificates, as
applicable pursuant to this paragraph, the certificate principal balance of the
Class I-PO, Class II-PO or Class III- PO Certificates, as applicable shall be
reduced not only by principal so distributed but also by the difference between
(i) principal distributable to the Class I-PO Certificates in accordance with
priority THIRD under clause (A)
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above, the principal distributable to the Class II-PO Certificates in accordance
with priority FOURTH under clause (B) above or the principal distributable to
the Class III-PO Certificates in accordance with priority THIRD under clause (C)
above, as the case may be, and (ii) principal actually distributed to the Class
I-PO, Class II-PO or Class III-PO Certificates, as applicable after giving
effect to this paragraph (such difference, the "Class PO Certificate Cash
Shortfall"). The Class PO Certificate Cash Shortfall for each such class with
respect to any distribution date will be added to the related Class PO
Certificate Deferred Amount.
On each distribution date, any available funds remaining after payment
of interest and principal to the classes of certificates entitled thereto, as
described above, will be distributed to the Class R-2 Certificates; provided
that if on any distribution date there are any Group I, Group II or Group III
Available Funds remaining after payment of interest and principal to a class or
classes of certificates entitled thereto, such amounts will be distributed to
the other classes of senior certificates, pro rata, based upon their certificate
principal balances, until all amounts due to all classes of senior certificates
have been paid in full, before any amounts are distributed to the Class R-2
Certificates. It is not anticipated that there will be any significant amounts
remaining for such distribution.
On each distribution date, all amounts representing prepayment charges
in respect of the mortgage loans in loan group I and loan group III received
during the related prepayment period will be withdrawn from the Distribution
Account and distributed to the Class XP Certificates and shall not be available
for distribution to the holders of any other class of certificates. The payment
of such prepayment charges shall not reduce the certificate principal balance of
the Class XP Certificates.
GLOSSARY
"Accrued Certificate Interest" for any certificate (other than the
Class I-PO, Class II-PO and III- PO Certificates) for any distribution date,
means an amount equal to the interest accrued during the related Interest
Accrual Period at the applicable Pass-Through Rate on the Certificate Principal
Balance (or Notional Balance) of such certificate immediately prior to such
distribution date less (i) in the case of a senior certificate (other than the
Class I-PO, Class II-PO and III-PO Certificates), such certificate's share of
any Net Interest Shortfall from the related mortgage loans and, after the
Cross-Over Date, the interest portion of any Realized Losses on the related
mortgage loans and (ii) in the case of a subordinated certificate, such
certificate's share of any Net Interest Shortfall (as defined below) and the
interest portion of any Realized Losses on the related mortgage loans. Such Net
Interest Shortfalls will be allocated among the certificates in proportion to
the amount of Accrued Certificate Interest that would have been allocated
thereto in the absence of such shortfalls. The interest portion of Realized
Losses for the mortgage loans will be allocated sequentially, in the following
order, to the Class B-6, Class B-5, Class B-4, Class B-3, Class B-2 and Class
B-1 Certificates, and following the Cross-Over Date, to the senior certificates
(other than the Class I-PO, Class II-PO, Class III-PO and Class XP Certificates)
related to the mortgage loans on which such Realized Losses occurred on a pro
rata basis. Accrued Certificate Interest is calculated on the basis of a 360-day
year consisting of twelve 30-day months. No Accrued Certificate Interest will be
payable with respect to any class of certificates after the distribution date on
which the outstanding certificate principal balance of such certificate has been
reduced to zero.
"Allocable Share" with respect to any class of subordinated
certificates on any distribution date will generally equal such class's pro rata
share (based on the certificate principal balance of each class entitled
thereto) of the sum of each of the components of the definition of Group I
Subordinate Optimal Principal Amount, Group II Subordinate Optimal Principal
Amount and Group III Senior Optimal Principal Amount; provided, that, except as
described in the second succeeding sentence, no class of subordinated
certificates (other than the class of subordinated certificates outstanding with
the lowest numerical designation) shall be entitled on any distribution date to
receive distributions pursuant to clauses (ii), (iii) and (v) of the definition
of Group I Subordinate Optimal Principal Amount, Group II Subordinate Optimal
Principal Amount and Group III Senior Optimal Principal Amount unless the Class
Prepayment Distribution Trigger for the related class is satisfied for such
distribution date. The "Class Prepayment Distribution Trigger" for a class of
subordinated certificates for any distribution date is satisfied if the fraction
(expressed as a percentage), the numerator of which is the aggregate
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certificate principal balance of such Class and each Class subordinated thereto,
if any, and the denominator of which is the Scheduled Principal Balances of all
of the mortgage loans as of the related due date, equals or exceeds such
percentage calculated as of the closing date. If on any distribution date the
certificate principal balance of any class of subordinated certificates for
which the related Class Prepayment Distribution Trigger was satisfied on such
distribution date is reduced to zero, any amounts distributable to such class
pursuant to clauses (ii), (iii) and (v) of the definition of Group I Subordinate
Optimal Principal Amount, Group II Subordinate Optimal Principal Amount and
Group III Senior Optimal Principal Amount, to the extent of such class's
remaining Allocable Share, shall be distributed to the remaining classes of
subordinated certificates in reduction of their respective certificate principal
balances, sequentially, in the order of their numerical class designations. If
the Class Prepayment Distribution Trigger is not satisfied for any class of
subordinated certificates on any distribution date, this may have the effect of
accelerating the amortization of more senior classes of subordinated
certificates.
"Applied Realized Loss Amount," with respect to any class of
subordinated certificates and as to any distribution date, means the sum of the
Realized Losses with respect to the mortgage loans and Class PO Certificate
Deferred Payment Writedown Amounts, which have been applied in reduction of the
certificate principal balance of such class which shall, on any such
distribution date, equal with respect to the Class B-6 Certificates, Class B-5
Certificates, Class B-4 Certificates, Class B-3 Certificates, Class B-2
Certificates and Class B-1 Certificates in that order so long as their
respective Certificate Principal Balances have not been reduced to zero, the
amount, if any, by which, (i) the aggregate Certificate Principal Balance of all
of the Certificates (after all distributions of principal, the allocation of
Realized Losses and any Class PO Certificate Deferred Payment Writedown Amount
on such distribution date) exceeds (ii) the aggregate Stated Principal Balance
of all of the mortgage loans as of the last day of the related Due Period.
"Certificate Principal Balance" with respect to any class of
certificates (other than the Class I-A2, Class I-X, Class II-X, Class III-X and
Class BX Certificates) and any distribution date, is the original certificate
principal balance of such class as set forth on the cover page of this
prospectus supplement or with respect to the Class B-4, Class B-5 and Class B-6
Certificates, is approximately $3,710,000, $2,886,000 and $2,682,037,
respectively, less the sum of (i) all amounts in respect of principal
distributed to such class on previous distribution dates and (ii) in the case of
the subordinated certificates, any Applied Realized Loss Amounts and Class PO
Certificate Deferred Payment Writedown Amounts allocated to such class on
previous distribution dates.
"Class B Certificates" means, collectively, the Class B-1, Class B-2,
Class B-3, Class B-4, Class B-5 and Class B-6 Certificates.
"Class PO Certificates" means, collectively, the Class I-PO, Class
II-PO and Class III-PO Certificates.
"Class PO Certificate Deferred Payment Writedown Amount" means, with
respect to any distribution date and (a) the Class I-PO Certificates, the amount
distributed to the Class I-PO Certificates on such distribution date pursuant to
priority FOURTH under clause (A) under "-- Distributions -- Allocations of
Payments on the Mortgage Loans", (b) the Class II-PO Certificates, the amount
distributed to the Class II-PO Certificates on such distribution date pursuant
to priority SIXTH under clause (B) under "-- Distributions -- Allocations of
Payments on the Mortgage Loans" and (c) the Class III-PO Certificates, the
amount distributed to the Class III-PO Certificates on such distribution date
pursuant to priority FOURTH under clause (C) under "-- Distributions --
Allocations of Payments on the Mortgage Loans". The Class PO Certificate
Deferred Payment Writedown Amount will be allocated to the classes of
subordinated certificates in inverse order of their numerical class
designations, until the certificate principal balance of each such class has
been reduced to zero.
"Class I-PO Certificate Principal Distribution Amount"with respect to
each distribution date and the Class I-PO Certificates, means an amount equal to
the sum of the following (but in no event greater than the aggregate Certificate
Principal Balance of the Class I-PO Certificates immediately prior to such
distribution date):
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(i) the applicable PO Percentage of the principal portion of
all monthly payments due on the related Discount Mortgage Loans on the
related Due Date, as specified in the amortization schedule at the time
applicable thereto (after adjustment for previous principal prepayments
but before any adjustment to such amortization schedule by reason of
any bankruptcy or similar proceeding or any moratorium or similar
waiver or grace period);
(ii) the applicable PO Percentage of the Stated Principal
Balance of each related Discount Mortgage Loan which was the subject of
a prepayment in full received by the related servicer during the
applicable Prepayment Period (as defined below);
(iii) the applicable PO Percentage of all partial prepayments
allocated to principal received during the applicable Prepayment Period
with respect to any related Discount Mortgage Loan;
(iv) the lesser of (a) the applicable PO Percentage of the sum
of (A) all Net Liquidation Proceeds allocable to principal received in
respect of each related Discount Mortgage Loan which became a defaulted
mortgage loan during the related Prepayment Period (other than mortgage
loans described in the immediately following clause (B)) and (B) the
Stated Principal Balance of each such related Discount Mortgage Loan
purchased by an insurer from the trustee during the related Prepayment
Period pursuant to the related primary mortgage insurance policy, if
any, or otherwise; and (b) the applicable PO Percentage of the sum of
(A) the Stated Principal Balance of each related Discount Mortgage Loan
which became a defaulted mortgage loan during the related Prepayment
Period (other than the related Discount Mortgage Loans described in the
immediately following clause (B)) and (B) the Stated Principal Balance
of each such related Discount Mortgage Loan that was purchased by an
insurer from the trustee during the related Prepayment Period pursuant
to the related primary mortgage insurance policy, if any or otherwise;
and
(v) the applicable PO Percentage of the sum of (a) the Stated
Principal Balance of each related Discount Mortgage Loan which was
repurchased by the seller or the related servicer in connection with
such distribution date and (b) the excess, if any, of the Stated
Principal Balance of a related Discount Mortgage Loan that has been
replaced by the seller or the related servicer with a substitute
mortgage loan pursuant to the related servicing agreement or the
pooling and servicing agreement in connection with such distribution
date over the Stated Principal Balance of such substitute mortgage
loan.
"Class II-PO Certificate Principal Distribution Amount"with respect to
each distribution date and the Class II-PO Certificates, means an amount equal
to the sum of the following (but in no event greater than the aggregate
Certificate Principal Balance of the Class II-PO Certificates immediately prior
to such distribution date):
(i) the applicable PO Percentage of the principal portion of
all monthly payments due on the related Discount Mortgage Loans on the
related Due Date, as specified in the amortization schedule at the time
applicable thereto (after adjustment for previous principal prepayments
but before any adjustment to such amortization schedule by reason of
any bankruptcy or similar proceeding or any moratorium or similar
waiver or grace period);
(ii) the applicable PO Percentage of the Stated Principal
Balance of each related Discount Mortgage Loan which was the subject of
a prepayment in full received by the related servicer during the
applicable Prepayment Period (as defined below);
(iii) the applicable PO Percentage of all partial prepayments
allocated to principal received during the applicable Prepayment Period
with respect to any related Discount Mortgage Loan;
(iv) the lesser of (a) the applicable PO Percentage of the sum
of (A) all Net Liquidation Proceeds allocable to principal received in
respect of each related Discount
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Mortgage Loan which became a defaulted mortgage loan during the related
Prepayment Period (other than mortgage loans described in the
immediately following clause (B)) and (B) the Stated Principal Balance
of each such related Discount Mortgage Loan purchased by an insurer
from the trustee during the related Prepayment Period pursuant to the
related primary mortgage insurance policy, if any, or otherwise; and
(b) the applicable PO Percentage of the sum of (A) the Stated Principal
Balance of each related Discount Mortgage Loan which became a defaulted
mortgage loan during the related Prepayment Period (other than the
related Discount Mortgage Loans described in the immediately following
clause (B)) and (B) the Stated Principal Balance of each such related
Discount Mortgage Loan that was purchased by an insurer from the
trustee during the related Prepayment Period pursuant to the related
primary mortgage insurance policy, if any or otherwise; and
(v) the applicable PO Percentage of the sum of (a) the Stated
Principal Balance of each related Discount Mortgage Loan which was
repurchased by the seller or the related servicer in connection with
such distribution date and (b) the excess, if any, of the Stated
Principal Balance of a related Discount Mortgage Loan that has been
replaced by the seller or the related servicer with a substitute
mortgage loan pursuant to the related servicing agreement or the
pooling and servicing agreement in connection with such distribution
date over the Stated Principal Balance of such substitute mortgage
loan.
"Class III-PO Certificate Principal Distribution Amount"with respect to
each distribution date and the Class III-PO Certificates, means an amount equal
to the sum of the following (but in no event greater than the aggregate
Certificate Principal Balance of the Class III-PO Certificates immediately prior
to such distribution date):
(i) the applicable PO Percentage of the principal portion of
all monthly payments due on the related Discount Mortgage Loans on the
related Due Date, as specified in the amortization schedule at the time
applicable thereto (after adjustment for previous principal prepayments
but before any adjustment to such amortization schedule by reason of
any bankruptcy or similar proceeding or any moratorium or similar
waiver or grace period);
(ii) the applicable PO Percentage of the Stated Principal
Balance of each related Discount Mortgage Loan which was the subject of
a prepayment in full received by the related servicer during the
applicable Prepayment Period (as defined below);
(iii) the applicable PO Percentage of all partial prepayments
allocated to principal received during the applicable Prepayment Period
with respect to any related Discount Mortgage Loan;
(iv) the lesser of (a) the applicable PO Percentage of the sum
of (A) all Net Liquidation Proceeds allocable to principal received in
respect of each related Discount Mortgage Loan which became a defaulted
mortgage loan during the related Prepayment Period (other than mortgage
loans described in the immediately following clause (B)) and (B) the
Stated Principal Balance of each such related Discount Mortgage Loan
purchased by an insurer from the trustee during the related Prepayment
Period pursuant to the related primary mortgage insurance policy, if
any, or otherwise; and (b) the applicable PO Percentage of the sum of
(A) the Stated Principal Balance of each related Discount Mortgage Loan
which became a defaulted mortgage loan during the related Prepayment
Period (other than the related Discount Mortgage Loans described in the
immediately following clause (B)) and (B) the Stated Principal Balance
of each such related Discount Mortgage Loan that was purchased by an
insurer from the trustee during the related Prepayment Period pursuant
to the related primary mortgage insurance policy, if any or otherwise;
and
(v) the applicable PO Percentage of the sum of (a) the Stated
Principal Balance of each related Discount Mortgage Loan which was
repurchased by the seller or the related servicer in connection with
such distribution date and (b) the excess, if any, of the Stated
Principal Balance of a related Discount Mortgage Loan that has been
replaced by the seller or
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the related servicer with a substitute mortgage loan pursuant to the
related servicing agreement or the pooling and servicing agreement in
connection with such distribution date over the Stated Principal
Balance of such substitute mortgage loan.
"Cross-Over Date" means the distribution date on which the Certificate
Principal Balance of the Subordinated Certificates has been reduced to zero.
"Discount Mortgage Loan" means (a) with respect to loan group I, any
mortgage loan with a net mortgage rate less than 8.50%, (b) with respect to loan
group II, any mortgage loan with a net mortgage rate less than 6.50% and (c)
with respect to loan group III, any mortgage loan with a net mortgage rate less
than 6.50%.
"Due Period" with respect to any distribution date, is the period
commencing on the second day of the month preceding the calendar month in which
such distribution date occurs and ending at the close of business on the first
day of the month in which such distribution date occurs.
"Group I Available Funds" shall mean the sum of Interest Funds and
Principal Funds relating to loan group I less amounts reimbursable to the
related servicer, the master servicer, the securities administrator and the
trustee as provided in the pooling and servicing agreement.
"Group I Certificates" consist of the Class I-A1, Class I-A2, Class
I-PO, Class BX and Class I- X Certificates.
"Group I Senior Optimal Principal Amount" with respect to each
distribution date and the Class I-A1 Certificates, means an amount equal to the
sum of the following (but in no event greater than the aggregate Certificate
Principal Balance of the Class I-A1 Certificates immediately prior to such
distribution date):
(i) the applicable Senior Percentage of the applicable Non-PO
Percentage of the principal portion of all monthly payments due on the
mortgage loans in loan group I on the related Due Date, as specified in
the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments but before any adjustment
to such amortization schedule by reason of any bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period);
(ii) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of each
mortgage loan in loan group I which was the subject of a prepayment in
full received by the related servicer during the applicable Prepayment
Period (as defined below);
(iii) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments allocated to
principal received during the applicable Prepayment Period with respect
to any mortgage loan in loan group I;
(iv) the lesser of (a) the applicable Senior Prepayment
Percentage of the applicable Non-PO Percentage of the sum of (A) all
Net Liquidation Proceeds allocable to principal received in respect of
each mortgage loan in loan group I which became a defaulted mortgage
loan during the related Prepayment Period (other than mortgage loans
described in the immediately following clause (B)) and (B) the Stated
Principal Balance of each such mortgage loan in loan group I purchased
by an insurer from the trustee during the related Prepayment Period
pursuant to the related primary mortgage insurance policy, if any, or
otherwise; and (b) the applicable Senior Percentage of the applicable
Non-PO Percentage of the sum of (A) the Stated Principal Balance of
each mortgage loan in loan group I which became a defaulted mortgage
loan during the related Prepayment Period (other than the mortgage
loans described in the immediately following clause (B)) and (B) the
Stated Principal Balance of each such mortgage loan in loan group I
that was purchased by an insurer from the trustee during the
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related Prepayment Period pursuant to the related primary mortgage
insurance policy, if any or otherwise; and
(v) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Stated Principal
Balance of each mortgage loan in loan group I which was repurchased by
the seller the related servicer in connection with such distribution
date and (b) the excess, if any, of the Stated Principal Balance of a
mortgage loan in loan group I that has been replaced by the seller or
the related servicer with a substitute mortgage loan pursuant to the
related servicing agreement or the pooling and servicing agreement in
connection with such distribution date over the Stated Principal
Balance of such substitute mortgage loan.
"Group I Subordinate Optimal Principal Amount" for the subordinated
certificates with respect to each distribution date means an amount equal to the
sum of the following for loan group I (but in no event greater than the
aggregate Certificate Principal Balances of the subordinated certificates
immediately prior to such distribution date):
(i) the applicable Subordinate Percentage of the applicable
Non-PO Percentage of the principal portion of all monthly payments due
on each mortgage loan in loan group I on the related Due Date, as
specified in the amortization schedule at the time applicable thereto
(after adjustment for previous principal prepayments but before any
adjustment to such amortization schedule by reason of any bankruptcy or
similar proceeding or any moratorium or similar waiver or grace
period);
(ii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of each
mortgage loan in loan group I which was the subject of a prepayment in
full received by the related servicer during the applicable Prepayment
Period;
(iii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments of principal
received during the applicable Prepayment Period for each mortgage loan
in loan group I;
(iv) the excess, if any, of (a) the Net Liquidation Proceeds
allocable to principal received during the related Prepayment Period in
respect of each defaulted mortgage loan in loan group I over (b) the
sum of the amounts distributable to the related senior
certificateholders pursuant to clause (iv) of the definition of "Group
I Senior Optimal Principal Amount" and "Class I-PO Certificate
Principal Distribution Amount" on such distribution date;
(v) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Stated Principal
Balance of each mortgage loan in loan group I which was repurchased by
the seller or the related servicer in connection with such distribution
date and (b) the difference, if any, between the Stated Principal
Balance of a mortgage loan in loan group I that has been replaced by
the seller or the related servicer with a substitute mortgage loan
pursuant to the related servicing agreement or the pooling and
servicing agreement in connection with such distribution date and the
Stated Principal Balance of such substitute mortgage loan; and
(vi) on the distribution date on which the Certificate
Principal Balances of the related senior certificates (other than the
Class I-A2, Class I-X, Class BX and Class I-PO Certificates) have all
been reduced to zero, 100% of any applicable Senior Optimal Principal
Amount.
"Group II Available Funds" shall mean the sum of Interest Funds and
Principal Funds relating to loan group II less amounts reimbursable to the
related servicer, the master servicer, the securities administrator and the
trustee as provided in the pooling and servicing agreement.
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"Group II Certificates" consist of the Class II-A1, Class II-A2, Class
II-A3, Class II-A4, Class II-A5, Class II-PO, Class II-X, Class R-1, Class R-2
and Class R-3 Certificates.
"Group II Senior Optimal Principal Amount" with respect to each
distribution date and the Group II Certificates (other than the Class II-X
Certificates and Class II-PO Certificates), means an amount equal to the sum of
the following (but in no event greater than the aggregate Certificate Principal
Balance of the Group II Certificates (other than the Class II-X Certificates and
Class II-PO Certificates) immediately prior to such distribution date):
(i) the applicable Senior Percentage of the applicable Non-PO
Percentage of the principal portion of all monthly payments due on the
mortgage loans in loan group II on the related Due Date, as specified
in the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments but before any adjustment
to such amortization schedule by reason of any bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period);
(ii) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of each
mortgage loan in loan group II which was the subject of a prepayment in
full received by the related servicer during the applicable Prepayment
Period (as defined below);
(iii) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments allocated to
principal received during the applicable Prepayment Period with respect
to any mortgage loan in loan group II;
(iv) the lesser of (a) the applicable Senior Prepayment
Percentage of the applicable Non-PO Percentage of the sum of (A) all
Net Liquidation Proceeds allocable to principal received in respect of
each mortgage loan in loan group II which became a defaulted mortgage
loan during the related Prepayment Period (other than mortgage loans
described in the immediately following clause (B)) and (B) the Stated
Principal Balance of each such mortgage loan in loan group II purchased
by an insurer from the trustee during the related Prepayment Period
pursuant to the related primary mortgage insurance policy, if any, or
otherwise; and (b) the applicable Senior Percentage of the applicable
Non-PO Percentage of the sum of (A) the Stated Principal Balance of
each mortgage loan in loan group II which became a defaulted mortgage
loan during the related Prepayment Period (other than the mortgage
loans described in the immediately following clause (B)) and (B) the
Stated Principal Balance of each such mortgage loan in loan group II
that was purchased by an insurer from the trustee during the related
Prepayment Period pursuant to the related primary mortgage insurance
policy, if any or otherwise; and
(v) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Stated Principal
Balance of each mortgage loan in loan group II which was repurchased by
the seller the related servicer in connection with such distribution
date and (b) the excess, if any, of the Stated Principal Balance of a
mortgage loan in loan group II that has been replaced by the seller or
the related servicer with a substitute mortgage loan pursuant to the
related servicing agreement or the pooling and servicing agreement in
connection with such distribution date over the Stated Principal
Balance of such substitute mortgage loan.
"Group II Subordinate Optimal Principal Amount" for the subordinated
certificates with respect to each distribution date means an amount equal to the
sum of the following for loan group II (but in no event greater than the
aggregate Certificate Principal Balances of the subordinated certificates
immediately prior to such distribution date):
(i) the applicable Subordinate Percentage of the applicable
Non-PO Percentage of the principal portion of all monthly payments due
on each mortgage loan in loan group II on the related Due Date, as
specified in the amortization schedule at the time applicable thereto
(after
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adjustment for previous principal prepayments but before any adjustment
to such amortization schedule by reason of any bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period);
(ii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of each
mortgage loan in loan group II which was the subject of a prepayment in
full received by the related servicer during the applicable Prepayment
Period;
(iii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments of principal
received during the applicable Prepayment Period for each mortgage loan
in loan group II;
(iv) the excess, if any, of (a) the Net Liquidation Proceeds
allocable to principal received during the related Prepayment Period in
respect of each defaulted mortgage loan in loan group II over (b) the
sum of the amounts distributable to the related senior
certificateholders pursuant to clause (iv) of the definition of "Group
II Senior Optimal Principal Amount" and "Class II-PO Certificate
Principal Distribution Amount" on such distribution date;
(v) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Stated Principal
Balance of each mortgage loan in loan group II which was repurchased by
the seller or the related servicer in connection with such distribution
date and (b) the difference, if any, between the Stated Principal
Balance of a mortgage loan in loan group II that has been replaced by
the seller or the related servicer with a substitute mortgage loan
pursuant to the related servicing agreement or the pooling and
servicing agreement in connection with such distribution date and the
Stated Principal Balance of such substitute mortgage loan; and
(vi) on the distribution date on which the Certificate
Principal Balances of the related senior certificates (other than the
Class II-X Certificates and Class II-PO Certificates) have all been
reduced to zero, 100% of any applicable Senior Optimal Principal
Amount.
"Group III Available Funds" shall mean the sum of Interest Funds and
Principal Funds relating to loan group III less amounts reimbursable to the
related servicer, the master servicer, the securities administrator and the
trustee as provided in the pooling and servicing agreement.
"Group III Certificates" consist of the Class III-A, Class III-PO and
Class III-X Certificates.
"Group III Senior Optimal Principal Amount" with respect to each
distribution date and the Class III-A Certificates, means an amount equal to the
sum of the following (but in no event greater than the aggregate Certificate
Principal Balance of the Class III-A Certificates immediately prior to such
distribution date):
(i) the applicable Senior Percentage of the applicable Non-PO
Percentage of the principal portion of all monthly payments due on the
mortgage loans in loan group III on the related Due Date, as specified
in the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments but before any adjustment
to such amortization schedule by reason of any bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period);
(ii) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of each
mortgage loan in loan group III which was the subject of a prepayment
in full received by the related servicer during the applicable
Prepayment Period (as defined below);
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(iii) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments allocated to
principal received during the applicable Prepayment Period with respect
to any mortgage loan in loan group III;
(iv) the lesser of (a) the applicable Senior Prepayment
Percentage of the applicable Non-PO Percentage of the sum of (A) all
Net Liquidation Proceeds allocable to principal received in respect of
each mortgage loan in loan group III which became a defaulted mortgage
loan during the related Prepayment Period (other than mortgage loans
described in the immediately following clause (B)) and (B) the Stated
Principal Balance of each such mortgage loan in loan group III
purchased by an insurer from the trustee during the related Prepayment
Period pursuant to the related primary mortgage insurance policy, if
any, or otherwise; and (b) the applicable Senior Percentage of the
applicable Non-PO Percentage of the sum of (A) the Stated Principal
Balance of each mortgage loan in loan group III which became a
defaulted mortgage loan during the related Prepayment Period (other
than the mortgage loans described in the immediately following clause
(B)) and (B) the Stated Principal Balance of each such mortgage loan in
loan group III that was purchased by an insurer from the trustee during
the related Prepayment Period pursuant to the related primary mortgage
insurance policy, if any or otherwise; and
(v) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Stated Principal
Balance of each mortgage loan in loan group III which was repurchased
by the seller the related servicer in connection with such distribution
date and (b) the excess, if any, of the Stated Principal Balance of a
mortgage loan in loan group III that has been replaced by the seller or
the related servicer with a substitute mortgage loan pursuant to the
related servicing agreement or the pooling and servicing agreement in
connection with such distribution date over the Stated Principal
Balance of such substitute mortgage loan.
"Group III Subordinate Optimal Principal Amount" for the subordinated
certificates with respect to each distribution date means an amount equal to the
sum of the following for loan group III (but in no event greater than the
aggregate Certificate Principal Balances of the subordinated certificates
immediately prior to such distribution date):
(i) the applicable Subordinate Percentage of the applicable
Non-PO Percentage of the principal portion of all monthly payments due
on each mortgage loan in loan group III on the related Due Date, as
specified in the amortization schedule at the time applicable thereto
(after adjustment for previous principal prepayments but before any
adjustment to such amortization schedule by reason of any bankruptcy or
similar proceeding or any moratorium or similar waiver or grace
period);
(ii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of each
mortgage loan in loan group III which was the subject of a prepayment
in full received by the related servicer during the applicable
Prepayment Period;
(iii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments of principal
received during the applicable Prepayment Period for each mortgage loan
in loan group III;
(iv) the excess, if any, of (a) the Net Liquidation Proceeds
allocable to principal received during the related Prepayment Period in
respect of each defaulted mortgage loan in loan group III over (b) the
sum of the amounts distributable to the related senior
certificateholders pursuant to clause (iv) of the definition of "Group
III Senior Optimal Principal Amount" and "Class III-PO Certificate
Principal Distribution Amount" on such distribution date;
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(v) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Stated Principal
Balance of each mortgage loan in loan group III which was repurchased
by the seller or the related servicer in connection with such
distribution date and (b) the difference, if any, between the Stated
Principal Balance of a mortgage loan in loan group III that has been
replaced by the seller or the related servicer with a substitute
mortgage loan pursuant to the related servicing agreement or the
pooling and servicing agreement in connection with such distribution
date and the Stated Principal Balance of such substitute mortgage loan;
and
(vi) on the distribution date on which the Certificate
Principal Balances of the related senior certificates (other than the
Class III-X Certificates and Class III-PO Certificates) have all been
reduced to zero, 100% of any applicable Senior Optimal Principal
Amount.
"Insurance Proceeds" are all proceeds of any insurance policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the related servicer's normal
servicing procedures, other than proceeds that represent reimbursement of the
related servicer's costs and expenses incurred in connection with presenting
claims under the related insurance policies.
"Interest Shortfall" with respect to any distribution date, means the
aggregate shortfall, if any, in collections of interest (adjusted to the related
net mortgage rates) on mortgage loans in the related loan group resulting from
(a) prepayments in full received during the related Prepayment Period, (b) the
partial prepayments received during the related Prepayment Period to the extent
applied prior to the Due Date in the month of the Distribution Date and (c)
interest payments on certain of the Mortgage Loans being limited pursuant to the
provisions of the Relief Act.
"Interest Funds" with respect to a distribution date and each loan
group generally are equal to the sum, without duplication, of
o all scheduled interest, less the related servicing fee, master
servicing fee and the lender paid mortgage insurance fee, if
any,
o all advances relating to interest,
o all Compensating Interest,
o Liquidation Proceeds, to the extent such Liquidation Proceeds
relate to interest, less all non-recoverable advances relating
to interest and certain expenses reimbursed during the related
Prepayment Period, in each case with respect to the mortgage
loans in such loan group,
o the interest portion of proceeds of the repurchase of any
mortgage loans, and
o the interest portion of the purchase price of the assets of
the trust upon exercise by the master servicer of its optional
termination right.
"Liquidation Proceeds" are all net proceeds, other than Insurance
Proceeds, received in connection with the partial or complete liquidation of
mortgage loans, whether through trustee's sale, foreclosure sale or otherwise,
or in connection with any condemnation or partial release of a mortgaged
property, together with the net proceeds received with respect to any mortgaged
properties acquired by the related servicer by foreclosure or deed-in-lieu of
foreclosure in connection with defaulted mortgage loans, other than the amount
of such net proceeds representing any profit realized by the related servicer in
connection with the disposition of any such properties.
"Net Interest Shortfalls" means Interest Shortfalls net of payments by
the related servicer or the master servicer in respect of Compensating Interest.
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"Net Liquidation Proceeds" with respect to a mortgage loan are
Liquidation Proceeds net of unreimbursed advances by the related servicer or the
master servicer, advances and expenses incurred by the related servicer or the
master servicer in connection with the liquidation of such mortgage loan and the
related mortgaged property.
"Non-Discount Mortgage Loan" means (a) with respect to loan group I,
any mortgage loan with a net mortgage rate greater than or equal to 8.50%, (b)
with respect to loan group II, any mortgage loan with a net mortgage rate
greater than or equal to 6.50% and (c) with respect to loan group III, any
mortgage loan with a net mortgage rate greater than or equal to 6.50%.
"Non-PO Percentage" means, (a) with respect to loan group I and (i) any
related Discount Mortgage Loan, the net mortgage rate thereof divided by 8.50%
and (ii) any related Non-Discount Mortgage Loan, 100%, (b) with respect to loan
group II and (i) any related Discount Mortgage Loan, the net mortgage rate
thereof divided by 6.50% and (ii) any related Non-Discount Mortgage Loan, 100%
and (c) with respect to loan group III and (i) any related Discount Mortgage
Loan, the net mortgage rate thereof divided by 6.50% and (ii) any related
Non-Discount Mortgage Loan, 100%.
"Notional Balance" means, (i) with respect to the Class I-A2
Certificates, the Certificate Principal Balance of the Class I-A1 Certificates,
(ii) with respect to the Class I-X Certificates, the aggregate Stated Principal
Balance of the Non-Discount Mortgage Loans in loan group I, (iii) with respect
to the Class II-X Certificates, the aggregate Stated Principal Balance of the
Non-Discount Mortgage Loans in loan group II, (iv) with respect to the Class
III-X Certificates, the aggregate Stated Principal Balance of the Non-Discount
Mortgage Loans in loan group III and (v) with respect to the Class BX
Certificates, an amount equal to the product of (a) two multiplied by (b) a
fraction, the numerator of which is the aggregate Stated Principal Balance of
the mortgage loans in loan group I minus the aggregate Certificate Principal
Balance of the Class I-A1 Certificates and the Class I-PO Certificates and the
denominator of which is the aggregate Certificate Principal Balance of the Class
B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates times
(c) a fraction, the numerator of which is the aggregate Certificate Principal
Balance of the Class B-1, Class B-2 and Class B-3 Certificates and the
denominator of which is 6.5.
"Pass-Through Rate" means, with respect to all offered certificates
(other than the Class I-A1, Class I-A2, Class I-PO, Class II-PO, Class III-PO,
Class I-X, Class II-X and Class III-X Certificates) the fixed rates set forth on
the cover of this prospectus supplement. The Class I-PO, Class II-PO, Class
III-PO and Class XP Certificates are not entitled to distributions in respect of
interest and do not have Pass-Through Rates. The Pass-Through Rate applicable to
the Class I-A1 Certificates is equal to the London interbank offered rate for
one month United States dollar deposits, which we refer to as One- Month LIBOR,
calculated as described in this prospectus supplement under " -- Calculation of
One- Month LIBOR" plus 0.55%, subject to a maximum rate of 8.50% per annum and a
minimum rate of 0.55% per annum. The Pass-Through Rate applicable to the Class
I-A2 Certificates is equal to 7.95% minus One-Month LIBOR, subject to a maximum
rate of 7.95% per annum and a minimum rate of 0.00% per annum. The Pass-Through
Rate applicable to the Class I-X Certificates is equal to the weighted average
of the excess of (a) the net mortgage rate on each Non-Discount Mortgage Loan in
loan group I over (b) 8.50% per annum. The Pass-Through Rate applicable to the
Class II-X Certificates is equal to the weighted average of the excess of (a)
the net mortgage rate on each Non- Discount Mortgage Loan in loan group II over
(b) 6.50% per annum. The Pass-Through Rate applicable to the Class III-X
Certificates is equal to the weighted average of the excess of (a) the net
mortgage rate on each Non-Discount Mortgage Loan in loan group III over (b)
6.50% per annum. The initial Pass-Through Rates for the Class I-A1, Class I-A2,
Class I-X, Class II-X and Class III-X Certificates is 2.370%, 6.130%, 0.585%,
0.959% and 1.315%, respectively.
"PO Percentage" means (a) with respect to loan group I and any related
Discount Mortgage Loan a fraction, expressed as a percentage, equal to 8.50%
minus the net mortgage rate thereof divided by 8.50%, (c) with respect to loan
group II and any related Discount Mortgage Loan a fraction, expressed as a
percentage, equal to 6.50% minus the net mortgage rate thereof divided by 6.50%
and (c) with respect to loan group III and any related Discount Mortgage Loan a
fraction, expressed as a percentage, equal to 6.50% minus the net mortgage rate
thereof divided by 6.50%.
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"Prepayment Period" with respect to a distribution date is the
immediately preceding calendar month in the case of the mortgage loans for which
EMC is the servicer and such period as is provided in the related servicing
agreement with respect to the related servicer.
"Principal Funds" generally are equal to the sum, without duplication,
of
o the scheduled principal collected during the related Due
Period or advanced on or before the related servicer advance
date,
o prepayments, exclusive of any prepayment charges, collected in
the related Prepayment Period,
o the Stated Principal Balance of each mortgage loan that was
repurchased by the seller or the related servicer,
o the amount, if any, by which the aggregate unpaid principal
balance of any replacement mortgage loans is less than the
aggregate unpaid principal balance of any deleted mortgage
loans delivered by the related servicer in connection with a
substitution of a mortgage loan,
o all Liquidation Proceeds collected during the related
Prepayment Period, to the extent such Liquidation Proceeds
relate to principal, less all non-recoverable advances
relating to principal reimbursed during the related Due
Period, and
o the principal portion of the purchase price of the assets of
the trust upon the exercise by the master servicer of its
optional termination right.
"Realized Loss" is the excess of the Stated Principal Balance of a
defaulted mortgage loan over the Net Liquidation Proceeds with respect thereto
that are allocated to principal.
"Relief Act" means the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended.
"Senior Certificates" consist of the Class I-A1, Class I-A2, Class
II-A1, Class II-A2, Class II- A3, Class II-A4, Class II-A5, Class III-A, Class
I-X, Class II-X, Class III-X, Class I-PO, Class II-PO, Class III-PO, Class XP,
Class BX, Class R-1, Class R-2 and Class R-3 Certificates.
"Senior Percentage" for the Group I, Group II and Group III
Certificates (other than the Class I-A2, Class I-X, Class II-X, Class III-X,
Class BX, Class I-PO, Class II-PO and Class III-PO Certificates) on any
distribution date will equal the lesser of (i) 100% and (ii) the percentage
(carried to six places rounded up) obtained by dividing the aggregate
Certificate Principal Balance of the Group I, Group II or Group III Certificates
(other than the Class I-A2, Class I-X, Class II-X, Class III-X, Class BX, Class
I-PO, Class II-PO and Class III-PO Certificates) immediately preceding such
distribution date by the aggregate Stated Principal Balance of the mortgage
loans in the related loan group (other than the applicable PO Percentage
thereof, with respect to the related Discount Mortgage Loans) as of the
beginning of the related Due Period. The initial Senior Percentages for the
Group I, Group II and Group III Certificates will be equal to approximately
90.07%, 90.74% and 90.75%, respectively.
"Senior Prepayment Percentage" for the Group I, Group II and Group III
Certificates (other than the Class I-A2, Class I-X, Class II-X, Class III-X,
Class BX, Class I-PO, Class II-PO and Class III- PO Certificates), respectively,
on any distribution date occurring during the periods set forth below will be as
follows:
Period (dates inclusive) Senior Prepayment Percentage
------------------------ ----------------------------
November 25, 2002 - October 25, 2007 100%
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November 25, 2007 - October 25, 2008 Senior Percentage for the related Senior
Certificates plus 70% of the related Subordinate
Percentage.
November 25, 2008 - October 25, 2009 Senior Percentage for the related Senior
Certificates plus 60% of the related Subordinate
Percentage.
November 25, 2009 - October 25, 2010 Senior Percentage for the related Senior
Certificates plus 40% of the related Subordinate
Percentage.
November 25, 2010 - October 25, 2011 Senior Percentage for the related Senior
Certificates plus 20% of the related Subordinate
Percentage.
November 25, 2011 and thereafter Senior Percentage for the related Senior
Certificates.
In addition, no reduction of the Group I, Group II or Group III Senior
Prepayment Percentage shall occur on any distribution date unless, as of the
last day of the month preceding such distribution date, (A) the aggregate Stated
Principal Balance of the mortgage loans delinquent 60 days or more (including
for this purpose any such mortgage loans in foreclosure and mortgage loans with
respect to which the related mortgaged property has been acquired by the trust),
averaged over the last six months, as a percentage of the sum of the aggregate
Certificate Principal Balance of the subordinated certificates does not exceed
50%; and (B) cumulative Realized Losses on the Mortgage Loans do not exceed (a)
30% of the aggregate Certificate Principal Balances of the subordinated
certificates as of the cut-off date (the "Original Subordinate Principal
Balance") if such distribution date occurs between and including November 2007
and October 2008, (b) 35% of the Original Subordinate Principal Balance if such
Distribution Date occurs between and including November 2008 and October 2009,
(c) 40% of the Original Subordinate Principal Balance if such distribution date
occurs between and including November 2009 and October 2010, (d) 45% of the
Original Subordinate Principal Balance if such Distribution Date occurs between
and including November 2010 and October 2011, and (e) 50% of the Original
Subordinate Principal Balance if such distribution date occurs during or after
November 2011.
Notwithstanding the foregoing, if on any distribution date, the
percentage, the numerator of which is the aggregate Certificate Principal
Balance of the related senior certificates (other than the Class I-A2, Class
I-X, Class II-X, Class III-X, Class BX, Class I-PO, Class II-PO and Class III-PO
Certificates) immediately preceding such distribution date, and the denominator
of which is the Stated Principal Balance of the mortgage loans in the related
loan group (other than the PO Percentage thereof, with respect to the Discount
Mortgage Loans) as of the beginning of the related Due Period, exceeds such
percentage as of the Cut-off Date, then the Group I, Group II and Group III
Senior Prepayment Percentages with respect to the Group I, Group II and Group
III Certificates for such distribution date will equal 100%.
"Stated Principal Balance" of any mortgage loan means, with respect to
any distribution date, the cut-off date principal balance thereof minus the sum
of
(i) the principal portion of the scheduled monthly payments due
from mortgagors with respect to such mortgage loan during the
Due Period ending prior to such distribution date (and
irrespective of any delinquency in their payment);
(ii) all prepayments of principal with respect to such mortgage
loan received prior to or during the related Prepayment
Period, and all liquidation proceeds to the extent applied by
the related servicer as recoveries of principal in accordance
with the pooling and servicing agreement or the related
servicing agreement that were received by the related
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servicer as of the close of business on the last day of the
Prepayment Period related to such distribution date, and
(iii) any Realized Loss thereon incurred during the related
Prepayment Period.
The Stated Principal Balance of any liquidated mortgage loan is zero.
"Subordinate Optimal Principal Amount" for the subordinated
certificates with respect to each distribution date means an amount equal to the
sum of the Group I Subordinate Optimal Principal Amount, the Group II
Subordinate Optimal Principal Amount and the Group III Subordinate Optimal
Principal Amount.
"Subordinate Percentage" for the subordinated certificates with respect
to each loan group related to the mortgage loans on any distribution date, means
100% minus the related Senior Percentage for the Senior Certificates related to
such loan group.
"Subordinate Prepayment Percentage" for the subordinated certificates
with respect to each loan group related to the mortgage loans on any
distribution date will equal 100% minus the related Senior Prepayment Percentage
for the Senior Certificates related to such loan group, except that on any
distribution date after the Certificate Principal Balances of the Group I, Group
II or Group III Certificates have each been reduced to zero, the Subordinate
Prepayment Percentage for the subordinated certificates with respect to each
loan group related to the mortgage loans will equal 100%. The initial
Subordinate Percentages for loan group I, loan group II and loan group III will
be equal to approximately 9.93%, 9.26% and 9.25%, respectively.
CROSSCOLLATERALIZATION PROVISIONS
If on any distribution date, all of the senior certificates of a
certificate group are no longer outstanding, the pro rata portion of the Senior
Optimal Principal Amount otherwise allocable to such certificate group will be
allocated to the other certificate group, in accordance with the payment
priorities described under " -- Distributions -- Allocations of Payments on the
Mortgage Loans," above, in reduction of the certificate principal balances
thereof. This potential for payment of principal amounts from one loan group to
pay principal on the other certificate group has the effect of
crosscollateralizing the certificate groups.
ALLOCATION OF REALIZED LOSSES
Realized Losses with respect to a mortgage loan will be allocated on a
pro rata basis between the applicable PO Percentage of the Stated Principal
Balance of such mortgage loan and the applicable Non-PO Percentage of such
Stated Principal Balance.
On each distribution date, the PO Percentage of the principal portion
of any Realized Loss on a Discount Mortgage Loan and any Class PO Certificate
Cash Shortfall will be allocated to the related Class PO Certificates until the
certificate principal balance thereof is reduced to zero. With respect to any
distribution date through the Cross-Over Date, the aggregate of all amounts so
allocable to the related Class PO Certificates on such date in respect of any
Realized Losses and Class PO Certificate Cash Shortfalls and all amounts
previously allocated in respect of such Realized Losses or Class PO Certificate
Cash Shortfalls and not distributed on prior distribution dates will be the
"Class PO Certificate Deferred Amount" with respect to the related Class PO
Certificate. To the extent funds are available therefor on any distribution date
through the Cross-Over Date, distributions in respect of the Class PO
Certificate Deferred Amount will be made in accordance with priority FOURTH of
clause (A) or clause (C) or priority SIXTH of clause (B), as applicable, under
"-- Distributions -- Allocations of Payments on the Mortgage Loans" above. No
interest will accrue on any Class PO Certificate Deferred Amount. On each
distribution date through the Cross-Over Date, the certificate principal balance
of the lowest ranking class of subordinated certificates then outstanding will
be reduced by the amount of any distributions in respect of the Class PO
Certificate Deferred Amount on such distribution date in accordance with the
priorities set forth above, through the operation of the Class PO Certificate
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Deferred Payment Writedown Amount. After the Cross-Over Date, no more
distributions will be made in respect of, and applicable Realized Losses and
Class PO Certificate Cash Shortfalls allocable to the related Class PO
Certificates will not be added to the Class PO Certificate Deferred Amount.
On any distribution date, the applicable Non-PO Percentage of the
principal portion of Realized Losses ("Non-PO Realized Losses") on the mortgage
loans which suffered Realized Losses during the related Prepayment Period will
not be allocated to any senior certificates until the Cross-Over Date. Prior to
the Cross-Over Date (or on such dates under certain circumstances) the
applicable Non-PO Percentage of the principal portion of Realized Losses on the
mortgage loans will be allocated as follows: first to the Class B-6
Certificates, second to the Class B-5 Certificates, third, to the Class B-4
Certificates, fourth, to the Class B-3 Certificates, fifth, to the Class B-2
Certificates, and sixth, to the Class B-1 Certificates, in each case until the
certificate principal balance of each such class has been reduced to zero.
Commencing on the Cross-Over Date, the applicable Non-PO Percentage of the
principal portion of Realized Losses on the mortgage loans in the related loan
group will be allocated among the outstanding classes of related senior
certificates (other than the Class I-A2, Class I-X, Class II-X, Class XP, Class
BX, Class I-PO, Class II-PO and Class III-PO Certificates), pro rata based upon
their respective certificate principal balances.
No reduction of the certificate principal balance of any class shall be
made on any distribution date on account of Realized Losses to the extent that
such reduction would have the effect of reducing the aggregate certificate
principal balance of all of the classes of certificates as of such distribution
date to an amount less than the Stated Principal Balances of the mortgage loans
as of the related Due Date (such limitation being the applicable "Loss
Allocation Limitation").
All allocations of Realized Losses will be accomplished on a
distribution date by reducing the certificate principal balance of the
applicable classes by their appropriate shares of any such losses occurring
during the month preceding the month of such distribution date and, accordingly,
will be taken into account in determining the distributions of principal and
interest on the certificates commencing on the following distribution date,
except that the aggregate amount of the principal portion of any Realized Losses
on the mortgage loans to be allocated to the related Class PO Certificates on
any distribution date through the Cross-Over Date will also be taken into
account in determining distributions in respect of the Class PO Certificate
Deferred Amount for such distribution date.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR business day preceding the commencement of each
accrual period for the offered certificates bearing interest at an adjustable
rate, which date we refer to as an interest determination date, the securities
administrator will determine One-Month LIBOR for such accrual period on the
basis of such rate as it appears on Telerate Screen Page 3750, as of 11:00 a.m.
London time on such interest determination date. If such rate does not appear on
such page, or such other page as may replace that page on that service, or if
such service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be reasonably selected by the securities administrator,
One-Month LIBOR for the applicable accrual period will be the Reference Bank
Rate. If no such quotations can be obtained and no Reference Bank Rate is
available, One-Month LIBOR will be the One-Month LIBOR applicable to the
preceding accrual period.
The Reference Bank Rate with respect to any accrual period, means the
arithmetic mean, rounded upwards, if necessary, to the nearest whole multiple of
0.03125%, of the offered rates for United States dollar deposits for one month
that are quoted by the Reference Banks, as described below, as of 11:00 a.m.,
New York City time, on the related interest determination date to prime banks in
the London interbank market for a period of one month in amounts approximately
equal to the aggregate certificate principal balance of all classes of offered
certificates bearing interest at an adjustable rate for such accrual period,
provided that at least two such Reference Banks provide such rate. If fewer than
two offered rates appear, the Reference Bank Rate will be the arithmetic mean,
rounded upwards, if necessary, to the nearest whole multiple of 0.03125%, of the
rates quoted by one or more major banks in New York City, selected by the
securities administrator, as of 11:00 a.m., New York City time, on
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such date for loans in U.S. dollars to leading European banks for a period of
one month in amounts approximately equal to the certificate principal balance of
all classes of offered certificates bearing interest at an adjustable rate for
such accrual period. 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; and "Reference Banks" means leading banks selected by the
securities administrator and engaged in transactions in Eurodollar deposits in
the international Eurocurrency market
o with an established place of business in London,
o which have been designated as such by the trustee and
o which are not controlling, controlled by, or under common
control with, the depositor, the seller or the master
servicer.
The establishment of One-Month LIBOR on each interest determination
date by the securities administrator and the securities administrator's
calculation of the rate of interest applicable to the classes of offered
certificates bearing interest at an adjustable rate for the related accrual
period shall, in the absence of manifest error, be final and binding.
REPORTS TO CERTIFICATEHOLDERS
On each distribution date, the securities administrator will make
available to each certificateholder, the trustee, the master servicer and the
depositor a statement generally setting forth, among other information:
1. the amount of the related distribution to holders of
the offered certificates allocable to principal,
separately identifying (A) the aggregate amount of
any principal prepayments included therein and (B)
the aggregate of all scheduled payments of principal
included therein;
2. the amount of such distribution to holders of the
offered certificates allocable to interest;
3. the Certificate Principal Balance or notional balance
of the offered certificates before and after giving
effect to the distribution of principal and
allocation of Applied Realized Loss Amounts on such
distribution date;
4. the Stated Principal Balance of all the mortgage
loans in the related loan group in the aggregate for
the following distribution date;
5. the amount of the master servicing fee for the master
servicer and the amount of the servicing fee for the
related servicer paid to or retained by the master
servicer or the related servicer, as the case may be,
for the related due period;
6. the pass-through rate for each class of offered
certificates for such distribution date;
7. the amount of advances included in the distribution
on such distribution date;
8. the number and aggregate principal amounts of the
mortgage loans in each loan group and in the total
pool (A) delinquent, exclusive of related mortgage
loans in foreclosure, (1) 31-60 days, (2) 61-90 days
and (3) 91 or more days, and (B) in foreclosure and
delinquent (1) 31-60 days, (2) 61-90 days and (3) 91
or more days, in each case as of the close of
business on the last day of the calendar month
preceding such distribution date;
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9. with respect to any mortgage loan in each loan group
that was liquidated during the preceding calendar
month, the loan number and stated principal balance
of, and Realized Loss on, such mortgage loan as of
the end of the related prepayment period;
10. the total number and principal balance of any real
estate owned, or REO properties in each loan group
and in the total pool as of the end of the related
prepayment period;
11. the cumulative Realized Losses for each loan group
and in the total pool through the end of the
preceding month; and
12. the three-month rolling average of the percent
equivalent of a fraction, the numerator of which is
the aggregate Stated Principal Balance of the
mortgage loans that are 60 days or more delinquent or
are in bankruptcy or foreclosure or are REO
properties, and the denominator of which is the
Stated Principal Balances of all of the mortgage
loans.
The securities administrator will make the monthly statement and, at
its option, any additional files containing the same information in an
alternative format, available each month to certificateholders via the
securities administrator's internet website. Assistance in using the website
service can be obtained by calling the securities administrator'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
securities administrator may change the way monthly statements are distributed
in order to make such distributions more convenient or more accessible to the
above parties.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will prepare and deliver to the master servicer and
to each certificateholder of record during the previous calendar year a
statement containing information necessary to enable certificateholders to
prepare their tax returns. Such statements will not have been examined and
reported upon by an independent public accountant.
AMENDMENT
The pooling and servicing agreement may be amended by the depositor,
the master servicer, the seller, the securities administrator and the trustee,
without the consent of certificateholders,
o to cure any ambiguity,
o to correct or supplement any provision therein, or
o to make any other revisions with respect to matters or
questions arising under the pooling and servicing agreement
which are not inconsistent with the provisions thereof,
provided that such action will not adversely affect in any material respect the
interests of any certificateholder. An amendment will be deemed not to adversely
affect in any material respect the interests of the certificateholders if the
person requesting such amendment obtains a letter from each rating agency
stating that such amendment will not result in the downgrading or withdrawal of
the respective ratings then assigned to any class of certificates.
In addition, the pooling and servicing agreement may be amended without
the consent of certificateholders 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's REMIC elections, provided that the trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification. In addition, the pooling and servicing agreement
may be amended by the depositor, the master servicer, the seller, the securities
administrator and the trustee with the consent of the holders of
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a majority in interest of each class of certificates affected thereby for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the pooling and servicing agreement or of modifying in any
manner the rights of the certificateholders; provided, however, that no such
amendment may
(a) reduce in any manner the amount of, or delay the timing
of, payments required to be distributed on any certificate without the
consent of the holder of such certificate;
(b) cause any trust fund REMIC to fail to qualify as a REMIC
for federal tax purposes;
(c) reduce the aforesaid percentage of aggregate outstanding
principal amounts of certificates of each class, the holders of which
are required to consent to any such amendment, without the consent of
the holders of all certificates of such class.
The trustee will not be entitled to consent to any amendment to the
pooling and servicing agreement without having first received an opinion of
counsel to the effect that such amendment is permitted under the terms of the
pooling and servicing agreement and will not cause the trust fund's REMIC
elections to fail to qualify as a REMIC for federal tax purposes.
VOTING RIGHTS
As of any date of determination,
o holders of the certificates other than the Class I-A2, Class
I-X, Class II-X, Class III-X, Class XP, Class BX and Class R
Certificates will be allocated 92.50% of all voting rights,
allocated among such certificates in proportion to their
respective outstanding certificate principal balances,
o holders of the Class I-A2, Class I-X, Class II-X, Class III-X,
Class XP and Class BX Certificates will each be allocated 1%
of all voting rights, and
o holders of each class of Class R Certificates will be
allocated 0.50% of all voting rights.
Voting rights will be allocated among the certificates of each such
class in accordance with their respective percentage interests.
OPTIONAL TERMINATION
The master servicer will have the right to purchase all remaining
mortgage loans and REO properties and thereby effect early retirement of all the
certificates, subject to the stated principal balance of the mortgage loans and
REO properties at the time of repurchase being less than or equal to 10% of
cut-off date principal balance of the mortgage loans. We refer to such date as
the optional termination date. In the event that the master servicer, exercises
such option, it will effect such repurchase at a price equal to the sum of
o 100% of the stated principal balance of each mortgage loan,
other than in respect of REO Property, plus accrued interest
thereon at the applicable mortgage rate,
o the appraised value of any REO property, up to the stated
principal balance of the related mortgage loan, and
o any unreimbursed out-of-pocket costs and expenses of the
trustee, the related servicer or the master servicer and the
principal portion of any unreimbursed advances previously
incurred by the related servicer or the master servicer, as
the case may be, in the performance of their respective
servicing obligations.
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Proceeds from such purchase will be distributed to the certificateholders in the
priority described above in "Description of the Certificates -- Distributions."
The proceeds from any such distribution may not be sufficient to distribute the
full amount to which each class of certificates is entitled if the purchase
price is based in part on the appraised value of any REO property and such
appraised value is less than the stated principal balance of the related
mortgage loan. Any purchase of the mortgage loans and REO properties will result
in an early retirement of the certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any mortgage loan which as of the first day of a calendar quarter
is delinquent in payment by 91 days or more, EMC Mortgage Corporation may, at
its option, purchase such mortgage loan at a price equal to 100% of the stated
principal balance thereof plus accrued interest thereon at the applicable
mortgage rate, from the date through which interest was last paid by the related
mortgagor or advanced to the first day of the month in which such amount is to
be distributed; provided that such mortgage loan is still delinquent in payment
by 91 days or more as of the date of such purchase and provided further, that
this limited purchase option, if not theretofore exercised, shall terminate on
the date prior to the last day of such calendar quarter. Such option, if not
exercised, shall not thereafter be reinstated as to any such mortgage loan
unless the delinquency is cured and the mortgage loan thereafter again becomes
delinquent in payment 91 days or more. In that event, the option shall again
become exercisable on the first date of the subsequent calendar quarter.
EVENTS OF DEFAULT
Events of default under the pooling and servicing agreement include:
o any failure by the master servicer to remit to the trustee any
payment, including an advance required to be made under the
terms of the pooling and servicing agreement, which continues
unremedied for one business day after written notice of such
failure shall have been given to the master servicer by the
trustee or the depositor, or to the master servicer and the
trustee by the holders of certificates evidencing not less
than 25% of the voting rights evidenced by the certificates;
o any failure by the master servicer to observe or perform in
any material respect any other of its covenants or agreements,
or any breach of a representation or warranty made by the
master servicer, in the pooling and servicing agreement, which
continues unremedied for 60 days after the giving of written
notice of such failure to the master servicer by the trustee
or the depositor, or to the master servicer and the trustee by
the holders of certificates evidencing not less than 25% of
the voting rights evidenced by the certificates; or
o 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 or
inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an event of default under the pooling and servicing
agreement remains unremedied, the trustee shall, but only upon the receipt of
written instructions from the holders of certificates having not less than 25%
of the voting rights evidenced by the certificates, terminate all of the rights
and obligations of the master servicer under the pooling and servicing agreement
and in and to the mortgage loans, whereupon the trustee shall automatically
succeed, after a transition period not exceeding 90 days, to all of the
responsibilities and duties of the master servicer under the pooling and
servicing agreement, including the limited obligation to make advances;
PROVIDED, HOWEVER, that the trustee shall have no obligation whatsoever with
respect to any liability incurred by the master servicer at or prior to the time
of receipt by the master servicer of such notice of termination. As compensation
therefor, the trustee shall be entitled to all funds relating to the mortgage
loans which the master servicer would have been entitled to retain if the master
servicer had continued to act as such, except for those amounts due
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the master servicer as reimbursement for advances previously made or expenses
previously incurred. Notwithstanding the above, the trustee may, if it shall be
unwilling so to act, or shall, if it is legally unable so to act, appoint, or
petition a court of competent jurisdiction to appoint, any established housing
and home finance institution which is a Fannie Mae or Freddie Mac approved
servicer as the successor to the master servicer under the pooling and servicing
agreement in the assumption of all or any part of the responsibilities, duties
or liabilities of the master servicer under the pooling and servicing agreement.
Pending appointment of a successor to the master servicer under the pooling and
servicing agreement, the trustee shall act in such capacity as provided under
the pooling and servicing agreement. In connection with such appointment and
assumption, the trustee may make such arrangements for the compensation of such
successor out of payments on mortgage loans as it and such successor shall
agree; PROVIDED, HOWEVER, that no such compensation shall be in excess of that
permitted the trustee as provided above. No assurance can be given that
termination of the rights and obligations of the master servicer under the
pooling and servicing agreement would not adversely affect the servicing of the
mortgage loans, including the delinquency experience of the mortgage loans. The
costs and expenses of the trustee in connection with the termination of the
master servicer, appointment of a successor master servicer and the transfer of
servicing, if applicable, to the extent not paid by the terminated master
servicer, will be paid by the trust fund.
No certificateholder, solely by virtue of such holder's status as a
certificateholder, will have any right under the pooling and servicing agreement
to institute any proceeding with respect thereto, unless such holder previously
has given to the trustee written notice of the continuation of an event of
default and unless the holders of certificates having not less than 25% of the
voting rights evidenced by the certificates have made written request to the
trustee to institute such proceeding in its own name as trustee thereunder and
have offered to the trustee reasonable indemnity and the trustee for 60 days has
neglected or refused to institute any such proceeding.
THE TRUSTEE
Bank One, National Association will be the trustee under the pooling
and servicing agreement. The depositor and the master servicer and their
affiliates may maintain other banking relationships in the ordinary course of
business with the trustee. The trustee's corporate trust office is located at 1
Bank One Plaza, Mail Suite IL1-0126, Chicago, IL 60670, Attention: Bear Stearns
Asset Backed Securities, Inc., Series 2002-AC5 or at such other address as the
trustee may designate from time to time.
THE SECURITIES ADMINISTRATOR
Wells Fargo Bank Minnesota, National Association will be the securities
administrator under the pooling and servicing agreement. The securities
administrator's corporate trust office is located at 9062 Old Annapolis Road,
Columbia, Maryland 21045, Attention: Bear Stearns Asset Backed Securities, Inc.,
Series 2002-AC5 or at such other address as the securities administrator may
designate from time to time.
The securities administrator may resign at any time, in which event the
master servicer will be obligated to appoint a successor securities
administrator. The trustee may also remove the securities administrator if the
securities administrator ceases to be eligible to continue as such under the
pooling and servicing agreement or if the securities administrator becomes
incapable of acting, bankrupt, insolvent or if a receiver or public officer
takes charge of the securities administrator or its property. Upon such
resignation or removal of the securities administrator, the trustee will be
entitled to appoint a successor securities administrator. The securities
administrator may also be removed at any time by the holders of certificates
evidencing ownership of not less than 51% of the trust. In the event that the
certificateholders remove the securities administrator, the compensation of any
successor securities administrator shall be paid by the certificateholders to
the extent that such compensation exceeds the amount agreed to by the trustee
and the securities administrator. Any resignation or removal of the securities
administrator and appointment of a successor securities administrator will not
become effective until acceptance of the appointment by the successor securities
administrator.
S-65
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
GENERAL
The weighted average life of, and the yield to maturity on, each class
of offered certificates generally will be directly related to the rate of
payment of principal, including prepayments, of the mortgage loans in the
related loan group. The actual rate of principal prepayments on pools of
mortgage loans is influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors and has fluctuated considerably in
recent years. In addition, the rate of principal prepayments may differ among
pools of mortgage loans at any time because of specific factors relating to the
mortgage loans in the particular pool, including, among other things, the age of
the mortgage loans, the geographic locations of the properties securing the
loans, the extent of the mortgagors' equity in such properties, and changes in
the mortgagors' housing needs, job transfers and employment status. The rate of
principal prepayments may also be affected by whether the mortgage loans impose
prepayment penalties. All of the mortgage loans in loan group I and certain of
the mortgage loans in loan group III at origination provided for the payment by
the borrower of a prepayment charge on voluntary prepayments typically made
within up to five years from the date of the execution of the related mortgage
note. These penalties, if still applicable and if enforced by the related
servicer would typically discourage prepayments on the mortgage loans. The
holders of the Class XP Certificates will be entitled to all prepayment charges
received on the mortgage loans in loan group I and loan group III. However,
there can be no assurance that the prepayment charges will have any effect on
the prepayment performance of the mortgage loans in loan group I or loan group
III. Investors should conduct their own analysis of the effect, if any, that the
prepayment charges may have on the prepayment performance of the mortgage loans
in loan group I and loan group III.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors who purchase the offered certificates at
prices other than par, even if the average rate of principal prepayments is
consistent with the expectations of investors. In general, the earlier the
payment of principal of the mortgage loans the greater the effect on an
investor's yield to maturity. As a result, 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 reduction or
increase in the rate of principal prepayments.
The mortgage loans were underwritten generally in accordance with
underwriting standards which are primarily intended to provide for single family
"non-conforming" mortgage loans. A "nonconforming" mortgage loan means a
mortgage loan which is ineligible for purchase by Fannie Mae or Freddie Mac due
to either credit characteristics of the related mortgagor or documentation
standards in connection with the underwriting of the related mortgage loan that
do not meet the Fannie Mae or Freddie Mac underwriting guidelines for "A" credit
mortgagors. These documentation standards may include mortgagors who provide
limited or no documentation in connection with the underwriting of the related
mortgage loan. Accordingly, mortgage loans underwritten under the seller's
non-conforming credit underwriting standards are likely to experience rates of
delinquency, foreclosure and loss that are higher, and may be substantially
higher, than mortgage loans originated in accordance with the Fannie Mae or
Freddie Mac underwriting guidelines. Any resulting losses, to the extent not
covered by credit enhancement, may affect the yield to maturity of the offered
certificates.
The principal payment rules require that, after the senior certificates
related to one loan group are no longer outstanding, principal payments from the
related loan group shall be allocated to the senior certificates relating to the
other loan group. To the extent a class of senior certificates receives such
additional amounts, the weighted average life thereof can be expected to
shorten.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS" AND
" -- CROSS- COLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT.
The yields to maturity of the offered certificates and, in particular
the subordinated certificates, in the order of payment priority, will be
progressively more sensitive to the rate, timing and severity of
S-66
Realized Losses on the mortgage loans. If an Applied Realized Loss Amount is
allocated to a Class of subordinated certificates, that class will thereafter
accrue interest on a reduced Certificate Principal Balance.
YIELD CONSIDERATIONS FOR SPECIFIC CLASSES
CLASS I-A1 CERTIFICATES AND CLASS I-A2 CERTIFICATES. Interest payable to the
Class I-A1 Certificates and Class I-A2 Certificates are dependent upon the level
of One-Month LIBOR. Therefore, fluctuations in the level of One-Month LIBOR may
increase or decrease the amount of interest payable on a given distribution date
with respect to each such class. Investors should fully consider the risk that
fluctuations in the level of One-Month LIBOR could result in the failure of
investors in the Class I-A1 Certificates and Class I-A2 Certificates to recover
fully their initial investments. In addition, distributions on the Class I-A2
Certificates are dependent upon the notional balance thereof. The notional
balance of the Class I-A2 Certificates is equal to the certificate principal
balance of the Class I-A1 Certificates. Therefore, the rate and timing of
principal payments (including prepayments) on the mortgage loans may adversely
affect the yield to maturity of an investor in the Class I-A2 Certificates to
the extent applied to the Class 1-A1 Certificates in reduction of the
certificate principal balance thereof. Investors in the Class I-A2 Certificates
should be aware that a faster than expected rate of principal payments
(including prepayments) on the mortgage loans could result in their failure to
fully recover their initial investment.
CLASS I-X, CLASS II-X AND CLASS III-X CERTIFICATES. Because the notional
balances of the Class I-X Certificates, Class II-X and Class III-X Certificates
will be based upon Stated Principal Balances of the Non-Discount Mortgage Loans
in the related loan group, the yield on the Class I-X, Class II-X and Class
III-X Certificates will be sensitive to the rate and timing of principal
payments of the Non- Discount Mortgage Loans in the related loan group. A rapid
rate of principal payments on the Non- Discount Mortgage Loans will have a
materially negative effect on the yield to investors in the such Certificates.
Moreover, as a result of the method of calculation of the Pass-Through Rate of
the Class I- X, Class II-X and Class III-X Certificates, to the extent the
related Non-Discount Mortgage Loans prepay faster than the related Discount
Mortgage Loans, the yield on the Class I-X, and Class II-X and Class III-X
Certificates will be reduced. Investors should fully consider the associated
risks, including the risk that a rapid rate of principal payments could result
in the failure of investors in such Classes of Certificates to recover fully
their initial investments.
CLASS BX CERTIFICATES. Because the notional balance of the Class BX Certificates
will be determined based in part on the aggregate certificate principal balance
of the Class B-1, Class B-2 and Class B-3 Certificates, the yield on the Class
BX Certificates will be sensitive to the rate of defaults on the mortgage loans
and the rate and timing of principal prepayments on the mortgage loans. In the
event that defaults on the mortgage loans result in the allocation of realized
losses to the Class B-1, Class B-2 and Class B-3 Certificates in reduction of
the certificate principal balances thereof, the yield to investors in the Class
BX Certificates will be adversely affected. In addition, in the event that Class
PO Certificate Deferred Payment Writedown Amounts are allocated to the Class
B-1, Class B-2 or Class B- 3 Certificates (as more particularly described
herein) in reduction of the certificate principal balances thereof, the yield to
investors in the Class BX Certificates will be adversely affected. The rate and
timing of principal prepayments on the mortgage loans may adversely affect the
yield to investors in the Class BX Certificates to the extent that such
principal prepayments result in distributions of principal to the Class B-1,
Class B-2 and Class B-3 Certificates in reduction of the certificate principal
balances thereof. Investors should fully consider the associated risks,
including the risk that defaults on the mortgage loans and the receipt of
principal prepayments could result in the failure of investors in the Class BX
Certificates to recover fully their initial investments.
CLASS I-PO, CLASS II-PO AND CLASS III-PO CERTIFICATES. The amounts payable with
respect to the Class I-PO, Class II-PO and Class III-PO Certificates derive only
from principal payments on the related Discount Mortgage Loans. As a result, the
yield on the Class I-PO, Class II-PO Class III-PO Certificates will be adversely
affected by slower than expected payments of principal (including prepayments,
defaults and liquidations) on the related Discount Mortgage Loans. Because the
Discount Mortgage Loans have lower net mortgage rates than the Non-Discount
Mortgage Loans, and because
S-67
the Mortgage Loans with lower net mortgage rates are likely to have lower
Mortgage Rates, the Discount Mortgage Loans are generally likely to prepay at a
slower rate than the Non-Discount Mortgage Loans.
RESIDUAL CERTIFICATES. Holders of the Residual Certificates are entitled to
receive distributions of principal and interest as described herein. However,
holders of such Certificates may have tax liabilities with respect to their
Certificates during the early years of the REMIC that substantially exceed the
principal and interest payable thereon during such periods.
PREPAYMENTS AND YIELDS OF OFFERED CERTIFICATES
The extent to which the yield to maturity of an offered certificate may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a discount or premium and, correspondingly, the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the mortgage loans in the related loan group. In particular, in the
case of an offered certificate purchased at a discount, an investor should
consider the risk that a slower than anticipated rate of principal payments,
liquidations and purchases of the mortgage loans in the related loan group could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of an offered certificate purchased at a premium, the
risk that a faster than anticipated rate of principal payments, liquidations and
purchases of such mortgage loans in the related loan group could result in an
actual yield to such investor that is lower than the anticipated yield.
The effective yield to the holders of the offered certificates (other
than the Class I-A1 Certificates and the Class I-A2 Certificates) will be lower
than the yield otherwise produced by the applicable rate at which interest is
passed through to such holders and the purchase price of such certificates
because monthly distributions will not be payable to such holders until the 25th
day or, if such day is not a business day, the following business day, of the
month following the month in which interest accrues on the related mortgage
loans, without any additional distribution of interest or earnings thereon in
respect of such delay.
All of the mortgage loans bear fixed rates. In general, if prevailing
interest rates fall significantly below the interest rates on the mortgage
loans, the mortgage loans are likely to be subject to higher prepayment rates
than if prevailing rates remain at or above the interest rates on the mortgage
loans. Conversely, if prevailing interest rates rise appreciably above the
interest rates on the mortgage loans, the mortgage loans are likely to
experience a lower prepayment rate than if prevailing rates remain at or below
the interest rates on such mortgage loans.
The "last scheduled distribution date" for each class of the offered
certificates is November 25, 2032, which is the distribution date in the month
following the latest maturing mortgage loan. The actual final distribution date
with respect to each Class of offered certificates could occur significantly
earlier than its last scheduled distribution date because
o prepayments are likely to occur which will be applied to the
payment of the certificate principal balances thereof and
o the master servicer may purchase all the mortgage loans when
the outstanding Stated Principal Balances thereof has declined
to 10% or less of the cut-off date principal balance of the
mortgage loans and may purchase mortgage loans in certain
other circumstances as described herein.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement,
which we refer to as the prepayment model, is a prepayment assumption which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans similar to the
mortgage loans in each loan group for the life of such mortgage loans. A 100%
prepayment assumption assumes that the outstanding principal balance of a pool
of mortgage loans prepays at a constant prepayment rate ("CPR") of 6% in the
first month of the life of such pool, such rate increasing by an additional
S-68
approximate 1.27% CPR (precisely 14/11 percent) each month thereafter through
the twelfth month of the life of such pool, and such rate thereafter remaining
constant at 20% CPR for the remainder of the life of such pool.
There is no assurance, however, that prepayments on the mortgage loans
will conform to any level of the prepayment model, and no representation is made
that the mortgage loans will prepay at the prepayment rates shown or any other
prepayment rate. The rate of principal payments on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates. Other factors affecting prepayment of
mortgage loans include changes in obligors' housing needs, job transfers and
unemployment. In the case of mortgage loans in general, if prevailing interest
rates fall significantly below the interest rates on such mortgage loans, the
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above the rates borne by such mortgage
loans. Conversely, if prevailing interest rates rise above the interest rates on
such mortgage loans, the rate of prepayment would be expected to decrease.
The following tables have been prepared on the basis of the following
assumptions, which we refer to, collectively, as modeling assumptions:
o the mortgage loans in the respective loan groups prepay at the
indicated percentages of the prepayment assumption;
o distributions on the offered certificates are received, in
cash, on the 25th day of each month, commencing in November
2002, in accordance with the payment priorities defined
herein;
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the mortgagors of
principal and interest on the mortgage loans occur;
o scheduled payments are assumed to be received on the first day
of each month commencing in November 2002, there are no
shortfalls in the payment of interest to certificateholders
and prepayments represent payment in full of individual
mortgage loans and are assumed to be received on the last day
of each month, commencing in October 2002, and include 30
days, interest thereon;
o the closing date for the Certificates is October 30, 2002;
o the master servicer does not exercise its right to purchase
the assets of the trust fund on the optional termination date;
and
o each loan group consists of mortgage loans having the
approximate characteristics described below:
S-69
Original Remaining Remaining
Amortization Amortization Balloon
Loan Current Gross Mortgage Net Mortgage Term Term Age Term
Group Balance ($) Rate (%) Rate (%) (in months) (in months) (in months) (in months)
----- ----------- -------- -------- ----------- ----------- ----------- -----------
1 20,206,815.00 8.060996023963 7.790996023963 357 354 3 n/a
1 22,137,365.11 7.630392885861 7.360392885861 357 354 3 n/a
1 8,865,460.06 7.993569518078 7.723569518078 355 352 3 n/a
1 1,201,797.29 8.297702856569 8.027702856569 359 357 2 178
1 3,759,149.17 8.321184625602 8.051184625602 359 357 2 178
1 1,012,552.99 8.147517670902 7.877517670902 360 358 2 178
1 8,012,207.93 9.404867156924 9.134867156924 360 357 3 n/a
1 8,874,176.65 9.302068036903 9.032068036903 360 357 3 n/a
1 5,774,494.92 9.407076173105 9.137076173105 360 357 3 n/a
1 485,991.85 9.445473699816 9.175473699816 338 335 3 n/a
1 1,210,040.89 9.211769059184 8.941769059184 360 358 2 178
1 2,714,422.92 9.401160755285 9.131160755285 360 357 3 177
1 758,037.37 8.992496699404 8.722496699404 360 358 2 178
1 42,695.77 10.25000000000 9.980000000000 360 357 3 177
1 100,060.58 8.625000000000 8.355000000000 360 356 4 n/a
2 10,669,337.53 6.690738823805 6.420738823805 334 332 2 n/a
2 204,817,834.83 7.809202287902 7.464387633371 354 351 3 n/a
2 5,980,042.49 7.545502922296 7.275502922296 360 357 3 177
3 680,618.65 6.661813017466 6.391813017466 347 345 2 n/a
3 102,781,984.90 8.362752708316 7.803108300802 355 352 3 n/a
3 532,138.40 8.370529582624 8.100529582624 360 357 3 177
3 282,005.01 8.623585747643 8.353585747643 360 356 4 n/a
3 533,863.39 8.985318252484 8.715318252484 360 357 3 177
3 728,361.53 8.681381389336 8.411381389336 360 357 3 n/a
3 31,436.16 8.000000000000 7.730000000000 360 357 3 n/a
S-70
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS I-A1
----------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 99 90 77 63 54
October 25, 2004.................... 98 79 54 33 21
October 25, 2005.................... 97 70 38 16 5
October 25, 2006.................... 96 61 25 5 0
October 25, 2007.................... 95 53 16 0 0
October 25, 2008.................... 94 47 10 0 0
October 25, 2009.................... 93 41 6 0 0
October 25, 2010.................... 91 36 4 0 0
October 25, 2011.................... 90 31 3 0 0
October 25, 2012.................... 88 28 2 0 0
October 25, 2013.................... 86 24 1 0 0
October 25, 2014.................... 84 22 1 0 0
October 25, 2015.................... 82 19 1 0 0
October 25, 2016.................... 80 16 1 0 0
October 25, 2017.................... 67 12 * 0 0
October 25, 2018.................... 64 11 * 0 0
October 25, 2019.................... 62 9 * 0 0
October 25, 2020.................... 59 8 * 0 0
October 25, 2021.................... 56 7 * 0 0
October 25, 2022.................... 52 6 * 0 0
October 25, 2023.................... 48 5 * 0 0
October 25, 2024.................... 44 4 * 0 0
October 25, 2025.................... 40 3 * 0 0
October 25, 2026.................... 35 3 * 0 0
October 25, 2027.................... 30 2 * 0 0
October 25, 2028.................... 24 1 * 0 0
October 25, 2029.................... 18 1 * 0 0
October 25, 2030.................... 12 1 * 0 0
October 25, 2031.................... 4 * * 0 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 19.45 7.43 2.92 1.68 1.31
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-71
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS II-A1
-----------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 99 90 77 63 54
October 25, 2004.................... 98 79 54 33 21
October 25, 2005.................... 97 69 37 15 5
October 25, 2006.................... 96 60 25 4 0
October 25, 2007.................... 94 52 15 0 0
October 25, 2008.................... 93 46 9 0 0
October 25, 2009.................... 91 40 5 0 0
October 25, 2010.................... 90 35 3 0 0
October 25, 2011.................... 88 30 1 0 0
October 25, 2012.................... 86 26 1 0 0
October 25, 2013.................... 84 23 * 0 0
October 25, 2014.................... 82 20 0 0 0
October 25, 2015.................... 79 17 0 0 0
October 25, 2016.................... 77 15 0 0 0
October 25, 2017.................... 72 12 0 0 0
October 25, 2018.................... 69 10 0 0 0
October 25, 2019.................... 66 9 0 0 0
October 25, 2020.................... 62 7 0 0 0
October 25, 2021.................... 59 6 0 0 0
October 25, 2022.................... 55 5 0 0 0
October 25, 2023.................... 50 4 0 0 0
October 25, 2024.................... 45 3 0 0 0
October 25, 2025.................... 40 2 0 0 0
October 25, 2026.................... 35 1 0 0 0
October 25, 2027.................... 29 1 0 0 0
October 25, 2028.................... 23 0 0 0 0
October 25, 2029.................... 16 0 0 0 0
October 25, 2030.................... 8 0 0 0 0
October 25, 2031.................... 1 0 0 0 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 19.37 7.16 2.79 1.66 1.29
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-72
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS II-A2
-----------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 100 100 100 100 100
October 25, 2004.................... 100 100 100 100 100
October 25, 2005.................... 100 100 100 100 100
October 25, 2006.................... 100 100 100 100 0
October 25, 2007.................... 100 100 100 0 0
October 25, 2008.................... 100 100 100 0 0
October 25, 2009.................... 100 100 100 0 0
October 25, 2010.................... 100 100 100 0 0
October 25, 2011.................... 100 100 100 0 0
October 25, 2012.................... 100 100 100 0 0
October 25, 2013.................... 100 100 100 0 0
October 25, 2014.................... 100 100 78 0 0
October 25, 2015.................... 100 100 57 0 0
October 25, 2016.................... 100 100 41 0 0
October 25, 2017.................... 100 100 29 0 0
October 25, 2018.................... 100 100 21 0 0
October 25, 2019.................... 100 100 15 0 0
October 25, 2020.................... 100 100 11 0 0
October 25, 2021.................... 100 100 8 0 0
October 25, 2022.................... 100 100 5 0 0
October 25, 2023.................... 100 100 4 0 0
October 25, 2024.................... 100 100 2 0 0
October 25, 2025.................... 100 100 2 0 0
October 25, 2026.................... 100 100 1 0 0
October 25, 2027.................... 100 100 1 0 0
October 25, 2028.................... 100 98 * 0 0
October 25, 2029.................... 100 63 * 0 0
October 25, 2030.................... 100 32 * 0 0
October 25, 2031.................... 100 6 * 0 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 29.19 27.50 14.28 4.78 3.60
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-73
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS II-A3
-----------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 99 90 77 63 54
October 25, 2004.................... 98 79 54 33 21
October 25, 2005.................... 97 69 37 15 5
October 25, 2006.................... 96 60 25 4 0
October 25, 2007.................... 94 52 15 0 0
October 25, 2008.................... 93 46 9 0 0
October 25, 2009.................... 91 40 5 0 0
October 25, 2010.................... 90 35 3 0 0
October 25, 2011.................... 88 30 1 0 0
October 25, 2012.................... 86 26 1 0 0
October 25, 2013.................... 84 23 * 0 0
October 25, 2014.................... 82 20 0 0 0
October 25, 2015.................... 79 17 0 0 0
October 25, 2016.................... 77 15 0 0 0
October 25, 2017.................... 72 12 0 0 0
October 25, 2018.................... 69 10 0 0 0
October 25, 2019.................... 66 9 0 0 0
October 25, 2020.................... 62 7 0 0 0
October 25, 2021.................... 59 6 0 0 0
October 25, 2022.................... 55 5 0 0 0
October 25, 2023.................... 50 4 0 0 0
October 25, 2024.................... 45 3 0 0 0
October 25, 2025.................... 40 2 0 0 0
October 25, 2026.................... 35 1 0 0 0
October 25, 2027.................... 29 1 0 0 0
October 25, 2028.................... 23 0 0 0 0
October 25, 2029.................... 16 0 0 0 0
October 25, 2030.................... 8 0 0 0 0
October 25, 2031.................... 1 0 0 0 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 19.37 7.16 2.79 1.66 1.29
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-74
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS II-A4
-----------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 99 88 72 56 45
October 25, 2004.................... 98 75 45 20 6
October 25, 2005.................... 96 63 25 0 0
October 25, 2006.................... 95 53 10 0 0
October 25, 2007.................... 93 43 0 0 0
October 25, 2008.................... 92 35 0 0 0
October 25, 2009.................... 90 28 0 0 0
October 25, 2010.................... 88 22 0 0 0
October 25, 2011.................... 86 17 0 0 0
October 25, 2012.................... 83 12 0 0 0
October 25, 2013.................... 81 8 0 0 0
October 25, 2014.................... 78 5 0 0 0
October 25, 2015.................... 75 2 0 0 0
October 25, 2016.................... 72 0 0 0 0
October 25, 2017.................... 67 0 0 0 0
October 25, 2018.................... 63 0 0 0 0
October 25, 2019.................... 59 0 0 0 0
October 25, 2020.................... 55 0 0 0 0
October 25, 2021.................... 51 0 0 0 0
October 25, 2022.................... 46 0 0 0 0
October 25, 2023.................... 41 0 0 0 0
October 25, 2024.................... 35 0 0 0 0
October 25, 2025.................... 29 0 0 0 0
October 25, 2026.................... 22 0 0 0 0
October 25, 2027.................... 15 0 0 0 0
October 25, 2028.................... 8 0 0 0 0
October 25, 2029.................... 0 0 0 0 0
October 25, 2030.................... 0 0 0 0 0
October 25, 2031.................... 0 0 0 0 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 17.71 5.05 2.04 1.27 1.01
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-75
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS II-A5
-----------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 100 100 100 100 100
October 25, 2004.................... 100 100 100 100 100
October 25, 2005.................... 100 100 100 92 28
October 25, 2006.................... 100 100 100 26 0
October 25, 2007.................... 100 100 96 0 0
October 25, 2008.................... 100 100 58 0 0
October 25, 2009.................... 100 100 33 0 0
October 25, 2010.................... 100 100 18 0 0
October 25, 2011.................... 100 100 9 0 0
October 25, 2012.................... 100 100 4 0 0
October 25, 2013.................... 100 100 1 0 0
October 25, 2014.................... 100 100 0 0 0
October 25, 2015.................... 100 100 0 0 0
October 25, 2016.................... 100 93 0 0 0
October 25, 2017.................... 100 77 0 0 0
October 25, 2018.................... 100 65 0 0 0
October 25, 2019.................... 100 55 0 0 0
October 25, 2020.................... 100 45 0 0 0
October 25, 2021.................... 100 37 0 0 0
October 25, 2022.................... 100 30 0 0 0
October 25, 2023.................... 100 23 0 0 0
October 25, 2024.................... 100 17 0 0 0
October 25, 2025.................... 100 12 0 0 0
October 25, 2026.................... 100 8 0 0 0
October 25, 2027.................... 100 3 0 0 0
October 25, 2028.................... 100 0 0 0 0
October 25, 2029.................... 97 0 0 0 0
October 25, 2030.................... 51 0 0 0 0
October 25, 2031.................... 4 0 0 0 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 28.05 18.20 6.71 3.66 2.79
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-76
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS III-A
-----------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 99 90 77 63 54
October 25, 2004.................... 98 80 55 34 22
October 25, 2005.................... 97 70 38 16 6
October 25, 2006.................... 96 61 26 6 0
October 25, 2007.................... 95 53 17 0 0
October 25, 2008.................... 94 47 11 0 0
October 25, 2009.................... 92 41 7 0 0
October 25, 2010.................... 91 36 4 0 0
October 25, 2011.................... 89 32 3 0 0
October 25, 2012.................... 88 28 2 0 0
October 25, 2013.................... 86 25 2 0 0
October 25, 2014.................... 84 22 1 0 0
October 25, 2015.................... 81 19 1 0 0
October 25, 2016.................... 79 17 1 0 0
October 25, 2017.................... 76 14 * 0 0
October 25, 2018.................... 73 12 * 0 0
October 25, 2019.................... 70 11 * 0 0
October 25, 2020.................... 66 9 * 0 0
October 25, 2021.................... 63 8 * 0 0
October 25, 2022.................... 59 7 * 0 0
October 25, 2023.................... 54 5 * 0 0
October 25, 2024.................... 50 4 * 0 0
October 25, 2025.................... 44 4 * 0 0
October 25, 2026.................... 39 3 * 0 0
October 25, 2027.................... 33 2 * 0 0
October 25, 2028.................... 26 2 * 0 0
October 25, 2029.................... 19 1 * 0 0
October 25, 2030.................... 11 1 * 0 0
October 25, 2031.................... 3 * * 0 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 20.08 7.54 2.96 1.70 1.33
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-77
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS I-PO
----------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 99 91 79 67 58
October 25, 2004.................... 98 81 59 40 29
October 25, 2005.................... 97 72 44 24 14
October 25, 2006.................... 96 64 32 14 7
October 25, 2007.................... 95 57 24 8 3
October 25, 2008.................... 93 51 18 5 2
October 25, 2009.................... 92 45 13 3 1
October 25, 2010.................... 90 40 10 2 *
October 25, 2011.................... 89 35 7 1 *
October 25, 2012.................... 87 31 5 1 *
October 25, 2013.................... 85 27 4 * *
October 25, 2014.................... 83 24 3 * *
October 25, 2015.................... 80 21 2 * *
October 25, 2016.................... 78 18 1 * *
October 25, 2017.................... 71 15 1 * *
October 25, 2018.................... 68 13 1 * *
October 25, 2019.................... 65 11 1 * *
October 25, 2020.................... 62 9 * * *
October 25, 2021.................... 58 8 * * *
October 25, 2022.................... 55 7 * * *
October 25, 2023.................... 51 6 * * *
October 25, 2024.................... 46 5 * * *
October 25, 2025.................... 41 4 * * *
October 25, 2026.................... 36 3 * * *
October 25, 2027.................... 31 2 * * *
October 25, 2028.................... 25 2 * * *
October 25, 2029.................... 18 1 * * *
October 25, 2030.................... 11 1 * * 0
October 25, 2031.................... 4 * * * 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 19.59 7.96 3.55 2.15 1.67
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-78
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS II-PO
-----------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 99 91 80 68 60
October 25, 2004.................... 97 81 59 40 30
October 25, 2005.................... 96 72 44 24 15
October 25, 2006.................... 94 63 32 14 7
October 25, 2007.................... 93 56 24 8 4
October 25, 2008.................... 91 50 17 5 2
October 25, 2009.................... 89 44 13 3 1
October 25, 2010.................... 87 38 9 2 *
October 25, 2011.................... 85 34 7 1 *
October 25, 2012.................... 82 29 5 1 *
October 25, 2013.................... 80 26 4 * *
October 25, 2014.................... 77 22 3 * *
October 25, 2015.................... 74 19 2 * *
October 25, 2016.................... 71 17 1 * *
October 25, 2017.................... 68 14 1 * *
October 25, 2018.................... 64 12 1 * *
October 25, 2019.................... 60 10 * * *
October 25, 2020.................... 56 9 * * *
October 25, 2021.................... 52 7 * * *
October 25, 2022.................... 48 6 * * *
October 25, 2023.................... 43 5 * * *
October 25, 2024.................... 37 4 * * *
October 25, 2025.................... 32 3 * * 0
October 25, 2026.................... 26 2 * * 0
October 25, 2027.................... 19 1 * * 0
October 25, 2028.................... 12 1 * * 0
October 25, 2029.................... 5 * * 0 0
October 25, 2030.................... 0 0 * 0 0
October 25, 2031.................... 0 0 * 0 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 17.89 7.69 3.54 2.18 1.70
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-79
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS III-PO
------------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 99 91 80 68 60
October 25, 2004.................... 98 81 59 40 30
October 25, 2005.................... 96 72 44 24 15
October 25, 2006.................... 95 64 32 14 7
October 25, 2007.................... 93 56 24 8 4
October 25, 2008.................... 91 50 18 5 2
October 25, 2009.................... 90 44 13 3 1
October 25, 2010.................... 88 39 9 2 *
October 25, 2011.................... 86 34 7 1 *
October 25, 2012.................... 84 30 5 1 *
October 25, 2013.................... 81 26 4 * *
October 25, 2014.................... 79 23 3 * *
October 25, 2015.................... 76 20 2 * *
October 25, 2016.................... 73 17 1 * *
October 25, 2017.................... 70 15 1 * *
October 25, 2018.................... 67 13 1 * *
October 25, 2019.................... 64 11 1 * *
October 25, 2020.................... 60 9 * * *
October 25, 2021.................... 56 8 * * *
October 25, 2022.................... 52 6 * * 0
October 25, 2023.................... 47 5 * * 0
October 25, 2024.................... 42 4 * * 0
October 25, 2025.................... 37 3 * * 0
October 25, 2026.................... 32 3 * * 0
October 25, 2027.................... 26 2 * 0 0
October 25, 2028.................... 20 1 * 0 0
October 25, 2029.................... 13 1 * 0 0
October 25, 2030.................... 6 * * 0 0
October 25, 2031.................... 0 0 * 0 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 18.72 7.82 3.56 2.19 1.70
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-80
PERCENT OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS B-1, CLASS B-2 AND CLASS B-3
----------------------------------
DISTRIBUTION DATE 0% 50% 125% 200% 250%
- ----------------- -- --- ---- ---- ----
Initial Percentage.................. 100 100 100 100 100
October 25, 2003.................... 99 99 99 99 99
October 25, 2004.................... 98 98 98 98 98
October 25, 2005.................... 97 97 97 97 97
October 25, 2006.................... 96 96 96 96 75
October 25, 2007.................... 95 95 95 88 37
October 25, 2008.................... 93 91 86 52 18
October 25, 2009.................... 92 86 75 31 9
October 25, 2010.................... 90 79 62 18 4
October 25, 2011.................... 89 71 49 11 2
October 25, 2012.................... 87 63 36 6 1
October 25, 2013.................... 85 55 26 4 1
October 25, 2014.................... 83 48 19 2 *
October 25, 2015.................... 81 42 14 1 *
October 25, 2016.................... 78 37 10 1 *
October 25, 2017.................... 72 31 7 * *
October 25, 2018.................... 69 27 5 * *
October 25, 2019.................... 66 23 4 * *
October 25, 2020.................... 63 20 3 * *
October 25, 2021.................... 59 17 2 * *
October 25, 2022.................... 55 14 1 * *
October 25, 2023.................... 51 12 1 * *
October 25, 2024.................... 47 10 1 * *
October 25, 2025.................... 42 8 * * *
October 25, 2026.................... 36 6 * * *
October 25, 2027.................... 31 5 * * *
October 25, 2028.................... 24 3 * * *
October 25, 2029.................... 18 2 * * *
October 25, 2030.................... 10 1 * * *
October 25, 2031.................... 3 * * * 0
October 25, 2032.................... 0 0 0 0 0
Weighted Average Life (in years)(1) 19.64 12.86 9.38 6.57 4.98
_________________
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective certificate principal balance for such class of offered
certificates.
S-81
CLASS I-A2 CERTIFICATES YIELD CONSIDERATIONS
The yield to investors on the Class I-A2 Certificates will be sensitive
to fluctuations in the level of One-Month LIBOR. The pass-through rate on the
Class I-A2 Certificates will vary inversely with One-Month LIBOR. The
pass-through rate on the Class I-A2 Certificates is subject to a maximum and a
minimum pass-through rate, and is therefore limited despite changes in One-Month
LIBOR in some circumstances. Changes in the level of One-Month LIBOR may not
correlate with changes in prevailing mortgage interest rates or changes in other
indices. It is possible that lower prevailing mortgage interest rates, which
might be expected to result in faster prepayments, could occur concurrently with
an increased level of One-Month LIBOR. Investors in the Class I-A2 Certificates
should also fully consider the effect on the yield on the Class I-A2
Certificates of changes in the level of One-Month LIBOR.
In addition, the yield to investors on the Class I-A2 Certificates will
be extremely sensitive to the rate and timing of principal payments (including
prepayments) on the mortgage loans, and that rate may fluctuate significantly
over time. The Notional Balance of the Class I-A2 Certificates is equal to the
Certificate Principal Balance of the Class I-A1 Certificates. Therefore, the
allocation of principal payments (including prepayments) on the related mortgage
loans to the Class I-A1 Certificates in reduction of the Certificate Principal
Balance thereof will reduce the Notional Balance of the Class I-A2 Certificates
and result in a reduction in the amount of interest payable to the Class I-A2
Certificates on subsequent Distribution Dates. Investors in the Class I-A2
Certificates should be aware that a faster than expected rate of principal
payments (including prepayments) on the related mortgage loans will have an
adverse effect on the yield to investors in the Class I-A2 Certificates and
could result in their failure to fully recover their initial investments.
To illustrate the significance of changes in the level of One-Month
LIBOR and prepayments on the yield to maturity on the Class I-A2 Certificates,
the following table indicates the approximate pre-tax yield to maturity on a
corporate bond equivalent basis under the different constant percentages of the
Prepayment Assumption and varying levels of One-Month LIBOR indicated. Because
the rate of distribution of principal on the certificates will be related to the
actual amortization, (including prepayments) of the mortgage loans, which will
include mortgage loans that have remaining terms to maturity shorter or longer
than assumed and mortgage rates higher or lower than assumed, the pre-tax yield
to maturity on the Class I-A2 Certificates is likely to differ from those shown
in the following table, even if all the mortgage loans prepay at constant
percentages of the Prepayment Assumption and the level of One-Month LIBOR and
the weighted average remaining term to maturity and the weighted average
mortgage rate of the mortgage loans are as assumed. Any differences between such
assumptions and the actual characteristics and performance of the mortgage loans
and of the certificates may result in yield being different from those shown in
the table. Discrepancies between assumed and actual characteristics and
performance underscore the hypothetical nature of the table, which is provided
only to give a general sense of the sensitivity of yield in varying prepayment
scenarios and different levels of One-Month LIBOR. In addition, it is highly
unlikely that the mortgage loans will prepay at a constant level of the
Prepayment Assumption until maturity, that all of the mortgage loans will prepay
at the same rate, or that the level of One-Month LIBOR will remain constant. The
timing of changes in the rate of prepayments may significantly affect the actual
yield to maturity to an investor, even if the average rate of principal
prepayments is consistent with an investor's expectation. In general, the
earlier the payment of principal of the mortgage loans, the greater the effect
on an investor's yield to maturity. As a result, 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 certificates will not be equally offset by a subsequent like
reduction (or increase) in the rate of principal prepayments.
The table set forth below is based on the structuring assumptions
(including the assumptions regarding the characteristics and performance of the
mortgage loans and the certificates, which may differ from the actual
characteristics and performance thereof), and assuming further that (i) on each
LIBOR rate adjustment date, One-Month LIBOR will be at the level shown, (ii) the
purchase price of the Class I-A2 Certificates is approximately $7,922,992 which
includes accrued interest and (iii) the
S-82
initial pass-through rate on the Class I-A2 Certificates is equal to 6.13%.
There can be no assurance that the mortgage loans will have the assumed
characteristics, will prepay at any of the rates shown in the table or at any
other particular rate, that the pre-tax yield to maturity on the Class I-A2
Certificates will correspond to any of the pre-tax yields to maturity shown
herein, that the level of One-Month LIBOR will correspond to the levels shown in
the table or that the purchase price of the Class I-A2 Certificates will be as
assumed. In addition to any other factors an investor may deem material, each
investor must make its own decision as to the appropriate prepayment assumption
to be used and the appropriate levels of One-Month LIBOR to be assumed in
deciding whether or not to purchase a Class I-A2 Certificate.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS I-A2 CERTIFICATES TO PREPAYMENTS AND ONE-MONTH LIBOR
PERCENTAGE OF PREPAYMENT ASSUMPTION
One-Month LIBOR 0% 50% 125% 200% 250%
--------------- -- --- ---- ---- ----
1.8200% 61.43% 48.26% 25.24% (4.86)% (27.06)%
3.8200% 39.92% 27.35% 4.34% (28.48) (51.15)%
5.8200% 19.00% 7.15% (15.73)% (55.83) (79.22)%
7.9500% and higher * * * * *
_____________________
*These yields represent a loss of substantially all of the assumed purchase
price for the Class I-A2 Certificates.
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class I-A2 Certificates, would
cause the discounted present value of the assumed stream of cash flows to equal
the assumed purchase price for those certificates. Accrued interest is included
in the assumed purchase price and is used in computing the corporate bond
equivalent yields shown. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Class I-A2 Certificates, and thus do not reflect the
return on any investment in the Class I-A2 Certificates when any reinvestment
rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the mortgage loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Class
I-A2 Certificates is likely to differ from those shown in the table, even if all
of the mortgage loans prepay at the indicated constant percentages of the
Prepayment Assumption over any given time period or over the entire life of the
Class I-A2 Certificates.
There can be no assurance that the mortgage loans will prepay at any
particular rate or that the yield on the Class I-A2 Certificates will conform to
the yields described herein. Moreover, the various remaining terms to maturity
and mortgage rates of the mortgage loans could produce slower or faster
principal distributions than indicated in the preceding table at the various
constant percentages of the Prepayment Assumption specified, even if the
weighted average remaining term to maturity and weighted average mortgage rate
of the mortgage loans are as assumed. Investors are urged to make their
investment decisions based on their determinations as to anticipated rates of
prepayment under a variety of scenarios. Investors in the Class I-A2
Certificates should fully consider the risk that a rapid rate of prepayments on
the mortgage loans could result in the failure of such investors to fully
recover their investments.
S-83
CLASS I-X, CLASS II-X, CLASS III-X, CLASS BX, CLASS I-PO, CLASS II-PO AND CLASS
III-PO CERTIFICATE YIELD CONSIDERATIONS
The yield to maturity on the Class I-X Certificates will be extremely
sensitive to both the timing of receipt of prepayments and the overall rate of
principal prepayments and defaults on the Non-Discount Mortgage Loans in loan
group I, which rate may fluctuate significantly over time. Investors in the
Class I-X Certificates should fully consider the risk that a rapid rate of
prepayments on the Non-Discount Mortgage Loans in loan group I could result in
the failure of such investors to fully recover their investments.
The yield to maturity on the Class II-X Certificates will be extremely
sensitive to both the timing of receipt of prepayments and the overall rate of
principal prepayments and defaults on the Non-Discount Mortgage Loans in loan
group II, which rate may fluctuate significantly over time. Investors in the
Class II-X Certificates should fully consider the risk that a rapid rate of
prepayments on the Non-Discount Mortgage Loans in loan group II could result in
the failure of such investors to fully recover their investments.
The yield to maturity on the Class III-X Certificates will be extremely
sensitive to both the timing of receipt of prepayments and the overall rate of
principal prepayments and defaults on the Non-Discount Mortgage Loans in loan
group III, which rate may fluctuate significantly over time. Investors in the
Class III-X Certificates should fully consider the risk that a rapid rate of
prepayments on the Non-Discount Mortgage Loans in loan group III could result in
the failure of such investors to fully recover their investments.
The yield to maturity on the Class BX Certificates will be extremely
sensitive to both the timing and receipt of prepayments and the overall rate of
principal prepayments and defaults on the mortgage loans. The rate and timing of
principal prepayments may adversely affect the yield to investors in the Class
BX Certificates to the extent such prepayments result in greater distributions
of principal to the Class B-1, Class B-2 and Class B-3 Certificates in reduction
of the certificate principal balances thereof on distribution dates immediately
following the receipt of such principal prepayments. Additionally, the rate of
defaults on the mortgage loans may adversely affect the yield to such investors
to the extent that such defaults result in the allocation of realized losses to
the Class B-1, Class B-2 or Class B-3 Certificates in reduction of the
certificate principal balances thereof. Investors in the Class BX Certificates
should fully consider the risk that principal prepayments and defaults on the
mortgage loans could result in the failure of such investors to fully recover
their investments.
The yield on the Class I-PO Certificates will be adversely affected by
slower than expected payments of principal (including prepayments, defaults,
liquidations and purchases of mortgage loans in the related loan group due to a
breach of a representation and warranty) on the Discount Mortgage Loans in loan
group I.
The yield on the Class II-PO Certificates will be adversely affected by
slower than expected payments of principal (including prepayments, defaults,
liquidations and purchases of mortgage loans in the related loan group due to a
breach of a representation and warranty) on the Discount Mortgage Loans in loan
group II.
The yield on the Class III-PO Certificates will be adversely affected by
slower than expected payments of principal (including prepayments, defaults,
liquidations and purchases of mortgage loans in the related loan group due to a
breach of a representation and warranty) on the Discount Mortgage Loans in loan
group III.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class I-X, Class II-X, Class III-X, Class BX, Class I-PO, Class
II-PO and Class III-PO Certificates to various constant rates of prepayment on
the related mortgage loans by projecting the monthly aggregate payments on the
Class I-X, Class II-X, Class III-X, Class BX, Class I-PO, Class II-PO and Class
III- PO Certificates and computing the corresponding pre-tax yields to maturity
on a corporate bond
S-84
equivalent basis, based on the structuring assumptions including the assumptions
regarding the characteristics and performance of such mortgage loans which
differ from the actual characteristics and performance thereof and assuming the
aggregate purchase prices set forth below. Any differences between such
assumptions and the actual characteristics and performance of the related
mortgage loans and of such Certificates may result in yields being different
from those shown in such tables. Discrepancies between assumed and actual
characteristics and performance underscore the hypothetical nature of the
tables, which are provided only to give a general sense of the sensitivity of
yields in varying prepayment scenarios.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS I-X CERTIFICATES TO PREPAYMENTS
PERCENTAGE OF PREPAYMENT ASSUMPTION
0% 50% 125% 200% 250%
-- --- ---- ---- ----
Assumed Purchase Price
----------------------
$397,743 43.90% 32.62% 14.52% (5.39)% (19.99)%
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS II-X CERTIFICATES TO PREPAYMENTS
PERCENTAGE OF PREPAYMENT ASSUMPTION
0% 50% 125% 200% 250%
-- --- ---- ---- ----
Assumed Purchase Price
----------------------
$3,720,066 60.05% 48.38% 29.67% 9.12% (5.92)%
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS III-X CERTIFICATES TO PREPAYMENTS
PERCENTAGE OF PREPAYMENT ASSUMPTION
0% 50% 125% 200% 250%
-- --- ---- ---- ----
Assumed Purchase Price
----------------------
$2,864,462 52.43% 40.94% 22.51% 2.25% (12.59)%
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS BX CERTIFICATES TO PREPAYMENTS
PERCENTAGE OF PREPAYMENT ASSUMPTION
0% 50% 125% 200% 250%
-- --- ---- ---- ----
Assumed Purchase Price
----------------------
$706,582 15.59% 12.99% 9.92% 2.67% (6.37)%
S-85
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS I-PO CERTIFICATES TO PREPAYMENTS
PERCENTAGE OF PREPAYMENT ASSUMPTION
0% 50% 125% 200% 250%
-- --- ---- ---- ----
Assumed Purchase Price
----------------------
$4,353,318 1.51% 4.05% 9.38% 15.56% 20.17%
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS II-PO CERTIFICATES TO PREPAYMENTS
PERCENTAGE OF PREPAYMENT ASSUMPTION
0% 50% 125% 200% 250%
-- --- ---- ---- ----
Assumed Purchase Price
----------------------
$97,577 1.66% 4.19% 9.37% 15.29% 19.62%
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS III-PO CERTIFICATES TO PREPAYMENTS
PERCENTAGE OF PREPAYMENT ASSUMPTION
0% 50% 125% 200% 250%
-- --- ---- ---- ----
Assumed Purchase Price
----------------------
$8,496 1.58% 4.13% 9.34% 15.26% 19.59%
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class I-X, Class II-X, Class
III-X, Class BX, Class I-PO, Class II-PO and Class III-PO Certificates, would
cause the discounted present value of the assumed stream of cash flows to equal
the assumed purchase price for those certificates listed in the tables (which
includes accrued interest in the case of the Class I-X, Class II-X, Class III-X
and Class BX Certificates). Accrued interest is included in the assumed purchase
price and is used in computing the yields shown. These yields do not take into
account the different interest rates at which investors may be able to reinvest
funds received by them as distributions on the Class I-X, Class II-X, Class
III-X, Class BX, Class I-PO, Class II-PO and Class III-PO Certificates, and thus
do not reflect the return on any investment in the Class I-X, Class II-X, Class
III-X, Class BX, Class I-PO, Class II-PO and Class III-PO Certificates when any
reinvestment rates other than the discount rates set forth in the preceding
tables are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the mortgage loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Class
I-X, Class II-X, Class III-X, Class BX, Class I-PO, Class II-PO and Class III-PO
Certificates is likely to differ from those shown in the tables, even if all of
the mortgage loans prepay at the indicated constant percentages of the
Prepayment Assumption over any given time period or over the entire life of such
certificates. A lower than anticipated rate of principal prepayments on the
Discount Mortgage Loans will have a material adverse effect on the yield to
maturity of the related Class PO Certificates. The rate and timing of principal
prepayments on the Discount Mortgage Loans may differ from the rate and timing
of principal prepayments on the Non-Discount Mortgage Loans. In addition,
because the Discount Mortgage Loans have net mortgage rates that are lower than
the net mortgage rates of the Non-Discount Mortgage Loans, and because mortgage
loans with lower net mortgage rates are likely to have lower mortgage rates, the
Discount Mortgage Loans are generally
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likely to prepay under most circumstances at a lower rate than the
Non-Discount Mortgage Loans. In addition, holders of the Class I-X, Class II-X
and Class III-X Certificates generally have rights to relatively larger portions
of interest payments on related mortgage loans with higher mortgage rates; thus,
the yield on the Class I-X, Class II-X and Class III-X Certificates will be
materially adversely affected to a greater extent than on the other offered
certificates if the related mortgage loans with higher mortgage rates prepay
faster than the related mortgage loans with lower mortgage rates.
There can be no assurance that the mortgage loans will prepay at any
particular rate or that the yield on the Class I-X, Class II-X, Class III-X,
Class BX, Class I-PO, Class II-PO and Class III- PO Certificates will conform to
the yields described herein. Moreover, the various remaining terms to maturity
of the related Mortgage Loans could produce slower or faster principal
distributions than indicated in the preceding table at the various constant
percentages of the Prepayment Assumption specified, even if the weighted average
remaining term to maturity and weighted average mortgage rate of the mortgage
loans are as assumed. Investors are urged to make their investment decisions
based on their determinations as to anticipated rates of prepayment under a
variety of scenarios. Investors in the Class I-X, Class II-X, Class III-X, Class
BX, Class I-PO, Class II-PO and Class III- PO Certificates should fully consider
the risk that a rapid rate of prepayments on the related mortgage loans could
result in the failure of such investors to fully recover their investments.
ADDITIONAL INFORMATION
The depositor intends to file certain additional yield tables and other
computational materials with respect to the certificates with the Securities and
Exchange Commission in a report on Form 8-K. Such tables and materials were
prepared by the underwriter 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 modeling assumptions. Accordingly, such tables
and other materials may not be relevant to or appropriate for investors other
than those specifically requesting them.
USE OF PROCEEDS
The depositor will apply the net proceeds of the sale of the offered
certificates against the purchase price of the mortgage loans.
FEDERAL INCOME TAX CONSEQUENCES
The pooling and servicing agreement provides that multiple REMIC
elections will be made with respect to the assets in the trust fund, creating a
tiered REMIC structure.
Upon the issuance of the offered certificates, Thacher Proffitt & Wood
("Tax Counsel") will deliver its opinion concluding that for federal income tax
purposes and assuming compliance with the pooling and servicing agreement, each
REMIC comprising the trust fund will qualify as a REMIC within the meaning of
Section 860D of the Internal Revenue Code of 1986, as amended (the "Code") and
the certificates, other than the Class R Certificates, will represent regular
interests in a REMIC and the Class R Certificates will each represent the
residual interest in a REMIC.
TAXATION OF REGULAR INTERESTS
A holder of an offered certificate, other than the Class R Certificates
(a "Regular Certificate"), will be treated for federal income tax purposes as
owning a regular interest in a REMIC.
Assuming that a Regular Certificate is held as a "capital asset" within
the meaning of section 1221 of the Code, gain or loss on its disposition should
generally, subject to the limitation described below, be capital gain or loss.
Gain will be treated as ordinary income, however, to the extent such
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gain does not exceed the excess, if any, of (x) the amount that would have been
includable in the holder's gross income with respect to the Regular Certificate
had income thereon accrued at a rate equal to 125% of the applicable federal
rate as defined in Section 1274(d) of the Code determined as of the date of
purchase of the Regular Certificate over (y) the amount actually included in
such holder's income with respect to the Regular Certificate.
Interest on a Regular Certificate must be included in income by a
holder under the accrual method of accounting, regardless of the holder's
regular method of accounting. In addition, a Regular Certificate could be
considered to have been issued with original issue discount, known as OID. The
Class I-A2, Class I-X, Class II-X, Class III-X, Class BX, Class I-PO, Class
II-PO and Class III-PO Certificates will, and the other Classes of Regular
Certificates, depending on their issue price, may, be issued with OID. We refer
you to "Material Federal Income Tax Considerations - Taxation of Debt
Securities" in the prospectus. The prepayment assumption that will be used in
determining the accrual of OID, market discount, or bond premium, if any, will
be a rate equal to, 125% of the Prepayment Assumption as described above. No
representation is made that the mortgage loans will prepay at such rates or at
any other rate. OID must be included in income as it accrues on a constant yield
method, regardless of whether the holder receives currently the cash
attributable to such OID.
TAXATION OF RESIDUAL INTERESTS
The Residual Certificates generally will not be treated as evidences of
indebtedness for federal income tax purposes. Instead, the Residual Certificates
will be treated as residual interests in each REMIC, representing rights to the
taxable income or net loss of each REMIC. Holders of the Residual Certificates
will be required to report and will be taxed on their pro rata share of such
income or loss, and such reporting requirements will continue until there are no
Certificates of any Class outstanding, even though holders of Residual
Certificates previously may have received full payment of any stated interest
and principal. The taxable income of holders of the Residual Certificates
attributable to the Residual Certificates may exceed any principal and interest
payments received by such Certificateholders during the corresponding period,
which would result in a negligible (or even negative) after-tax return, in
certain circumstances. Furthermore, because the tax on income may exceed the
cash distributions with respect to the earlier accrual periods of the term of
the REMIC, Residual Certificateholders should have other sources of funds
sufficient to pay any federal income taxes due in the earlier years of the
REMIC's term as a result of their ownership of the Residual Certificates.
An individual, trust or estate that holds (whether directly or
indirectly through certain pass- through entities) a Residual Certificate may
have significant additional gross income with respect to, but may be subject to
limitations on the deductibility of, the Servicing Fee and other administrative
expenses properly allocable to the REMIC in computing such Certificateholder's
regular tax liability and will not be able to deduct such fees or expenses to
any extent in computing such Certificateholder's alternative minimum tax
liability. Such expenses will be allocated for federal income tax information
reporting purposes entirely to the Residual Certificates. See "Federal Income
Tax Consequences--REMIC Residual Certificates" and "--REMIC Residual
Certificates-- Mismatching of Income and Deductions; Excess Inclusions" in the
Prospectus.
The IRS has issued final REMIC regulations that add to the conditions
described in the Prospectus necessary to assure that a transfer of a
non-economic residual interest would be respected. The additional conditions
require that in order to qualify as a safe harbor transfer of a residual, the
transferee represent that it will not cause the income "to be attributable to a
foreign permanent establishment or fixed base (within the meaning of an
applicable income tax treaty) of the transferee or another U.S. taxpayer" and
either (i) the amount received by the transferee be no less on a present value
basis than the present value of the net tax detriment attributable to holding
the residual interest reduced by the present value of the projected payments to
be received on the residual interest or (ii) the transfer is to a domestic
taxable corporation with specified large amounts of gross and net assets and
that meets certain otfuture transfers will be to taxable domestic corporations
in transactions that qualify for the same her requirements where agreement is
made that all
S-88
"safe harbor" provision. Eligibility for the safe harbor requires, among other
things, that the facts and circumstances known to the transferor at the time of
transfer not indicate to a reasonable person that the taxes with respect to the
residual interest will not be paid, with an unreasonably low cost for the
transfer specifically mentioned as negating eligibility. The regulations
generally apply to transfers of residual interests occurring on or after
February 4, 2000. See "Federal Income Tax Consequences--Transfers of REMIC
Residual Securities--Restrictions on Transfer; Holding by Pass-Through Entities"
in the Prospectus.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions," called the "Prohibited Transactions
Tax." In general, subject to certain specified exceptions, a prohibited
transaction means the disposition of a mortgage loan, the receipt of income from
a source other than a mortgage loan or certain other permitted investments, the
receipt of compensation for services, or gain from the disposition of an asset
purchased with the payments on the mortgage loans for temporary investment
pending distribution on the certificates. It is not anticipated that any REMIC
comprising the trust fund will engage in any prohibited transactions in which it
would recognize a material amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property, called the "Contributions Tax."
None of the REMICs comprising the trust fund will accept contributions that
would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also
be subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable to
real estate investment trusts. "Net income from foreclosure property" generally
means gain from the sale of a foreclosure property held as inventory.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax that
may be imposed on a REMIC arises out of a breach of the master servicer's or the
trustee's obligations, as the case may be, under the pooling and servicing
agreement or in respect of compliance with then applicable law, such tax will be
borne by the master servicer or trustee in either case out of its own funds. In
the event that the master servicer or the trustee, as the case may be, fails to
pay or is not required to pay any such tax as provided above, such tax will be
paid by the relevant REMIC within the trust fund with amounts otherwise
distributable to the holders of Certificates in the manner provided in the
pooling and servicing agreement.
STATUS OF THE OFFERED CERTIFICATES
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code, and as "real estate assets" under Section
856(c)(5)(B) of the Code, generally, in the same proportion that the assets of
the trust fund would be so treated. In addition, to the extent a regular
interest represents real estate assets under Section 856(c)(5)(B) of the Code,
the interest derived from that regular interest would be interest on obligations
secured by interests in real property for purposes of section 856(c)(3) of the
Code.
For further information regarding the federal income tax consequences
of investing in the offered certificates, we refer you to "Material Federal
Income Tax Considerations" in the prospectus.
STATE TAXES
None of the depositor, the master servicer, the trustee or the
securities administrator makes any representations regarding the tax
consequences of purchase, ownership or disposition of the
S-89
offered certificates under the federal tax laws or the tax laws of any state.
Investors considering an investment in the offered certificates should consult
their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the offered certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA from engaging in certain transactions involving
such plan and its assets unless a statutory, regulatory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes certain
excise taxes on prohibited transactions involving "disqualified persons" and
employee benefit plans or other arrangements (including, but not limited to,
individual retirement accounts) described under that section (collectively with
employee benefit plans subject to ERISA, "Plans"). ERISA authorizes the
imposition of civil penalties for prohibited transactions involving Plans not
covered under Section 4975 of the Code. Any Plan fiduciary which proposes to
cause a Plan to acquire offered certificates should consult with its counsel
with respect to the potential consequences under ERISA and the Code of the
Plan's acquisition and ownership of such offered certificates. See "ERISA
Considerations" in the prospectus.
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements. Accordingly,
assets of such plans may be invested in offered certificates without regard to
the ERISA considerations described herein and in the prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in a class of offered certificates should consider,
among other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the mortgage loans.
The U.S. Department of Labor has granted to Bear, Stearns & Co. Inc. an
administrative exemption (Prohibited Transaction Exemption ("PTE") 90-30, as
amended by PTE 97-34 and PTE 2000-58) (the "Exemption") 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, the holding and
the subsequent resale by Plans of certificates in pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption as discussed in "ERISA
Considerations" in the prospectus. The Exemption applies to obligations such as
the mortgage loans in the trust fund which have loan-to-value ratios not in
excess of 100 percent, provided that the certificates issued are rated at least
"BBB-", as more fully described in "ERISA Considerations" in the prospectus.
The Exemption also provides relief from certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary causes a
Plan to acquire certificates in a trust 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 certificates, at least fifty percent (50%) of each class of
certificates in which Plans have invested is acquired by persons
independent of the Restricted Group;
S-90
o such fiduciary (or its affiliate) is an obligor with respect to five
percent (5%) or less of the fair market value of the obligations
contained in the trust;
o a Plan's investment in certificates of any class does not exceed
twenty-five percent (25%) of all of the certificates of that class
outstanding at the time of the acquisition; and
o immediately after the acquisition, no more than twenty-five percent
(25%) of the assets of any Plan with respect to which such person is
a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same
entity.
The Exemption does not apply to Plans sponsored by the Underwriter, the
trustee, the master servicer, any servicer, any obligor with respect to mortgage
loans included in the trust fund constituting more than five percent of the
aggregate unamortized principal balance of the assets in the trust fund, any
insurer or any affiliate of such parties (the "Restricted Group"). It is
expected that the Exemption will apply to the acquisition and holding of the
senior certificates (other than the Class R Certificates) and the subordinated
certificates by Plans and that all conditions of the Exemption other than those
within the control of the investors will be met. In addition, as of the date
hereof, there is no single mortgagor that is the obligor on five percent (5%) of
the mortgage loans included in the trust fund by aggregate unamortized principal
balance of the assets of the trust fund.
Because the exemptive relief afforded by the Exemption or any similar
exemption that may be available will not likely apply to the purchase, sale or
holding of the Residual Certificates, no Residual Certificate or any interest
therein may be acquired or held by any Plan, any Trustee or other person acting
on behalf of any Plan, or any other person using plan assets to effect such
acquisition or holding-- a plan investor--unless the transferee provides the
seller, the master servicer and the trustee with an opinion of counsel
satisfactory to those entities, which opinion will not be at the expense of
those entities, that the purchase of the Residual Certificates by or on behalf
of the plan investor will not constitute or result in the assets of the Trust
being deemed to be " plan assets" subject to the prohibited transactions
provisions of ERISA or Code Section 4975 and will not subject the seller, the
master servicer or the trustee to any obligation in addition to those undertaken
in the pooling and servicing agreement. Each beneficial owner of a Residual
Certificate or any interest therein, unless it has provided the above opinion of
counsel, shall be deemed to have represented, by virtue of its acquisition or
holding of that certificate or interest therein, that it is not a plan investor.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Exemption or any other exemption, and the
potential consequences in their specific circumstances, prior to making an
investment in the senior certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment prudence
and diversification, an investment in the offered 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement between the depositor and Bear, Stearns & Co. Inc., as underwriter,
the depositor has agreed to sell the offered certificates to the Underwriter,
and the Underwriter has agreed to purchase the offered certificates from the
depositor. Distribution of the offered 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. In connection with the sale of the
offered certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting discounts. It is
expected that the proceeds to the depositor from the sale of the offered
certificates will be approximately $420,000,000 plus accrued interest on the
offered certificates (other than the Class I-A1, Class I-A2, Class I-PO, Class
II-PO and Class III-PO Certificates), before deducting issuance expenses payable
by the depositor, estimated to be approximately $425,000.
S-91
The depositor has been advised by the underwriter that it intends to make
a market in the offered certificates, but the underwriter has no obligation to
do so. There can be no assurance that a secondary market for the offered
certificates, or any particular Class thereof, will develop or, if it does
develop, that it will continue or that such market will provide sufficient
liquidity to certificateholders.
The depositor has agreed to indemnify the underwriter against, or make
contributions to the underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended. The underwriter is an
affiliate of the depositor and EMC.
LEGAL MATTERS
The validity of the certificates, including certain federal income tax
consequences with respect hereto, will be passed upon for the depositor by
Thacher Proffitt & Wood, New York, New York. Thacher Proffitt & Wood, New York,
New York, will also pass upon certain legal matters on behalf of the depositor,
EMC and the underwriter.
S-92
RATINGS
It is a condition of the issuance of the offered certificates that each
class of offered certificates be assigned at least the ratings designated below
by Moody's and Standard & Poor's.
Rating
------
Class Moody's Standard & Poor's
----- ------- -----------------
I-A1 Aaa AAA
I-A2 Aaa AAA
II-A1 Aaa AAA
II-A2 Aaa AAA
II-A3 Aaa AAA
II-A4 Aaa AAA
II-A5 Aaa AAA
III-A Aaa AAA
I-PO Aaa AAA
II-PO Aaa AAA
III-PO Aaa AAA
I-X Aaa AAA
II-X Aaa AAA
III-X Aaa AAA
BX Aaa AAA
B-1 --- AA
B-2 --- A
B-3 --- BBB
R-1 --- AAA
R-2 --- AAA
R-3 --- AAA
The security ratings assigned to the offered certificates should be
evaluated independently from similar ratings on other types of securities. 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 respective rating
agency. The ratings on the offered certificates do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the mortgage
loans or the anticipated yields in light of prepayments.
S-93
The depositor has not requested ratings of the offered certificates by
any rating agency other than Moody's and Standard & Poor's. However, there can
be no assurance as to whether any other rating agency will rate the offered
certificates or, if it does, what ratings would be assigned by such other rating
agency. The ratings assigned by such other rating agency to the offered
certificates could be lower than the respective ratings assigned by the rating
agencies.
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INDEX OF DEFINED TERMS
Accrued Certificate Interest...................................................................................S-46
Agreement......................................................................................................S-28
Allocable Share................................................................................................S-46
Applied Realized Loss Amount...................................................................................S-47
Certificate Principal Balance..................................................................................S-47
Class B Certificates...........................................................................................S-47
Class I-PO Certificate Principal Distribution Amount...........................................................S-47
Class II-PO Certificate Principal Distribution Amount..........................................................S-48
Class III-PO Certificate Principal Distribution Amount.........................................................S-49
Class PO Certificate Deferred Amount...........................................................................S-59
Class PO Certificate Deferred Payment Writedown Amount.........................................................S-47
Class PO Certificates..........................................................................................S-47
Class Prepayment Distribution Trigger..........................................................................S-46
Clearstream....................................................................................................S-39
Code...........................................................................................................S-87
CPR............................................................................................................S-68
Cross-Over Date..........................................................................................S-45, S-50
CSSF...........................................................................................................S-40
Discount Mortgage Loan.........................................................................................S-50
Distribution Account...........................................................................................S-35
DTC............................................................................................................S-38
Due Period.....................................................................................................S-50
EMC............................................................................................................S-28
ERISA..........................................................................................................S-90
Euroclear......................................................................................................S-39
Exemption......................................................................................................S-90
FHA............................................................................................................S-26
Financial Intermediary.........................................................................................S-39
Global Securities...............................................................................................I-1
GreenPoint.....................................................................................................S-24
Group I Available Funds..................................................................................S-42, S-50
Group I Certificates...........................................................................................S-50
Group I Senior Optimal Principal Amount........................................................................S-50
Group I Subordinate Optimal Principal Amount...................................................................S-51
Group II Available Funds.................................................................................S-42, S-51
Group II Certificates..........................................................................................S-52
Group II Senior Optimal Principal Amount.......................................................................S-52
Group II Subordinate Optimal Principal Amount..................................................................S-52
Group III Available Funds................................................................................S-43, S-53
Group III Certificates.........................................................................................S-53
Group III Senior Optimal Principal Amount......................................................................S-53
Group III Subordinate Optimal Principal Amount.................................................................S-54
Insurance Proceeds.............................................................................................S-55
Interest Funds.................................................................................................S-55
Interest Shortfall.............................................................................................S-55
Liquidation Proceeds...........................................................................................S-55
Loss Allocation Limitation.....................................................................................S-60
Master Servicer................................................................................................S-28
Master Servicer Collection Account.............................................................................S-35
MERS...........................................................................................................S-23
MERS(R)System...................................................................................................S-23
NCC............................................................................................................S-25
NCM......................................................................................................S-25, S-28
NCM Loans......................................................................................................S-28
NCM Servicing Agreement........................................................................................S-28
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Net Interest Shortfalls........................................................................................S-55
Net Liquidation Proceeds.......................................................................................S-56
Non-Discount Mortgage Loan.....................................................................................S-56
Non-PO Percentage..............................................................................................S-56
Non-PO Realized Losses.........................................................................................S-60
Notional Balance...............................................................................................S-56
Original Subordinate Principal Balance.........................................................................S-58
Pass-Through Rate..............................................................................................S-56
Plans..........................................................................................................S-90
PO Percentage..................................................................................................S-56
Prepayment Interest Shortfall..................................................................................S-36
Prepayment Period..............................................................................................S-57
Principal Funds................................................................................................S-57
PTE............................................................................................................S-90
Realized Loss..................................................................................................S-57
Relief Act...............................................................................................S-55, S-57
Rules..........................................................................................................S-39
Senior Certificates............................................................................................S-57
Senior Percentage..............................................................................................S-57
Senior Prepayment Percentage...................................................................................S-57
Stated Principal Balance.......................................................................................S-58
Subordinate Optimal Principal Amount.....................................................................S-47, S-59
Subordinate Percentage.........................................................................................S-59
Subordinate Prepayment Percentage..............................................................................S-59
super jumbos...................................................................................................S-26
Tax Counsel....................................................................................................S-87
VA.............................................................................................................S-26
Wells Fargo....................................................................................................S-28
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SCHEDULE A
MORTGAGE LOAN STATISTICAL DATA
The following information sets forth in tabular format certain
information, as of the cut-off date, about the mortgage loans in the aggregate
and about the mortgage loans in each loan group. Other than with respect to
rates of interest, percentages are approximate and are stated by cut-off date
principal balance of all of the mortgage loans, or of mortgage loans in the
related loan group, as applicable. The sum of the respective columns may not
equal the total indicated due to rounding.
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
MORTGAGE INTEREST RATE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
---------------------- -------------- ------------------ ------------------
6.001% - 6.500%.......................... 6 $ 2,241,642 0.54%
6.501% - 7.000%.......................... 136 50,416,594 12.23
7.001% - 7.500%.......................... 278 81,807,655 19.85
7.501% - 8.000%.......................... 310 81,874,156 19.86
8.001% - 8.500%.......................... 424 84,941,116 20.61
8.501% - 9.000%.......................... 424 74,054,583 17.97
9.001% - 9.500%.......................... 178 24,879,810 6.04
9.501% - 10.000%......................... 84 9,678,987 2.35
10.001% - 10.500%........................ 9 1,494,647 0.36
10.501% - 11.000%........................ 7 803,700 0.19
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
As of the cut-off date, the weighted average mortgage rate of the
mortgage loans in the total pool was approximately 8.035% per annum.
A-1
ORIGINAL LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
ORIGINAL LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------------- -------------- ------------------ ------------------
10.01% - 20.00%.......................... 1 $ 36,487 0.01%
20.01% - 30.00%.......................... 3 819,238 0.20
30.01% - 40.00%.......................... 15 3,277,437 0.80
40.01% - 50.00%.......................... 23 9,522,488 2.31
50.01% - 60.00%.......................... 54 17,905,068 4.34
60.01% - 70.00%.......................... 105 35,615,093 8.64
70.01% - 80.00%.......................... 655 164,143,771 39.82
80.01% - 90.00%.......................... 297 66,894,107 16.23
90.01% - 100.00%......................... 703 113,979,203 27.65
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
As of the cut-off date, the weighted average original loan-to-value ratio
of the mortgage loans in the total pool was approximately 81.62%.
A-2
SCHEDULED PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE
CUT-OFF DATE IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
SCHEDULED PRINCIPAL BALANCE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------- -------------- ------------------ ------------------
$ 50,000 or less......................... 69 $ 2,905,638 0.70%
$ 50,001 - $100,000...................... 408 30,860,898 7.49
$100,001 - $150,000...................... 375 46,426,561 11.26
$150,001 - $200,000...................... 247 42,640,347 10.34
$200,001 - $250,000...................... 132 29,297,460 7.11
$250,001 - $300,000...................... 90 24,627,769 5.97
$300,001 - $350,000...................... 143 46,489,813 11.28
$350,001 - $400,000...................... 122 46,046,725 11.17
$400,001 - $450,000...................... 92 39,241,690 9.52
$450,001 - $500,000...................... 66 31,540,147 7.65
$500,001 - $550,000...................... 30 15,832,793 3.84
$550,001 - $600,000...................... 24 13,715,032 3.33
$600,001 - $650,000...................... 35 22,166,000 5.38
$650,001 or more......................... 23 20,402,019 4.95
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
As of the cut-off date, the average principal balance of the mortgage
loans in the total pool was approximately $222,087.
A-3
CREDIT SCORE FOR THE MORTGAGE LOANS IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
CREDIT SCORE RANGE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------------ -------------- ------------------ ------------------
No Credit Score Available................ 19 $ 3,451,413 0.84%
561 - 580................................ 10 1,477,762 0.36
581 - 600................................ 39 6,547,697 1.59
601 - 620................................ 107 18,782,686 4.56
621 - 640................................ 178 37,037,221 8.99
641 - 660................................ 238 50,046,274 12.14
661 - 680................................ 232 56,710,616 13.76
681 - 700................................ 289 64,051,566 15.54
701 - 720................................ 241 52,916,637 12.84
721 - 740................................ 202 43,279,190 10.50
741 - 760................................ 155 37,014,135 8.98
761 - 780................................ 101 28,473,565 6.91
781 - 800................................ 41 11,506,418 2.79
801 or higher............................ 4 897,713 0.22
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
As of the cut-off date, the weighted average credit score of the mortgage
loans in the total pool for which credit scores are available is approximately
692.
A-4
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES IN THE TOTAL POOL*
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
STATE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
----- -------------- ------------------ ------------------
Arizona.................................. 79 $ 13,078,417 3.17%
California............................... 315 109,048,527 26.46
Connecticut.............................. 36 8,355,278 2.03
Florida.................................. 203 32,795,190 7.96
Georgia.................................. 69 13,890,431 3.37
Illinois................................. 100 20,223,401 4.91
Massachusetts............................ 67 18,099,439 4.39
Maryland................................. 66 11,850,965 2.88
New Jersey............................... 106 25,575,066 6.20
Nevada................................... 45 12,553,656 3.05
New York................................. 117 36,277,890 8.80
Texas.................................... 92 13,359,248 3.24
Virginia................................. 73 17,922,883 4.35
Other (less than 2% in any state)........ 488 79,162,500 19.21
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
*No more than approximately 0.64% of the total pool by cut-off date
principal balance will be secured by properties located in any one zip code
area.
A-5
PROPERTY TYPES OF MORTGAGED PROPERTIES IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
PROPERTY TYPE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------- -------------- ------------------ ------------------
Single Family............................ 1,304 $286,044,973 69.40%
PUD...................................... 199 55,302,025 13.42
2-4 Family............................... 224 48,139,463 11.68
Condominium.............................. 123 22,129,075 5.37
Manufactured Home........................ 6 577,356 0.14
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
OCCUPANCY STATUS OF MORTGAGED PROPERTIES IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
OCCUPANCY STATUS MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
---------------- -------------- ------------------ ------------------
Owner Occupied........................... 1,417 $351,813,659 85.35%
Second Home.............................. 40 8,807,091 2.14
Investor................................. 399 51,572,142 12.51
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
Based upon representation of the related mortgagors at the time of
origination.
A-6
ORIGINAL TERM OF THE MORTGAGE LOANS IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
ORIGINAL TERM MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------- -------------- ------------------ ------------------
120 - 179 months......................... 2 $ 97,547 0.02%
180 - 239 months......................... 145 29,609,618 7.18
240 - 359 months......................... 6 1,341,890 0.33
360 months............................... 1,703 381,143,836 92.47
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
As of the cut-off date, the weighted average stated original term to
scheduled maturity of the mortgage loans in the total pool was approximately 347
months.
REMAINING TERM TO STATED MATURITY FOR THE MORTGAGE LOANS IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
REMAINING TERM TO STATED MATURITY MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------------- -------------- ------------------ ------------------
61 - 120 months........................ 2 $ 97,547 0.02%
121 - 180 months......................... 145 29,609,618 7.18
181 - 240 months......................... 4 259,654 0.06
241 - 300 months......................... 2 1,082,236 0.26
301 - 360 months......................... 1,703 381,143,836 92.47
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
As of the cut-off date, the weighted average stated remaining months to
scheduled maturity of the mortgage loans in the total pool was approximately 344
months.
A-7
LOAN PURPOSE FOR THE MORTGAGE LOANS IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
LOAN PURPOSE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------ -------------- ------------------ ------------------
Purchase................................. 1,272 $259,080,017 62.85%
Cash-Out Refinance....................... 423 102,116,999 24.77
Rate/Term Refinance...................... 161 50,995,875 12.37
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
DOCUMENTATION TYPE OF THE MORTGAGE LOANS IN THE TOTAL POOL
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
LOAN PURPOSE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------ -------------- ------------------ ------------------
Full/Alternative......................... 255 $ 64,664,465 15.69%
Stated Income............................ 410 122,715,084 29.77
No Ratio................................. 219 39,190,655 9.51
No Income/No Asset....................... 881 173,481,462 42.09
Stated/Stated............................ 91 12,141,224 2.95
----- ------------ ------
Total............................. 1,856 $412,192,891 100.00%
===== ============ ======
A-8
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
MORTGAGE INTEREST RATE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
---------------------- -------------- ------------------ ------------------
6.001% - 6.500%.......................... 3 $ 1,151,110 1.35%
6.501% - 7.000%.......................... 11 5,115,721 6.01
7.001% - 7.500%.......................... 31 9,011,456 10.58
7.501% - 8.000%.......................... 78 17,692,077 20.78
8.001% - 8.500%.......................... 93 15,730,132 18.47
8.501% - 9.000%.......................... 132 18,003,155 21.14
9.001% - 9.500%.......................... 96 10,794,602 12.68
9.501% - 10.000%......................... 54 6,430,193 7.55
10.001% - 10.500%........................ 6 877,949 1.03
10.501% - 11.000%........................ 3 348,873 0.41
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
As of the cut-off date, the weighted average mortgage rate of the
mortgage loans in Loan Group I was approximately 8.382% per annum.
A-9
ORIGINAL LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
ORIGINAL LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------------- -------------- ------------------ ------------------
30.01% - 40.00%.......................... 1 $ 169,689 0.20%
40.01% - 50.00%.......................... 2 747,044 0.88
50.01% - 60.00%.......................... 7 1,714,784 2.01
60.01% - 70.00%.......................... 11 2,934,762 3.45
70.01% - 80.00%.......................... 225 36,968,543 43.41
80.01% - 90.00%.......................... 80 15,011,781 17.63
90.01% - 100.00%......................... 181 27,608,667 32.42
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
As of the cut-off date, the weighted average original loan-to-value ratio
of the mortgage loans in Loan Group I was approximately 84.69%.
A-10
SCHEDULED PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE
CUT-OFF DATE IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
SCHEDULED PRINCIPAL BALANCE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------- -------------- ------------------ ------------------
$ 50,000 or less......................... 18 $ 813,233 0.96%
$ 50,001 - $100,000..................... 156 11,606,874 13.63
$100,001 - $150,000...................... 127 15,722,875 18.46
$150,001 - $200,000...................... 84 14,573,051 17.11
$200,001 - $250,000...................... 30 6,688,078 7.85
$250,001 - $300,000...................... 30 8,229,436 9.66
$300,001 - $350,000...................... 13 4,210,171 4.94
$350,001 - $400,000...................... 14 5,279,697 6.20
$400,001 - $450,000...................... 12 5,072,363 5.96
$450,001 - $500,000...................... 9 4,288,175 5.04
$500,001 - $550,000...................... 6 3,147,120 3.70
$550,001 - $600,000...................... 2 1,152,730 1.35
$600,001 - $650,000...................... 3 1,932,492 2.27
$650,001+................................ 3 2,438,972 2.86
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
As of the cut-off date, the average principal balance of the mortgage
loans in Loan Group I was approximately $167,959.
A-11
CREDIT SCORE FOR THE MORTGAGE LOANS IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
CREDIT SCORE RANGE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------------ -------------- ------------------ ------------------
No Credit Score Available................ 3 $ 509,905 0.60%
581 - 600................................ 7 701,410 0.82
601 - 620................................ 18 3,340,873 3.92
621 - 640................................ 69 12,706,139 14.92
641 - 660................................ 91 15,007,002 17.62
661 - 680................................ 86 12,950,311 15.21
681 - 700................................ 83 14,135,363 16.60
701 - 720................................ 49 7,396,136 8.69
721 - 740................................ 45 7,758,914 9.11
741 - 760................................ 30 4,850,092 5.70
761 - 780................................ 20 4,574,742 5.37
781 - 800................................ 5 1,130,079 1.33
801 or higher............................ 1 94,304 0.11
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
As of the cut-off date, the weighted average credit score of the mortgage
loans in Loan Group I for which credit scores are available is approximately
681.
A-12
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES IN LOAN GROUP I*
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
STATE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
----- -------------- ------------------ ------------------
Arizona.................................. 26 $ 3,148,412 3.70%
California............................... 56 17,723,130 20.81
Florida.................................. 93 11,579,770 13.60
Georgia.................................. 35 5,181,050 6.08
Illinois................................. 36 6,133,654 7.20
Massachusetts............................ 13 3,266,265 3.84
Maryland................................. 24 3,090,664 3.63
Michigan................................. 18 1,967,617 2.31
New Jersey............................... 9 1,704,864 2.00
Nevada................................... 12 1,913,481 2.25
New York................................. 39 10,122,000 11.89
Texas.................................... 21 2,787,449 3.27
Virginia................................. 17 2,547,995 2.99
Washington............................... 9 1,779,334 2.09
Other (less than 2% in any state)........ 99 12,209,584 14.34
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
*No more than approximately 1.64% of the mortgage loans in Loan Group I
by cut-off date principal balance will be secured by properties located in any
one zip code area.
A-13
PROPERTY TYPES OF MORTGAGED PROPERTIES IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
PROPERTY TYPE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------- -------------- ------------------ ------------------
Single Family............................ 327 $50,500,134 59.30%
2-4 Family............................... 99 20,095,971 23.60
PUD...................................... 43 9,065,962 10.65
Condominium.............................. 38 5,493,201 6.45
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
OCCUPANCY STATUS OF MORTGAGED PROPERTIES IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
OCCUPANCY STATUS MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
---------------- -------------- ------------------ ------------------
Owner Occupied........................... 305 $61,289,239 71.97%
Second Home.............................. 9 2,015,644 2.37
Investor................................. 193 21,850,385 25.66
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
Based upon representation of the related mortgagors at the time of
origination.
A-14
ORIGINAL TERM OF THE MORTGAGE LOANS IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
ORIGINAL TERM MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------- -------------- ------------------ ------------------
180 - 239 months......................... 75 $11,832,356 13.90%
360 months............................... 432 73,322,913 86.10
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
As of the cut-off date, the weighted average stated term to scheduled
maturity of the mortgage loans in Loan Group I was approximately 335 months.
REMAINING TERM TO STATED MATURITY FOR THE MORTGAGE LOANS IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
REMAINING TERM TO STATED MATURITY MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------------- -------------- ------------------ ------------------
121 - 180 months......................... 75 $11,832,356 13.90%
301 - 360 months........................ 432 73,322,913 86.10
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
As of the cut-off date, the weighted average stated remaining months to
scheduled maturity of the mortgage loans in Loan Group I was approximately 332
months.
LOAN PURPOSE FOR THE MORTGAGE LOANS IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
LOAN PURPOSE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------ -------------- ------------------ ------------------
Purchase................................. 415 $65,605,727 77.04%
Cash-Out Refinance....................... 70 13,691,245 16.08
Rate/Term Refinance...................... 22 5,858,297 6.88
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
A-15
DOCUMENTATION TYPE FOR MORTGAGE LOANS IN LOAN GROUP I
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
DOCUMENTATION TYPE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------------ -------------- ------------------ ------------------
Full/Alternative......................... 42 $ 7,993,765 9.39%
Stated Income............................ 124 28,676,480 33.68
No Ratio................................. 121 13,663,250 16.05
No Income/No Asset....................... 203 32,501,512 38.17
Stated/Stated............................ 17 2,320,262 2.72
--- ----------- ------
Total............................. 507 $85,155,269 100.00%
=== =========== ======
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
MORTGAGE INTEREST RATE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
---------------------- -------------- ------------------ ------------------
6.001% - 6.500%.......................... 2 $ 938,670 0.42%
6.501% - 7.000%.......................... 90 40,455,598 18.27
7.001% - 7.500%.......................... 160 61,922,491 27.96
7.501% - 8.000%.......................... 121 50,093,997 22.62
8.001% - 8.500%.......................... 88 35,253,979 15.92
8.501% - 9.000%.......................... 67 24,884,081 11.24
9.001% - 9.500%.......................... 25 5,609,174 2.53
9.501% - 10.000%......................... 16 1,622,027 0.73
10.001% - 10.500%........................ 1 232,370 0.10
10.501% - 11.000%........................ 4 454,828 0.21
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
As of the cut-off date, the weighted average mortgage rate of the
mortgage loans in Loan Group II was approximately 7.748% per annum.
A-16
ORIGINAL LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
ORIGINAL LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------------- -------------- ------------------ ------------------
20.01% - 30.00%.......................... 1 $ 544,995 0.25%
30.01% - 40.00%.......................... 9 2,644,608 1.19
40.01% - 50.00%.......................... 14 7,980,541 3.60
50.01% - 60.00%.......................... 26 14,346,147 6.48
60.01% - 70.00%.......................... 63 28,606,687 12.92
70.01% - 80.00%.......................... 267 108,159,152 48.84
80.01% - 90.00%.......................... 96 34,916,503 15.77
90.01% - 100.00%......................... 98 24,268,582 10.96
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
As of the cut-off date, the weighted average original loan-to-value ratio
of the mortgage loans in Loan Group II was approximately 77.10%.
A-17
SCHEDULED PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE
CUT-OFF DATE IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
SCHEDULED PRINCIPAL BALANCE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------- -------------- ------------------ ------------------
$50,000 or less.......................... 6 $ 253,727 0.11%
$50,001 - $100,000...................... 28 2,067,109 0.93
$100,001 - $150,000...................... 21 2,646,707 1.20
$150,001 - $200,000...................... 21 3,721,083 1.68
$200,001 - $250,000...................... 27 5,890,024 2.66
$250,001 - $350,000...................... 8 2,248,922 1.02
$300,001 - $350,000...................... 122 39,799,714 17.97
$350,001 - $400,000...................... 107 40,387,939 18.24
$400,001 - $450,000...................... 79 33,755,489 15.24
$450,001 - $500,000...................... 57 27,251,971 12.31
$500,001 - $550,000...................... 24 12,685,673 5.73
$550,001 - $600,000...................... 22 12,562,302 5.67
$600,001 - $650,000...................... 32 20,233,508 9.14
$650,001 or more......................... 20 17,963,047 8.11
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
As of the cut-off date, the average principal balance of the mortgage
loans in Loan Group II was approximately $385,831.
A-18
CREDIT SCORE FOR THE MORTGAGE LOANS IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
CREDIT SCORE RANGE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------------ -------------- ------------------ ------------------
No Credit Score Available 16 $ 2,941,509 1.33%
561 - 580................................ 5 1,033,501 0.47
581 - 600................................ 17 4,117,095 1.86
601 - 620................................ 25 7,709,071 3.48
621 - 640................................ 34 13,481,533 6.09
641 - 660................................ 69 25,524,898 11.53
661 - 680................................ 88 35,898,976 16.21
681 - 700................................ 84 32,834,370 14.83
701 - 720................................ 70 27,654,332 12.49
721 - 740................................ 51 21,107,133 9.53
741 - 760................................ 51 21,829,366 9.86
761 - 780................................ 44 18,453,055 8.33
781 - 800................................ 19 8,408,339 3.80
801 or higher............................ 1 474,037 0.21
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
As of the cut-off date, the weighted average credit score of the mortgage
loans in Loan Group II for which credit scores are available is approximately
696.
A-19
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES IN LOAN GROUP II*
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
STATE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
----- -------------- ------------------ ------------------
Arizona.................................. 15 $ 5,132,523 2.32%
California............................... 175 76,663,700 34.62
Colorado................................. 12 4,732,900 2.14
Connecticut.............................. 12 5,411,058 2.44
Florida.................................. 48 13,902,467 6.28
Georgia.................................. 16 6,183,118 2.79
Illinois................................. 18 7,484,932 3.38
Massachusetts............................ 24 9,058,840 4.09
Maryland................................. 15 4,768,532 2.15
Nevada................................... 12 7,602,107 3.43
New Jersey............................... 41 14,698,732 6.64
New York................................. 53 20,456,853 9.24
North Carolina........................... 12 4,501,668 2.03
Virginia................................. 26 10,232,614 4.62
Other (less than 2% in any state)........ 95 30,637,170 13.83
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
*No more than approximately 1.18% of the mortgage loans in Loan Group
II by cut-off date principal balance will be secured by properties located in
any one zip code area.
PROPERTY TYPES OF MORTGAGED PROPERTIES IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
PROPERTY TYPE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------- -------------- ------------------ ------------------
Single Family............................ 422 $164,519,571 74.29%
PUD...................................... 90 36,030,908 16.27
2-4 Family............................... 31 11,829,294 5.34
Condominium.............................. 31 9,087,441 4.10
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
A-20
OCCUPANCY STATUS OF MORTGAGED PROPERTIES IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
OCCUPANCY STATUS MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
---------------- -------------- ------------------ ------------------
Owner Occupied........................... 503 $201,923,511 91.18%
Second Home.............................. 22 5,674,054 2.56
Investor................................. 49 13,869,650 6.26
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
Based upon representation of the related mortgagors at the time of
origination.
ORIGINAL TERM OF THE MORTGAGE LOANS IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
ORIGINAL TERM MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------- -------------- ------------------ ------------------
180 - 239 months........................ 34 $ 14,310,981 6.46%
240 - 359 months......................... 2 1,082,236 0.49
360 months............................... 538 206,073,998 93.05
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
As of the cut-off date, the weighted average stated original term to
scheduled maturity of the mortgage loans in Loan Group II was approximately 348
months.
REMAINING TERM TO STATED MATURITY FOR THE MORTGAGE LOANS IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
REMAINING TERM TO STATED MATURITY MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------------- -------------- ------------------ ------------------
121 - 180 months......................... 34 $ 14,310,981 6.46%
181 - 240 months......................... 2 1,082,236 0.49
301 - 360 months........................ 538 206,073,998 93.05
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
As of the cut-off date, the weighted average stated remaining months to
scheduled maturity of the mortgage loans in Loan Group II was approximately 345
months.
A-21
LOAN PURPOSE FOR THE MORTGAGE LOANS IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
LOAN PURPOSE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------ -------------- ------------------ ------------------
Purchase................................. 323 $118,037,448 53.30%
Cash-Out Refinance....................... 165 65,183,018 29.43
Rate/Term Refinance...................... 86 38,246,749 17.27
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
DOCUMENTATION TYPE FOR MORTGAGE LOANS IN LOAN GROUP II
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
DOCUMENTATION TYPE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------------ -------------- ------------------ ------------------
Full/Alternative......................... 108 $ 44,608,108 20.14%
Stated Income............................ 208 84,240,349 38.04
No Ratio................................. 46 18,839,840 8.51
No Income/No Asset....................... 191 69,838,787 31.53
Stated/Stated............................ 21 3,940,131 1.78
--- ------------ ------
Total............................. 574 $221,467,215 100.00%
=== ============ ======
A-22
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
MORTGAGE INTEREST RATE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
---------------------- -------------- ------------------ ------------------
6.001% - 6.500%.......................... 1 $ 151,863 0.14%
6.501% - 7.000%.......................... 35 4,845,275 4.59
7.001% - 7.500%.......................... 87 10,873,708 10.30
7.501% - 8.000%.......................... 111 14,088,082 13.34
8.001% - 8.500%.......................... 243 33,957,005 32.17
8.501% - 9.000%.......................... 225 31,167,347 29.52
9.001% - 9.500%.......................... 57 8,476,034 8.03
9.501% - 10.000%......................... 14 1,626,767 1.54
10.001% - 10.500%........................ 2 384,328 0.36
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
As of the cut-off date, the weighted average mortgage rate of the
mortgage loans in Loan Group III was approximately 8.358% per annum.
A-23
ORIGINAL LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
ORIGINAL LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------------- -------------- ------------------ ------------------
10.01% - 20.00%.......................... 1 $ 36,487 0.03%
20.01% - 30.00%.......................... 2 274,243 0.26
30.01% - 40.00%.......................... 5 463,140 0.44
40.01% - 50.00%.......................... 7 794,904 0.75
50.01% - 60.00%.......................... 21 1,844,138 1.75
60.01% - 70.00%.......................... 31 4,073,644 3.86
70.01% - 80.00%.......................... 163 19,016,076 18.01
80.01% - 90.00%.......................... 121 16,965,822 16.07
90.01% - 100.00%......................... 424 62,101,954 58.83
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
As of the cut-off date, the weighted average original loan-to-value ratio
of the mortgage loans in Loan Group III was approximately 88.63%.
A-24
SCHEDULED PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE
CUT-OFF DATE IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
SCHEDULED PRINCIPAL BALANCE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------- -------------- ------------------ ------------------
$50,000 or less.......................... 45 $ 1,838,678 1.74%
$50,001 - $100,000...................... 224 17,186,915 16.28
$100,001 - $150,000...................... 227 28,056,979 26.58
$150,001 - $200,000...................... 142 24,346,213 23.06
$200,001 - $250,000...................... 75 16,719,358 15.84
$250,001 - $350,000...................... 52 14,149,410 13.40
$300,001 - $350,000...................... 8 2,479,928 2.35
$350,001 - $400,000...................... 1 379,089 0.36
$400,001 - $450,000...................... 1 413,838 0.39
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
As of the cut-off date, the average principal balance of the mortgage
loans in Loan Group III was approximately $136,220.
A-25
CREDIT SCORE FOR THE MORTGAGE LOANS IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
CREDIT SCORE RANGE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------------ -------------- ------------------ ------------------
561 - 580................................ 5 $ 444,260 0.42%
581 - 600................................ 15 1,729,192 1.64
601 - 620................................ 64 7,732,742 7.32
621 - 640................................ 75 10,849,550 10.28
641 - 660................................ 78 9,514,374 9.01
661 - 680................................ 58 7,861,329 7.45
681 - 700................................ 122 17,081,833 16.18
701 - 720................................ 122 17,866,168 16.92
721 - 740................................ 106 14,413,142 13.65
741 - 760................................ 74 10,334,677 9.79
761 - 780................................ 37 5,445,768 5.16
781 - 800................................ 17 1,968,001 1.86
801 or higher............................ 2 329,371 0.31
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
As of the cut-off date, the weighted average credit score of the mortgage
loans in Loan Group III for which credit scores are available is approximately
692.
A-26
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES IN LOAN GROUP III*
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
CREDIT SCORE RANGE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------------ -------------- ------------------ ------------------
Arizona.................................. 38 $ 4,797,482 4.54%
California............................... 84 14,661,696 13.89
Florida.................................. 62 7,312,953 6.93
Georgia.................................. 18 2,526,263 2.39
Illinois................................. 46 6,604,815 6.26
Indiana.................................. 22 2,166,807 2.05
Massachusetts............................ 30 5,774,333 5.47
Maryland................................. 27 3,991,770 3.78
Michigan................................. 23 2,394,462 2.27
Nevada................................... 21 3,038,068 2.88
New Jersey............................... 56 9,171,469 8.69
New York................................. 25 5,699,037 5.40
North Carolina........................... 24 2,412,413 2.29
Pennsylvania............................. 36 3,164,952 3.00
Texas.................................... 58 6,558,466 6.21
Virginia................................. 30 5,142,274 4.87
Other (less than 2% in any state)........ 175 20,153,148 19.09
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
*No more than approximately 0.65% of the mortgage loans in Loan Group
III by cut-off date principal balance will be secured by properties located in
any one zip code area.
A-27
PROPERTY TYPES OF MORTGAGED PROPERTIES IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
PROPERTY TYPE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------- -------------- ------------------ ------------------
Single Family............................ 555 $ 71,025,267 67.28%
PUD...................................... 66 10,205,155 9.67
2-4 Family............................... 94 16,214,197 15.36
Condominium.............................. 54 7,548,432 7.15
Manufactured Home ....................... 6 577,356 0.55
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
OCCUPANCY STATUS OF MORTGAGED PROPERTIES IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
OCCUPANCY STATUS MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
---------------- -------------- ------------------ ------------------
Owner Occupied........................... 609 $ 88,600,909 83.93%
Second Home.............................. 9 1,117,393 1.06
Investor................................. 157 15,852,106 15.02
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
Based upon representation of the related mortgagors at the time of
origination.
A-28
ORIGINAL TERM OF THE MORTGAGE LOANS IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
ORIGINAL TERM MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------- -------------- ------------------ ------------------
120 - 179 months......................... 2 $ 97,547 0.09%
180 - 239 months........................ 36 3,466,282 3.28
240 - 359 months......................... 4 259,654 0.25
360 months............................... 733 101,746,926 96.38
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
As of the cut-off date, the weighted average stated original term to
scheduled maturity of the mortgage loans in Loan Group III was approximately 354
months.
REMAINING TERM TO STATED MATURITY FOR THE MORTGAGE LOANS IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
REMAINING TERM TO STATED MATURITY MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
--------------------------------- -------------- ------------------ ------------------
61 - 120 months.......................... 2 $ 97,547 0.09%
121 - 180 months......................... 36 3,466,282 3.28
181 - 240 months......................... 4 259,654 0.25
301 - 360 months........................ 733 101,746,926 96.38
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
As of the cut-off date, the weighted average stated remaining months to
scheduled maturity of the mortgage loans in Loan Group III was approximately 350
months.
LOAN PURPOSE FOR THE MORTGAGE LOANS IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
LOAN PURPOSE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------ -------------- ------------------ ------------------
Purchase................................. 534 $ 75,436,843 71.46%
Cash-Out Refinance....................... 188 23,242,736 22.02
Rate/Term Refinance...................... 53 6,890,829 6.53
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
A-29
DOCUMENTATION TYPE FOR MORTGAGE LOANS IN LOAN GROUP III
AGGREGATE SCHEDULED
NUMBER OF BALANCE OUTSTANDING
DOCUMENTATION TYPE MORTGAGE LOANS AS OF CUT-OFF-DATE % OF MORTGAGE POOL
------------------ -------------- ------------------ ------------------
Full/Alternative......................... 105 $ 12,062,593 11.43%
Stated Income............................ 78 9,798,255 9.28
No Ratio................................. 52 6,687,566 6.33
No Income/No Asset....................... 487 71,141,164 67.39
Stated/Stated............................ 53 5,880,831 5.57
--- ------------ ------
Total............................. 775 $105,570,408 100.00%
=== ============ ======
A-30
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except under limited circumstances, the globally offered Bear Stearns
Asset Backed Securities, Inc. Asset-Backed Certificates, Series 2002-AC5 (the
"Global Securities") will be available only in book- entry form. Investors in
the Global Securities may hold the Global Securities through any of DTC,
Euroclear or Clearstream. 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 Euroclear and Clearstream 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 and prior Asset-Backed Certificates issues.
Secondary cross-market trading between Euroclear or Clearstream and DTC
participants holding Certificates will be effected on a delivery-against-payment
basis through the respective depositaries of Euroclear and Clearstream and as
DTC participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet established
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, Euroclear and Clearstream
will hold positions on behalf of their participants through their respective
depositaries, which in turn will hold the positions in accounts as DTC
participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Asset-Backed Certificates
issues. 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 Euroclear or
Clearstream 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
Asset-Backed Certificates issues in sameday funds.
I-1
TRADING BETWEEN EUROCLEAR AND/OR CLEARSTREAM PARTICIPANTS. Secondary
market trading between Euroclear participants or Clearstream participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC SELLER AND EUROCLEAR OR CLEARSTREAM PURCHASER. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Euroclear participant or a Clearstream participant, the
purchaser will send instructions to Euroclear or Clearstream through a Euroclear
participant or Clearstream participant at least one business day prior to
settlement. Euroclear or Clearstream will instruct the respective depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of either
the actual number of days in the accrual period and a year assumed to consist of
360 days or a 360-day year of 12 30-day months as applicable to the related
class of Global Securities. 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 Euroclear participant's or Clearstream 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 Euroclear or Clearstream cash debt will be valued
instead as of the actual settlement date.
Euroclear participants and Clearstream 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 Euroclear or Clearstream. Under
this approach, they may take on credit exposure to Euroclear or Clearstream
until the Global Securities are credited to their accounts one day later.
As an alternative, if Euroclear or Clearstream has extended a line of
credit to them, Euroclear participants or Clearstream participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Euroclear participants or Clearstream
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 the overdraft charges, although this result will depend
on each Euroclear participant's or Clearstream 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 Euroclear participants or
Clearstream participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC participants a crossmarket transaction
will settle no differently than a trade between two DTC participants.
Trading between Euroclear or Clearstream seller and DTC Purchaser. Due to
time zone differences in their favor, Euroclear participants and Clearstream
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 Euroclear or Clearstream through a Euroclear participant or
Clearstream participant at least one business day prior to settlement. In these
cases Euroclear or Clearstream 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 either the actual number of days in the accrual period and a
year assumed to consist of 360 days or a 360-day year of 12 30-day months as
applicable to the related class of Global Securities.
I-2
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 Euroclear participant or
Clearstream participant the following day, and receipt of the cash proceeds in
the Euroclear participant's or Clearstream 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 Euroclear participant or Clearstream
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 Euroclear participant's or
Clearstream participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Euroclear or Clearstream and that purchase
Global Securities from DTC participants for delivery to Euroclear participants
or Clearstream participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Euroclear or Clearstream for one day (until the
purchase side of the day trade is reflected in their Euroclear or Clearstream
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Euroclear or Clearstream 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 Euroclear participant or
Clearstream participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% (or in some cases 31%) U.S. withholding tax
that generally applies to payments of interest on registered debt issued by U.S.
persons, unless (1) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between the beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(2) the beneficial owner takes one of the following steps to obtain an exemption
or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8 BEN). Beneficial owners of
Global Securities that are non-U.S. persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 BEN. If the information shown on
Form W-8 BEN changes, a new Form W-8 BEN must be filed within 30 days of the
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.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8 BEN). Non-U.S. persons that are beneficial 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-8
BEN.
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.
I-3
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Global Securities holder
files by submitting the appropriate form to the person through whom he holds
(e.g., the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Forms W-8 BEN and W- 8ECI are generally effective for
three calendar years.
o U.S. Person. As used in this prospectus supplement the term
"U.S. person" means a beneficial owner of a Certificate that
is for United States federal income tax purposes
o a citizen or resident of the United States,
o a corporation or partnership created or organized in or under
the laws of the United States or of any State thereof or the
District of Columbia,
o an estate the income of which is subject to United States
federal income taxation regardless of its source, 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 United States persons have the authority
to control all substantial decisions of the trust.
As used in this prospectus supplement, the term "non-U.S. person" means a
beneficial owner of a Certificate that is not a U.S. person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities or
with the application of the extensive withholding regulations that are generally
effective with respect to payments made after December 31, 2000 which have
detailed rules regarding the determination of beneficial ownership. Investors
are advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
Prospectus
Mortgage-Backed/Asset-Backed Securities (Issuable in Series)
Bear Stearns Asset Backed Securities, Inc.
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 fund or debt obligations
secured by assets of the related trust fund.
o Each series of securities will consist of one or more classes of
mortgage-backed or asset-backed certificates or notes.
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 distributions of 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.
Offers of the securities will be made through Bear, Stearns & Co. Inc. and the
other underwriters listed in the related prospectus supplement.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund will consist
primarily of assets from one of the following categories:
o mortgage loans secured by senior or junior liens on one- to
four-family residential properties;
o closed-end and/or revolving home equity loans secured by senior or
junior liens on one- to four-family residential or mixed-use
properties;
o 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;
o installment sales contracts and installment loan agreements secured
by senior or junior liens on manufactured homes or by mortgages on
the related real estate;
o mortgage-backed securities issued or guaranteed by Ginnie Mae,
Freddie Mac or Fannie Mae; and
o private label mortgage-backed or asset-backed securities.
- --------------------------------------------------------------------------------
Consider carefully the risk factors beginning on page 3 of this prospectus.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus
- --------------------------------------------------------------------------------
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.
Bear, Stearns & Co. Inc.
October 26, 2001
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 cannot contradict the
information contained in this prospectus, insofar as the prospectus supplement
contains specific information about a particular series of securities 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.
Each prospectus supplement generally will include the following information with
respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the mortgage loans, home equity loans, home
improvement contracts, manufactured housing contracts, mortgage
backed securities and/or private securities in the related trust
fund;
o information concerning the seller or sellers of the mortgage loans,
home equity loans, home improvement contracts, manufactured housing
contracts, mortgage backed securities and/or private securities and
information concerning any servicer;
o the terms of any credit enhancement with respect to particular
classes of the securities;
o information concerning other trust fund assets, including any
reserve fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to
each class of securities, and the timing and order of priority of
principal payments;
o information about any REMIC or FASIT tax elections for some or all
of the trust fund assets; and
o particulars of the plan of distribution for the securities.
We include cross-references in this prospectus and the accompanying prospectus
supplement to captions in these materials where you can find further related
discussions. The Table of Contents included in the accompanying prospectus
supplement lists the pages on which these captions are located.
There is also a Glossary of Terms beginning on page 115 where you will find
definitions of certain capitalized terms used in this prospectus.
If you require additional information, the mailing address of our principal
executive offices is Bear Stearns Asset Backed Asset Securities, Inc., 245 Park
Avenue, New York, New York 10167 and our telephone number is (212) 272-4095. For
other means of acquiring additional information about us or a series of
securities, see "Incorporation of Certain Information by Reference" beginning on
page 113 of this prospectus.
2
Risk Factors
You should consider carefully the following information, together with the
information set forth under "Risk Factors" in the accompanying prospectus
supplement, since it identifies the principal risk factors associated with an
investment in the securities.
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, we
cannot give you any assurance that a
resale market will develop following the
issuance and sale of any series of the
securities. Even if a resale market does
develop, you may not be able to sell
your securities when you wish or at the
price you want.
Only the assets of the related trust
fund are available to pay your
securities ........................... The securities of each series will be
payable solely from the assets of the
related trust fund, including any
applicable credit enhancement, and will
not have a claim against the assets of
any other trust. In the case of
securities that are in the form of
notes, the related indenture will
require that noteholders proceed only
against the assets of the related trust
fund. We cannot give you any assurance
that the market value of the assets in
any trust fund will be equal to or
greater than the total principal amount
of the related securities then
outstanding, plus accrued interest.
Moreover, if the assets of a trust fund
are ever sold, the sale proceeds will be
applied first to reimburse any related
trustee, servicer and credit enhancement
provider for their unpaid fees and
expenses before any remaining amounts
are distributed to securityholders.
In addition, at the times specified in
the related prospectus supplement,
assets of the trust fund and the related
security accounts may be released to the
depositor, the servicer, the credit
enhancement provider or other persons,
if
o all payments then due on
the related securities
have been made, and
o any other payments specified in
the related prospectus supplement
have been made.
3
Credit enhancement may be
insufficient to provide against
particular risks ..................... Once released, such assets will no
longer be available to make payments
to securityholders. You will have no
recourse against the depositor or
any other person if any required
distribution on the securities is
not made or for any other default.
The only obligations of the
depositor with respect to a trust
fund or the related securities would
result from a breach of the
representations and warranties that
the depositor may make concerning
the trust assets. However, because
of the depositor's very limited
assets, even if the depositor should
be required to repurchase a loan
from a particular trust fund because
of the breach of a representation or
warranty, its sole source of funds
for the repurchase would be:
o funds obtained from enforcing any
similar obligation of the
originator of the loan, or
o monies from any reserve fund
established to pay for loan
repurchases.
Although credit enhancement is intended
to reduce the effect of delinquent
payments or loan losses on particular
classes of securities, the amount of any
credit enhancement is subject to the
limits described in the related
prospectus supplement. In addition, the
amount of credit enhancement may decline
or be depleted before the related
securities are paid in full. As a
result, securityholders may suffer
losses.
Principal payments 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 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
underlying loans in the trust fund
or, if the trust fund contains
underlying securities, on the
loans backing the underlying
securities;
4
o how payments of principal are
allocated among the classes of
securities of that series as
specified in the related
prospectus supplement;
o if any party has an option to
terminate the related trust;
o early, the effect of the exercise
of the option;
o the rate and timing of defaults
and losses on the assets in the
related trust fund;
o repurchases of assets in the
related trust fund as a result of
material breaches of
representations and warranties
made by the depositor or a seller;
and
o in the case of a trust fund that
contains revolving credit line
loans, any provisions for
non-amortization, early
amortization or scheduled
amortization periods described in
the related prospectus supplement.
All the above factors may affect the
yield to maturity of the securities.
The interest accrual period
may reduce the effective yield
on your securities ................. Interest payable on the securities on
any given distribution date will include
all interest accrued during the related
interest accrual period. Each prospectus
supplement will specify the interest
accrual period for the related
securities. If interest accrues during
the calendar month before the related
distribution date, your effective yield
will be less than it would be if the
interest accrual period ended the day
before the distribution date. As a
result, your effective yield at par may
be less than the indicated coupon rate.
Loans with balloon payments may
increase your risk of loss ......... Certain underlying loans may not be
fully amortizing over their terms to
maturity 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
generally must be able to refinance the
loan or sell the related property prior
to the loan's maturity date. The
borrower's ability to do so will depend
on
5
such factors as the level of available
mortgage rates at the time of sale or
refinancing, the relative strength of
the local housing market, the borrower's
equity in the property, the borrower's
general financial condition and tax
laws.
Adjustable rate loans may be
underwritten to less stringent
standards than fixed rate loans .... A trust fund may include adjustable rate
loans that were underwritten on the
assumption that the borrowers would be
able to make higher monthly payments in
a relatively short period of time. In
fact, however, the borrowers' income may
not be sufficient to meet their loan
payments as payment amounts increase,
thus increasing the risk of default.
Junior lien loans generally are
riskier than senior lien loans ..... If the mortgage or home equity loans in
a trust fund are primarily in a junior
lien position, any proceeds from
liquidations, insurance recoveries or
condemnations must be used first to
satisfy the claims of the related senior
lien loans (and related foreclosure
expenses) before being available to
satisfy the junior lien loans. In
addition, a junior mortgage lender may
only foreclose subject to the related
senior mortgage. As a result, the junior
mortgage lender must either pay the
related senior mortgage lender in full,
at or before the foreclosure sale, or
agree to make the regular payments on
the senior mortgage. The trust will not
have a source of funds to satisfy any
senior mortgages or to continue making
payments on them. As a result, the
trust's ability, as a practical matter,
to foreclose on any junior mortgage loan
will be quite limited.
A decline in property values could
reduce the amount and delay the
timing of recoveries on defaulted
mortgage loans ..................... The following factors, among others,
could adversely affect property values
in such a way that the outstanding
balance of the related loans, together
with any senior financing on the same
properties, would equal or exceed those
values:
o an overall decline in the
residential real estate markets
where the properties are located;
6
o failure of borrowers to maintain
their properties adequately; and
o natural disasters that may not be
covered by hazard insurance, such
as earthquakes and floods.
If property values decline, actual rates
of delinquencies, foreclosures and
losses on the underlying loans could be
higher than those currently experienced
by the mortgage lending industry in
general.
Some mortgaged properties may
not be owner occupied .............. The mortgaged properties in the trust
fund may not be owner occupied. Rates of
delinquencies, foreclosures and losses
on mortgage loans secured by non-owner
occupied properties may be higher than
those on mortgage loans secured by the
borrower's primary residence.
Home improvement contracts and
other loans may not have
sufficient security ................ A trust fund may include home
improvement contracts that are not
secured by an interest in real estate or
otherwise. A trust fund may also include
mortgage or home equity loans with
original loan-to-value ratios (or
combined loan-to-value ratios in the
case of junior loans) greater than 100%.
In these cases, the trust fund could be
treated as a general unsecured creditor
for the unsecured portion of these
loans.
If a loan of this type goes into
default, the trust fund will have
recourse only against the borrower's
assets generally for the unsecured
portion of the loan, along with the
borrower's other general unsecured
creditors. In a bankruptcy proceeding,
the unsecured portion of the loan may be
discharged, even if the value of the
borrower's assets available to the trust
fund would be insufficient to pay the
remaining amounts owing on the loan.
Home improvement contracts
will not be stamped ................ The depositor will ensure that a UCC-1
financing statement is filed that
identifies as collateral the home
improvement contracts included in a
trust fund. However, unless the related
prospectus supplement provides
otherwise, the home improvement
contracts
7
themselves will not be stamped or marked
to reflect their assignment to the trust
fund. Thus, if as a result of
negligence, fraud or otherwise, a
subsequent purchaser were able to take
physical possession of the contracts
without notice of the assignment to the
trust fund, the interests of the related
securityholders in those contracts could
be defeated.
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 or seller
will deposit a specified amount in a
pre-funding account on the date the
securities are issued. In this case, the
deposited funds may be used only to
acquire additional assets for the trust
during a specified period after the
initial issuance of the securities. Any
amounts remaining in the account at the
end of that period will be distributed
as a prepayment of principal to the
holders of the related securities. The
resulting prepayment could adversely
affect the yield to maturity on those
securities.
Bankruptcy laws may result in
adverse claims against
trust fund assets ................. The federal bankruptcy code and state
debtor relief laws may adversely affect
the ability of the trust fund, as a
secured lender, to realize upon its
security. For example, in a federal
bankruptcy proceeding, a lender may not
foreclose on mortgaged property without
the bankruptcy court's permission.
Similarly, the debtor may propose a
rehabilitation plan, in the case of
mortgaged property that is not his
principal residence, that would reduce
the amount of the lender's secured
indebtedness to the value of the
property as of the commencement of the
bankruptcy. As a result, the lender
would be treated as a general unsecured
creditor for the reduced amount, the
amount of the monthly payments due on
the loan could be reduced, and the
interest rate and loan payment schedule
could be changed.
Any such actions could result in delays
in receiving payments on the loans
underlying the securities and result in
the reduction of total payments.
8
Environmental risks may
adversely affect trust
fund assets ........................ Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances, these
laws and regulations impose obligations
on owners or operators of residential
properties such as those that secure the
loans. Failure to comply with these laws
and regulations can result in fines and
penalties that could be assessed against
the trust fund as owner of the related
property.
In some states, a lien on the property
due to contamination has priority over
the lien of an existing mortgage.
Further, a mortgage lender may be held
liable as an "owner" or "operator" for
costs associated with the release of
petroleum from an underground storage
tank under certain circumstances. If the
trust fund is considered the owner or
operator of a property, it will suffer
losses as a result of any liability
imposed for environmental hazards on the
property.
Consumer protection laws may
adversely affect trust fund assets.. The loans and contracts in each trust
fund also may be subject to federal laws
relating to loan origination and
underwriting. These laws
o require certain disclosures to the
borrowers regarding the terms of
the loans;
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status, national
origin, receipt of public
assistance or the exercise of any
right under the consumer credit
protection act, in the extension
of credit;
o regulate the use and reporting of
information related to the
borrower's credit experience; and
o require additional application
disclosures, limit changes that
may be made to the loan documents
without the borrower's consent and
restrict a lender's ability to
declare a default or to suspend or
reduce a borrower's credit limit
to certain enumerated events.
9
Loans may also be subject to federal
laws that impose additional disclosure
requirements on creditors with respect
to non-purchase money mortgage loans
with high interest rates or high
up-front fees and charges. These laws
can impose specific liabilities upon
creditors that fail to comply and may
affect the enforceability of the related
loans. In addition, the trust fund, as
assignee of the creditor, would
generally be subject to all claims and
defenses that the borrower could assert
against the creditor, including the
right to rescind the loan.
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 the
trust fund, as assignee of the creditor,
to all claims and defenses which the
borrower in a sale transaction could
assert against the seller of defective
goods.
If certain provisions of these federal
laws are violated, the servicer may be
unable to collect all or part of the
principal or interest on the loans. The
trust fund also could be subject to
damages and administrative enforcement.
Subordinate securities are
subject to additional risk ......... If you invest in any class of
subordinate securities, your rights as
an investor to receive payments
otherwise due you will be subordinate to
the rights of the servicer and the
holders of the related senior
securities. As a result, before
investing in any subordinate securities,
you must be prepared to bear the risk
that payments on your securities may be
delayed and that you might not recover
all of your initial investment.
Any credit support provided by
financial instruments may be
insufficient to protect
against particular risks ........... As described under "Credit
Enhancement--Financial Instruments" in
this prospectus, a trust fund may
include financial instruments to protect
against certain risks or to provide
certain cash flow characteristics for
10
particular classes of the securities of
a series. If you invest in one of these
classes and the issuer of the financial
instruments fails to perform its
obligations, the yield to maturity,
market price and liquidity of your
securities could be materially adversely
affected. In addition, if the issuer of
the related financial instruments
experiences a credit rating downgrade,
the market price and liquidity of your
securities could be reduced. Finally, if
the financial instruments are intended
to provide an approximate or partial
hedge for certain risks or cashflow
characteristics, the yield to maturity,
market price and liquidity of your
securities could be adversely affected
to the extent that the financial
instrument does not provide a perfect
hedge.
REMIC residual securities are
subject to additional risk ......... If you invest in any class of securities
that represent the "residual interest"
in a real estate mortgage investment
conduit (REMIC), you will be required to
report as ordinary income your pro rata
share of the REMIC's taxable income,
whether or not you actually received any
cash. Thus, as the holder of a REMIC
residual interest security, you could
have taxable income and tax liabilities
in a year that are in excess of your
ability to deduct servicing fees and any
other REMIC expenses. In addition,
because of their special tax treatment,
your after-tax yield on a REMIC residual
interest security may be significantly
less than that of a corporate bond with
similar cash-flow characteristics and
pre-tax yield.
Transfers of REMIC residual interest
securities are also restricted.
FASIT ownership securities are
subject to additional risk ......... If you are a fully taxable domestic
corporation that invests in any class of
securities representing the "ownership
interest" in a financial asset
securitization investment trust (FASIT),
you will be required to report as
ordinary income your pro rata share of
the FASIT's taxable income, whether or
not you actually received any cash.
Thus, as the holder of a FASIT ownership
interest security, you could have
taxable income and tax liabilities in a
year that are in excess of your ability
to deduct servicing fees and any other
FASIT expenses. In addition, because of
their special
11
tax treatment, your after-tax yield on a
FASIT ownership interest security may be
significantly less than that of a
corporate bond with similar cash-flow
characteristics and pre-tax yield.
Transfers of FASIT ownership interest
securities are also restricted.
Book-entry registration 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 to the accounts of its
participants. In turn, these
participants will credit the
distributions to your account either
directly or indirectly through indirect
participants.
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 rating
categories of a nationally recognized
rating agency. A rating is based on the
adequacy of the value of the trust fund
assets and any credit enhancement for
that class and reflects the rating
agency's assessment of the likelihood
that holders of the class of securities
will receive the payments to which they
are entitled. A rating is not an
assessment of the likelihood that
principal prepayments on the underlying
loans will be made, the degree to which
the rate of prepayments might differ
from that originally anticipated or the
likelihood of an early termination of
the securities. You should not view a
rating as a recommendation to purchase,
hold or sell securities because it does
not address the
12
market price or suitability of the
securities for any particular investor.
There is no assurance that any rating
will remain in effect for any given
period or that the rating agency will
not lower or withdraw the rating in the
future. The rating agency could lower or
withdraw its rating due to:
o any decrease in the adequacy of
the value of the trust fund assets
or any related credit enhancement,
or
o an adverse change in the financial
or other condition of a credit
enhancement provider.
13
Description of the Securities
General
Bear Stearns Asset Backed Securities, Inc., as depositor, will establish a
trust fund for each series of its 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 under a pooling and servicing
agreement or a trust agreement among the depositor, the trustee and, if the
trust fund includes loans, the related servicer. A form of pooling and servicing
agreement has been filed as an exhibit 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. A
form of indenture has been filed as an exhibit to the registration statement of
which this prospectus forms a part. If the trust fund includes loans, the trust
fund and the servicer of the loans will also enter into a servicing agreement.
Each seller named in the related prospectus supplement, from which the
depositor will have purchased assets to be included in the trust fund, may agree
to reimburse the depositor for certain fees and expenses that the depositor
incurs in connection with the offering of the securities.
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 pooling and servicing agreement or
trust agreement, in the case of a series of certificates, and of the indenture
and servicing agreement, in the case of a series of notes, 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 prospectus supplement and the
governing agreements for that series.
Each series of securities will consist of one or more classes which may be
compound interest securities, variable interest securities, planned balance
(PAC) securities, zero coupon securities, principal only securities, interest
only securities or participating securities. A series may also include one or
more classes of subordinated securities. The securities of each series will be
issued only in fully registered form, without coupons, in the authorized
denominations for each class specified in the related prospectus supplement.
Upon satisfaction of any conditions applicable to a particular class as
described in the related prospectus supplement, the transfer of the securities
may be registered, and the securities may be exchanged, at the office of the
trustee without the payment of any service charge, other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange. If specified in the related prospectus supplement, one or more classes
of a series may be available in book-entry form only.
Unless otherwise provided in the related prospectus supplement, payments
of principal of and interest on a series of securities will be made on each
distribution date specified in the prospectus supplement by check mailed to
holders of that series, registered as such at the close of business on the
record date specified in the prospectus supplement that is applicable to that
distribution date, at their
14
addresses appearing on the security register. However, payments may be made by
wire transfer (at the expense of the holder requesting payment by wire transfer)
in circumstances described in the prospectus supplement. However, final payments
of principal in retirement of each security will be made only upon presentation
and surrender of the security at the office of the related trustee. Notice of
the final payment on a security will be mailed to each holder before the
distribution date on which the final principal payment is expected to be made.
Payments of principal of and interest on the securities will be made by
the trustee, or a paying agent on behalf of the trustee, as specified in the
related prospectus supplement. Unless otherwise provided in the related
prospectus supplement, the following amounts will be deposited directly into the
collection account established for a particular series of securities with the
trustee (or with the servicer in the name of the trustee):
o all payments with respect to the primary assets for that series
(see, "--The Primary Assets and Their Valuation" below), together
with reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating agencies
identified in the prospectus supplement as rating that series and
deposited in each reserve fund for the series established in the
name of the trustee; and
o amounts available pursuant to any other credit enhancement for the
series.
If provided in the related prospectus supplement, the deposits may be net
of certain amounts payable to the servicer and any other person specified in the
prospectus supplement. These amounts thereafter will be deposited into the
separate distribution account established for the series and will be available
to make payments on the related securities on the next distribution date. See
"The Trust Funds--Collection and Distribution Accounts" in this prospectus.
The Primary Assets and Their Valuation
The primary assets of each trust fund may include one or more pools of the
following:
o Residential Loans,
o Home Equity Loans,
o Home Improvement Contracts,
o Manufactured Housing Contracts,
o Agency Securities, and
o Private Label Securities.
When we use the term "loans" in this prospectus, we include Residential
Loans, Home Equity Loans, Home Improvement Contracts and Manufactured Housing
Contracts. The residential or mixed-use
15
properties that secure the loans are collectively referred to in this prospectus
as the "mortgaged properties."
If specified in the related prospectus supplement for a series of notes,
each primary asset included in the related trust fund will be assigned an
initial Asset Value. Unless otherwise specified in the related prospectus
supplement, the initial Asset Value of the primary assets of the trust fund will
be at least equal to the principal amount of the related notes on the date of
issuance.
Payments of Interest
The securities of each class that by their terms are entitled to receive
interest will bear interest (calculated, unless otherwise specified in the
related prospectus supplement, on the basis of a 360-day year of twelve 30-day
months) from the date and at the rate specified in the prospectus supplement, or
will be entitled to receive interest payment amounts calculated in the method
described in the prospectus supplement. Interest on the interest-bearing
securities of a series will be payable on the distribution date specified in the
related prospectus supplement. The rate of interest on securities of a series
may be variable or may change with changes in the annual interest rates of the
loans (or underlying loans) included in the related trust fund and/or as
prepayments occur with respect to the loans (or underlying loans). Principal
only securities may not be entitled to receive any interest distributions or may
be entitled to receive only nominal interest distributions. Any interest on zero
coupon securities that is not paid on the related distribution date will accrue
and be added to principal on that date.
Interest payable on the securities on a distribution date will include all
interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding that distribution date.
Payments of Principal
On each distribution date for a series, principal payments will be made to
the holders of the securities on which principal is then payable, to the extent
set forth in the prospectus supplement. The payments will be made in a total
amount determined as specified in the prospectus supplement and will be
allocated among the respective classes of the series in the manner, at the times
and in the priority (which may include allocation by random lot) set forth in
the prospectus supplement.
Final Scheduled Distribution Date
The final scheduled distribution date with respect to each class of a
series of notes is the date no later than which the total principal balance of
the class will be fully paid, and the final scheduled distribution date with
respect to each class of a series of certificates is the date on which the
principal balance of the class is expected to be reduced to zero, in each case
calculated on the basis of the assumptions applicable to that series described
in the 14 related prospectus supplement. The final scheduled distribution date
for each class of a series will be specified in the related prospectus
supplement.
16
Since payments on the primary assets of each trust fund will be used to
make distributions that reduce the outstanding principal amount of the related
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date. Furthermore, with respect to a series of
certificates, unless otherwise specified in the related prospectus supplement,
the actual final distribution date of any certificate may occur later than its
final scheduled distribution date as a result of delinquencies, defaults and
liquidations of the primary assets of the related trust fund. No assurance can
be given as to the actual prepayment experience with respect to any series. See
"--Weighted Average Lives of the Securities" below.
Special Redemption
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
the securities may be subject to special redemption, in whole or in part, on the
special redemption date specified in the related prospectus supplement if, as a
consequence of prepayments on the loans (or underlying loans) or low yields then
available for reinvestment, the entity specified in the prospectus supplement
determines, based on assumptions set forth in the applicable agreement, that the
available interest amount that will have accrued on the securities through the
designated interest accrual date specified in the related prospectus supplement
is less than the amount of interest that will have accrued on the securities to
that date. In this event and as further described in the related prospectus
supplement, the trustee will redeem a principal amount of outstanding securities
of the series sufficient to cause the available interest amount to equal the
amount of interest that will have accrued through the designated interest
accrual date for the securities outstanding immediately after the redemption.
Optional Redemption, Purchase or Termination
The depositor or the servicer or any other entity that may be designated
in the related prospectus supplement will have the option, on any distribution
date, to purchase one or more classes of certificates of any series or redeem,
in whole or in part, one or more classes of notes of any series under the
circumstances, if any, specified in the related prospectus supplement.
Alternatively, if the prospectus supplement for a series of certificates so
provides, the depositor, the servicer or another entity designated in the
prospectus supplement will have the option to cause an early termination of the
related trust fund by repurchasing all of the primary assets from the trust fund
on or after a date specified in the prospectus supplement, or on or after such
time as the total outstanding principal amount of the certificates or primary
assets (as specified in the prospectus supplement) is equal to or less than the
amount or percentage specified in the prospectus supplement. Notice of the
redemption, purchase or termination must be given by the depositor or the
trustee prior to the related date. The redemption, purchase or repurchase price
will be set forth in the prospectus supplement. If specified in the prospectus
supplement, in the event that a REMIC election has been made, the trustee shall
receive a satisfactory opinion of counsel that the optional redemption, purchase
or termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Internal Revenue Code of 1986, as amended.
In addition, the prospectus supplement may provide other circumstances
under which holders of securities of a series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related primary assets.
17
Weighted Average Lives of the Securities
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
the security will be repaid to the investor. Unless otherwise specified in the
related prospectus supplement, the weighted average life of the securities of a
class will be influenced by the rate at which the amount financed under the
loans (or underlying loans relating to the Agency Securities or Private Label 15
Securities, as applicable), included in the trust fund for a series is paid,
whether in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The prospectus supplement for each series of
securities will describe the prepayment standard or model, if any, that is used
and may contain tables setting forth the projected weighted average life of each
class of securities of the series and the percentage of the original principal
amount of each class of securities of the series that would be outstanding on
specified distribution dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans (or
underlying loans relating to the Agency Securities or Private Label Securities,
as applicable) included in the related trust fund will conform to any level of
any prepayment standard or model specified in the related prospectus supplement.
The rate of principal prepayments on pools of loans may be influenced by a
variety of factors, including job-related factors such as transfers, layoffs or
promotions and personal factors such as divorce, disability or prolonged
illness. Economic conditions, either generally or within a particular geographic
area or industry, also may affect the rate of principal prepayments. Demographic
and social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do
others. The deductibility of mortgage interest payments, servicing decisions and
other factors also can affect the rate of principal prepayments. As a result,
there can be no assurance as to the rate or timing of principal prepayments of
the loans (or underlying loans) either from time to time or over the lives of
the loans (or underlying loans).
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
loans (or underlying loans) for a series, the loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by the loans. In this regard, it should be noted that the loans (or
underlying loans) for a series may have different interest rates. In addition,
the weighted average life of a class of securities may be affected by the
varying maturities of the loans (or underlying loans). If any loans (or
underlying loans) for a series have actual terms to stated maturity that are
less than those that were assumed in calculating the final scheduled
distribution date of the related securities, one or more classes of the series
may be fully paid prior to their respective final scheduled distribution date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate established by the rating agencies named in the
related prospectus supplement.
18
The Trust Funds
General
The notes of each series will be secured by the pledge of the assets of
the related trust fund, and the certificates of each series will represent
interests in the assets of the related trust fund. The trust fund of each series
will include assets purchased by the depositor from the seller composed of:
o the primary assets of the trust fund;
o amounts available from the reinvestment of payments on the primary
assets at any Assumed Reinvestment Rate that may be established by
the rating agencies specified in the related prospectus supplement;
o any credit enhancement in the form of an irrevocable letter of
credit, surety bond, insurance policy or other form of credit
support;
o REO property consisting of any mortgaged property or home
improvement that secured a loan but which is acquired by foreclosure
or deed in lieu of foreclosure or repossession; and
o the amount, if any, initially deposited into the collection account
or distribution account(s) for the series as specified in the
related prospectus supplement.
The securities will be non-recourse obligations of the related trust fund.
Unless the prospectus supplement indicates otherwise, the assets of the trust
fund specified in the related prospectus supplement will serve as collateral
only for that series of securities. Holders of a series of notes may only
proceed against the collateral securing that series in the case of a default
with respect to the notes and may not proceed against any assets of the
depositor or the related trust fund not pledged to secure the notes.
The primary assets for a series will be sold by the seller to the
depositor or purchased by the depositor in the open market or in privately
negotiated transactions (which may include transactions with affiliates) and
will be transferred by the depositor to the related trust fund. Loans relating
to a series will be serviced by the servicer (which may be the seller) that is
specified in the related prospectus supplement. The servicer will service the
loans pursuant to a pooling and servicing agreement with respect to a series of
certificates, or a servicing agreement between the trust fund and servicer with
respect to a series of notes.
If the prospectus supplement so provides, a trust fund relating to a
series of securities may be a business trust formed under the laws of the state
specified in the prospectus supplement pursuant to a trust agreement between the
depositor and the trustee.
Each trust fund, prior to the initial offering of the related series of
securities, will have no assets or liabilities. No trust fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related primary assets and other
assets contemplated in this prospectus and in the related prospectus
supplement, and the proceeds thereof,
19
o to issue the related securities,
o to make payments and distributions on the securities, and
o to perform certain related activities.
No trust fund is expected to have any source of capital other than its
assets and any related credit enhancement.
Primary assets included in the trust fund for a series may consist of any
combination of loans, Agency Securities and Private Label Securities, as and to
the extent the related prospectus supplement specifies.
The Loans
General. Loans in each trust fund may consist of Residential Loans, Home
Equity Loans, Home Improvement Contracts or Manufactured Housing Contracts. If
specified in the related prospectus supplement, the loans in the related trust
fund may include cooperative apartment 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. As more fully
described in the related prospectus supplement, the loans may be either
"conventional" loans or loans that are insured or guaranteed by a governmental
agency like the FHA or VA. The loans will have been originated in accordance
with the underwriting criteria specified in the related prospectus supplement.
In general, the loans in a pool will have monthly payments due on the
first day of each month. However, as described in the related prospectus
supplement, the loans in a pool may have payments due more or less frequently
than monthly. In addition, payments may be due on any day during a month. The
payment terms of the loans to be included in a trust fund will be described in
the related prospectus supplement and may include any of the following features,
all as described in this prospectus or 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.
20
Changes to an adjustable rate may be subject to periodic limitations, maximum
rates, minimum rates or a combination of these limitations. As specified in the
related prospectus supplement, the loans may provide for payments in level
monthly installments, for balloon payments, or for payments that are allocated
to principal and interest according to the "sum of the digits" or "Rule of 78s"
methods. Accrued interest may be deferred and added to the principal of a loan
for the periods and under the circumstances as may be specified in the related
prospectus supplement. Loans may provide for the payment of interest at a rate
lower than the specified loan rate 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 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
- 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.
Prepayments of principal may be conditioned on payment of 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 for particular 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 mortgagee to demand payment of
the entire loan in connection with the sale or transfer of the related property.
Other loans may be assumable by persons meeting the then applicable underwriting
standards of the related seller.
A trust fund may contain buydown loans that include provisions for a third
party to subsidize partially the monthly payments of the borrowers on those
loans during the early years of those loans, the
21
difference to be made up from a buydown fund contributed by that third party at
the time of origination of the loan. A buydown fund will be in an amount equal
either to the discounted value or full aggregate amount of future payment
subsidies. The underlying assumption of buydown plans is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and inflation, so that the borrower will be able to meet the
full loan payments at the end of the buydown period. If assumption of increased
income is not fulfilled, the possibility of defaults on buydown loans is
increased. The related prospectus supplement will contain information with
respect to any buydown loan concerning limitations on the interest rate paid by
the borrower initially, on annual increases in the interest rate and on the
length of the buydown period.
When we use the term "mortgaged property" in this prospectus, we mean the
real property which secures repayment of the related loan. Home Improvement
Contracts and Manufactured Housing Contracts may, and the other loans will, be
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on a mortgaged property. In the case of Home Equity Loans, the
related liens may be subordinated to one or more senior liens on the related
mortgaged properties as described in the prospectus supplement. As specified in
the related prospectus supplement, home improvement contracts and manufactured
housing contracts may be unsecured or secured by purchase money security
interests in the financed home improvements and the financed manufactured homes.
When we use the term "properties" in this prospectus, we mean the related
mortgaged properties, home improvements and manufactured homes. The properties
relating to the loans will consist primarily of single-family properties,
meaning detached or semi-detached one- to four-family dwelling units,
townhouses, rowhouses, individual condominium units, individual units in planned
unit developments and other dwelling units, or mixed-use properties. Any
mixed-use property will not exceed three stories and its primary use will be for
one- to four-family residential occupancy, with the remainder of its space for
retail, professional or other commercial uses. Any non-residential use will be
in compliance with local zoning laws and regulations. Properties may include
vacation and second homes, investment properties and leasehold interests. In the
case of leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the related loan by a time period specified in the related
prospectus supplement. The 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.
Loans with specified loan-to-value ratios and/or principal balances may be
covered wholly or partially by primary mortgage guaranty insurance policies. The
existence, extent and duration of any coverage provided by primary mortgage
guaranty insurance policies will be described in the related prospectus
supplement.
Home Equity Loans. The primary assets for a series may consist, in whole
or in part, of, closed-end home equity loans, revolving credit line home equity
loans or certain balances forming a part of the revolving credit line loans,
secured by mortgages creating senior or junior liens primarily on one- to
four-family residential or mixed-use properties. The full principal amount of a
closed-end loan is advanced at origination of the loan and generally is
repayable in equal (or substantially equal) installments of an amount sufficient
to fully amortize the loan at its stated maturity. Unless otherwise described in
the related prospectus supplement, the original terms to stated maturity of
closed-end loans will not exceed 360 months. Principal amounts of a revolving
credit line loan may be drawn down (up to the maximum amount set forth 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
22
supplement, the trust fund will not include any amounts borrowed under a
revolving credit line loan after the cut-off date designated in the prospectus
supplement. As more fully described in the related prospectus supplement,
interest on each revolving credit line loan, excluding introductory rates
offered from time to time during promotional periods, is computed and payable
monthly on the average daily principal balance of that loan. Under certain
circumstances, a borrower under either a revolving credit line loan or a
closed-end loan may choose an interest-only payment option. In this case only
the amount of interest that accrues on the loan during the billing cycle must be
paid. An interest-only payment option may be available for a specified period
before the borrower must begin making at least the minimum monthly payment of a
specified percentage of the average outstanding balance of the loan.
The rate of prepayment on Home Equity Loans cannot be predicted. Home
Equity Loans have been originated in significant volume only during the past few
years and the depositor is not aware of any publicly available studies or
statistics on the rate of their prepayment. The prepayment experience of the
related trust fund may be affected by a wide variety of factors, including
general economic conditions, prevailing interest rate levels, the availability
of alternative financing and homeowner mobility and the frequency and amount of
any future draws on any revolving credit line loans. Other factors that might be
expected to affect the prepayment rate of a pool of Home Equity Loans include
the amounts of, and interest rates on, the underlying first mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
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, Home Equity Loans may experience a
higher rate of prepayment than traditional fixed-rate first mortgage loans. On
the other hand, because Home Equity Loans such as the revolving credit line
loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgage loans. Any future
limitations on the right of borrowers to deduct interest payments on Home Equity
Loans for federal income tax purposes may further increase the rate of
prepayments of the Home Equity Loans. Moreover, the enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related Home Equity Loans. See "Material Legal Aspects of the
Loans--Due-on-Sale Clauses in Mortgage Loans" in this prospectus.
Collections on revolving credit line loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that is as
little as the minimum monthly payment for that month or, during the
interest-only period for certain revolving credit line loans (and,
in more limited circumstances, closed-end loans with respect to
which an interest-only payment option has been selected), the
interest, fees and charges for that month.
o A borrower may make a payment that is as much as the entire
principal balance plus accrued interest and related fees and charges
during a month.
o A borrower may fail to make the required periodic payment.
o Collections on the mortgage loans may vary due to seasonal
purchasing and the payment habits of borrowers.
23
Each single family property will be located on land owned in fee simple by
the borrower or on land leased by the borrower for a term of at least ten years
(unless otherwise provided in the related prospectus supplement) greater than
the term of the related loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building. Unless otherwise specified in the related prospectus supplement,
mortgages on cooperative dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate principal balance of loans secured by single family
properties that are owner-occupied will be disclosed in the related prospectus
supplement. Unless otherwise specified in the prospectus supplement, the sole
basis for a representation that a given percentage of the loans are secured by
single family property that is owner-occupied will be either:
o a representation by the borrower at origination of the loan either
that the underlying mortgaged property will be used by the borrower
for a period of at least six months every year or that the borrower
intends to use the mortgaged property as a primary residence, or
o a finding that the address of the underlying mortgaged property is
the borrower's mailing address as reflected in the servicer's
records.
To the extent specified in the related prospectus supplement, single
family properties may include non-owner occupied investment properties and
vacation and second homes.
Home Improvement Contracts. The primary assets for a series may consist,
in whole or in part, of home improvement installment sales contracts and
installment loan agreements originated by home improvement contractors in the
ordinary course of business. As specified in the related prospectus supplement,
the Home Improvement Contracts will be either unsecured or secured by senior or
junior mortgages primarily on single family properties, or by purchase money
security interests in the related home improvements. Unless otherwise specified
in the applicable prospectus supplement, the Home Improvement Contracts will be
fully amortizing and may have fixed interest rates or adjustable interest rates
and may provide for other payment characteristics as described below and in the
related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the home
improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
Manufactured Housing Contracts. The trust fund assets for a series may
consist, in whole or part, of conventional manufactured housing installment
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business. As specified in the related
prospectus supplement, the Manufactured Housing Contracts will be secured by
manufactured homes, located in any of the fifty states or the District of
Columbia or by mortgages on the real estate on which the manufactured homes are
located.
24
The manufactured homes securing the Manufactured Housing Contracts will
consist of manufactured homes within the meaning of 42 United States Code,
Section 5402(6), or manufactured homes meeting those other standards as shall be
described in the related prospectus supplement. Section 5402(6) defines a
"manufactured home" as "a structure, transportable in one or more sections,
which, in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning and
electrical systems contained therein; except that the term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Manufactured homes, unlike mortgaged properties, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home or home improvement may be lower than the
principal amount outstanding under the related contract.
Additional Information. The selection criteria applicable to the loans
will be specified in the related prospectus supplement. These include, but are
not limited to, the combined loan-to-value ratios or loan-to-value ratios, as
applicable, original terms to maturity and delinquency information.
The loans for a series of securities may include loans that do not
amortize their entire principal balance by their stated maturity in accordance
with their terms but require a balloon payment of the remaining principal
balance at maturity, as specified in the related prospectus supplement. As
further described in the related prospectus supplement, the loans for a series
of securities may include loans that do not have a specified stated maturity.
The loans will be either conventional contracts or contracts insured by
the Federal Housing Administration (FHA) or partially guaranteed by the Veterans
Administration (VA). Loans designated in the related prospectus supplement as
insured by the FHA will be insured under various FHA programs as authorized
under the United States Housing Act of 1937, as amended.. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
loans relating to a series of securities may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time or origination
of such loan.
The insurance premiums for loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development (HUD) and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted loan to HUD. With respect to
a defaulted FHA-insured loan, the servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the servicer or HUD,
that default was caused by circumstances beyond the borrower's control, the
servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
borrower. Such plans may involve the reduction or suspension of regular mortgage
payments for a specified period, with such payments to be made upon or
25
before the maturity date of the mortgage, or the recasting of payments due under
the mortgage up to or beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD may
provide relief by making payments to the servicer in partial or full
satisfaction of amounts due under the loan (which payments are to be repaid by
the borrower to HUD) or by accepting assignment of the loan from the servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the loan and HUD must have rejected any request for relief from
the borrower before the servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The servicer of each FHA-insured loan will be obligated
to purchase any such debenture issued in satisfaction of a loan upon default for
an amount equal to the principal amount of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted loan adjusted to reimburse the
servicer for certain costs and expenses and to deduct certain amounts received
or retained by the servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to the date of foreclosure but in general only to the extent it was allowed
pursuant to a forbearance plan approved by HUD. When entitlement to insurance
benefits results from assignment of the loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself, upon foreclosure of an FHA-insured loan,
bears interest from a date 30 days after the borrower's first uncorrected
failure to perform any obligation to make any payment due under the loan and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related prospectus supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended. The Serviceman's Readjustment Act permits a veteran (or
in certain instances, the spouse of a veteran) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program has
no mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to its guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed loan, the servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranteed amount is submitted to the VA after liquidation of
26
the related mortgaged property.
The amount payable under a VA guaranty will be the percentage of the
VA-insured loan originally guaranteed by the VA applied to the indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
The prospectus supplement for each series will provide information with
respect to the loans that are primary assets of the related trust fund as of the
cut-off date, including, among other things, and to the extent relevant:
o the aggregate unpaid principal balance of the loans;
o the range and weighted average interest rates on the loans and, in
the case of adjustable rate loans, the range and weighted average of
the current interest rates and the lifetime interest rate caps, if
any;
o the range and average principal balance of the loans;
o the weighted average original and remaining terms to stated maturity
of the loans and the range of original and remaining terms to stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the loans, as applicable;
o the percentage (by principal balance as of the cut-off date) of
loans that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the loans;
o the percentage (by principal balance as of the cut-off date) of
loans that are secured by mortgaged properties or home improvements
or that are unsecured;
o the geographic distribution of any mortgaged properties securing the
loans;
o for loans that are secured by single family properties, the
percentage (by principal balance as of the cut-off date) secured by
shares relating to cooperative dwelling units, condominium units,
investment property and vacation or second homes;
o the lien priority of the loans;
o the delinquency status and year of origination of the loans;
27
o whether the loans are closed-end loans and/or revolving credit line
loans; and
o in the case of revolving credit line loans, the general payments and
credit line terms of those loans and other pertinent features.
The prospectus supplement will also specify any other limitations on the
types or characteristics of the loans in the trust fund for the related series
of securities.
If information of the nature described above respecting the loans is not
known to the depositor at the time the securities are initially offered, more
general or approximate information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related series of securities and to be filed with the SEC
within 15 days after the initial issuance of the securities.
Private Label Securities
General. Primary assets for a series may consist, in whole or in part, of
Private Label Securities or PLS (i.e., private mortgage-backed asset-backed
securities) that include:
o pass-through certificates representing beneficial interests in
underlying loans of a type that would otherwise be eligible to be
loans held directly by the trust fund, or
o collateralized obligations secured by underlying loans of a type
that would otherwise be eligible to be loans held directly by the
trust fund.
The Private Label Securities will previously have been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering from a
person that is not an affiliate of the Private Label Securities at
the time of sale (nor its affiliate at any time during the three
preceding months) and a period of two years has elapsed since the
date the Private Label Securities were acquired from the issuer or
its affiliate, whichever is later.
Although individual underlying loans may be insured or guaranteed by the
United States or one of its agencies or instrumentalities, they need not be, and
the Private Label Securities themselves may be, but need not be, insured or
guaranteed.
The Private Label Securities will have been issued pursuant to a pooling
and servicing agreement, a trust agreement or similar agreement. The
seller/servicer of the underlying loans will have entered into a PLS agreement
with the PLS trustee. The PLS trustee, its agent or a custodian will take
possession of the underlying loans. The underlying loans will be serviced by the
PLS servicer directly or by one or more sub-servicers subject to the supervision
of the PLS servicer.
The issuer Private Label Securities will be
28
o a financial institution or other entity engaged generally in the
business of lending,
o a public agency or instrumentality of a state, local or federal
government, or
o a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to
such trusts, and selling beneficial interests in trusts.
If specified in the prospectus supplement, the PLS issuer may be an
affiliate of the depositor. The obligations of the PLS issuer generally will be
limited to certain representations and warranties that it makes 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.
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 the underlying loans after a certain date or under other
circumstances specified in the related prospectus supplement.
The loans underlying the Private Label Securities may be fixed rate, level
payment, fully amortizing loans or adjustable rate loans or loans having balloon
or other irregular payment features. The underlying loans will be secured by
mortgages on mortgaged properties.
Credit Support Relating to Private Label Securities. Credit support in the
form of reserve funds, subordination of other private securities issued under
the PLS agreement, guarantees, cash collateral accounts, security policies or
other types of credit support may be provided with respect to the underlying
loans or with respect to the Private Label Securities themselves. The type,
characteristics and amount of credit support will be a function of the
characteristics of the underlying loans and other factors and will be based on
the requirements of the nationally recognized statistical rating organization
that rated the Private Label Securities.
Additional Information. If the primary assets of a trust fund include
Private Label Securities, the related prospectus supplement will specify the
items listed below, to the extent relevant and to the extent information is
reasonably available to the depositor and the depositor reasonably believes the
information to be reliable:
o the total approximate principal amount and type of the Private Label
Securities to be included in the trust fund,
o the maximum original term to stated maturity of the Private Label
Securities,
o the weighted average term to stated maturity of the Private Label
Securities,
o the pass-through or certificate rate or range of rates of the
Private Label Securities,
29
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,
security policies or guarantees relating to the underlying loans or
to the Private Label Securities themselves;
o the terms on which underlying loans may, or are required to, be
purchased prior to their stated maturity or the stated maturity of
the Private Label Securities, and
o the terms on which underlying loans may be substituted for those
originally underlying the Private Label Securities.
In addition, the related prospectus supplement will provide information
about the loans underlying the Private Label Securities, including
o the payment features of the underlying loans (i.e., whether
closed-end loans or revolving credit line loans, whether fixed rate
or adjustable rate, whether level payment or balloon payment loans),
o the approximate aggregate principal balance, if known, of the
underlying loans insured guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
underlying loans,
o the minimum and maximum stated maturities of the underlying loans at
origination,
o the lien priority of the underlying loans, and
o the delinquency status and year of origination of the underlying
loans.
The above disclosure may be on an approximate basis and will be as of the
date specified in the related prospectus supplement. If information of the
nature described above for the Private Label Securities is not known to the
depositor at the time the securities are initially offered, more general or
approximate information of a similar nature will be provided in the prospectus
supplement and the additional information, if available, will be set forth in a
Current Report on Form 8-K to be available to investors on the date of issuance
of the related series of securities and to be filed with the SEC within 15 days
of the initial issuance of the securities.
Agency Securities
Ginnie Mae. The Government National Mortgage Association (Ginnie Mae) is a
wholly-owned corporate instrumentality of HUD. Section 306(g) of Title II of the
National Housing Act of 1934, as amended, authorizes Ginnie Mae to, among other
things, guarantee the timely payment of principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
the FHA under the National Housing Act of 1934 or Title V of the National
Housing Act of 1949, or 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.
30
Section 306(g) of the National Housing Act of 1934 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 guarantee under this subsection." In
order to meet its obligations under any guarantee under Section 306(g) of the
National Housing Act, Ginnie Mae may, under Section 306(d) of the National
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable Ginnie Mae, with no limitations as to amount, to
perform its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae certificate held in a trust fund
for a series of securities will be a "fully modified pass-through"
mortgaged-backed certificate issued and serviced by 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. Each Ginnie Mae certificate may be
a GNMA I certificate or a GNMA II certificate. The mortgage loans underlying the
Ginnie Mae certificates will consist of FHA loans and/or VA loans. Each mortgage
loan of this type is secured by a one- to four-family residential property or a
manufactured home. Ginnie Mae will approve the issuance of each Ginnie Mae
certificate in accordance with a guaranty agreement between Ginnie Mae and the
issuer and servicer of the Ginnie Mae certificate. Pursuant to its guaranty
agreement, a Ginnie Mae servicer will be required to advance its own funds in
order to make timely payments of all amounts due on each of the related Ginnie
Mae certificates, even if the payments received by the Ginnie Mae servicer on
the FHA loans or VA loans underlying each of those Ginnie Mae certificates are
less than the amounts due on those Ginnie Mae certificates.
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 40 years (but may have original
maturities of substantially less than 40 years). Each Ginnie Mae certificate
will provide for the payment by or on behalf of the Ginnie Mae servicer to the
registered holder of the Ginnie Mae certificate of 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 loans or VA loans 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 the related FHA loans or VA
loans.
If a Ginnie Mae servicer is unable to make the payments on a Ginnie Mae
certificate as it becomes due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payment. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of a Ginnie Mae certificate. In
the event no payment is made by a Ginnie Mae servicer and the Ginnie Mae
servicer fails to notify and request Ginnie Mae to make the payment, the holder
of the related Ginnie Mae certificate will have recourse only against Ginnie Mae
to obtain the 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 the Ginnie Mae certificates for any amounts that are not paid when due.
Except for pools of mortgage loans secured by manufactured homes, all
mortgage loans underlying a particular Ginnie Mae certificate must have the same
interest rate over the term of the loan.
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The interest rate on a GNMA I certificate will equal the interest rate on the
mortgage loans included in the pool of mortgage loans underlying the GNMA I
certificate, less one-half percentage point per year of the unpaid principal
balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II certificate may have annual
interest rates that vary from each other by up to one percentage point. The
interest rate on each GNMA 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
GNMA II certificate (except for pools of mortgage loans secured by manufactured
homes).
Regular monthly installment payments on each Ginnie Mae certificate will
be comprised of interest due as specified on a 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 is due. Regular monthly installments
on each Ginnie Mae certificate, are required to be paid to the trustee
identified in the related prospectus supplement as registered holder by the 15th
day of each month in the case of a GNMA I certificate, and are required to be
mailed to the trustee by the 20th day of each month in the case of a GNMA 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 a loan will be passed through to the trustee identified in the
related prospectus supplement 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 those 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 the mortgage loans, will be less than the amount
of stated interest on the mortgage loans. The interest not so paid will be added
to the principal of the graduated payment mortgage loans and, together with
interest on that interest, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer/servicer 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 loans are available in
inspect of graduated payment or buydown mortgages. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
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. 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. Fannie Mae acquires funds to purchase mortgage
loans from many capital market investors that may not ordinarily invest in
mortgages. In so doing, it expands the total amount of funds available for
32
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
Fannie Mae Certificates. Fannie Mae certificates are either guaranteed
mortgage pass-through certificates or stripped mortgage-backed securities. The
following discussion of Fannie Mae certificates applies equally to both types of
Fannie Mae certificates, except as otherwise indicated. Each Fannie Mae
certificate to be included in the trust fund for a series of securities will
represent a fractional undivided interest in a pool of mortgage loans formed by
Fannie Mae. Each pool formed by Fannie Mae will consist of mortgage loans of one
of the following types:
o fixed-rate level installment conventional mortgage loans,
o fixed-rate level installment mortgage loans that are insured by FHA
or partially guaranteed by the VA,
o adjustable rate conventional mortgage loans, or
o adjustable rate mortgage loans that are insured by the FHA or
partially guaranteed by the VA.
Each mortgage loan must meet the applicable standards set forth under the
Fannie Mae purchase program and will be secured by a first lien on a one- to
four-family residential property.
Each Fannie Mae certificate will be issued pursuant to a trust indenture.
Original maturities of substantially all of the conventional, level payment
mortgage loans underlying a Fannie Mae certificate are expected to be between
either eight to 15 years or 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 guaranteed mortgage-backed
certificate and the series pass-through rate payable with respect to a Fannie
Mae stripped mortgage-backed security 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 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
50 basis points and 250 basis points greater than the annual pass-through rate,
in the case of a Fannie Mae guaranteed mortgage-backed certificate, or the
series pass-through rate in the case of a Fannie Mae stripped mortgage-backed
security. 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 55
basis points and 255 basis points greater than the annual pass-through rate, in
the case of a Fannie Mae guaranteed mortgage-backed certificate, or the series
pass-through rate in the case of a Fannie Mae stripped mortgage-backed security.
Fannie Mae guarantees to each registered holder of a Fannie Mae
certificate that it will distribute on a timely basis 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
33
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 the 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. 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 those mortgage loans.
Fannie Mae stripped mortgage-backed securities are issued in series of two
or more classes, with each class representing a specified undivided fractional
interest in principal distributions and interest distributions, adjusted to the
series pass-through rate, on the underlying pool of mortgage loans. The
fractional interests of each class in principal and interest distributions are
not identical, but the classes in the aggregate represent 100% of the principal
distributions and interest distributions, adjusted to the series pass-through
rate, on the respective pool. Because of the difference between the fractional
interests in principal and interest of each class, the effective rate of
interest on the principal of each class of Fannie Mae stripped mortgage-backed
securities may be significantly higher or lower than the series pass-through
rate and/or the weighted average interest rate of the underlying mortgage loans.
Unless otherwise specified by Fannie Mae, Fannie Mae certificates
evidencing interests in pools of mortgages formed on or after May 1, 1985 will
be 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 on the Fannie Mae
certificates will be made by wire, and with respect to fully registered Fannie
Mae certificates, distributions on the Fannie Mae certificates will be made by
check.
Freddie Mac. The Federal Home Loan Mortgage Corporation (Freddie Mac) is a
shareholder-owned, United States government-sponsored enterprise created
pursuant to the Federal Home loan Mortgage Corporation Act, Title III of the
Emergency Home Finance Act of 1970, as amended. The common stock of Freddie Mac
is owned by the Federal Home loan Banks. 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 FHA loans, VA loans or participation interests in
those mortgage loans and the sale of the 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 the quality, type and class which meet generally the purchase standards
imposed by private institutional mortgage investors.
Freddie Mac Certificates. Each Freddie Mac certificate included in a trust
fund for a series will represent an undivided interest in a pool of mortgage
loans that may consist of first lien conventional loans, FHA loans or VA 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
34
Cash Program or Guarantor Program. Typically, 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 of those mortgage
loans must meet the applicable standards set forth in the law governing Freddie
Mac. A Freddie Mac certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac certificate group. Under the
guarantor program, any Freddie Mac certificate group 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 in the Freddie Mac certificate group represented by a Freddie Mac
certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac certificate ultimate receipt by a holder of
all principal on the underlying mortgage loans, without any offset or deduction,
to the extent of that holder's pro rata share. However, Freddie Mac does not
guarantee, except if and to the extent specified in the prospectus supplement
for a series, 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 the related 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 guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (x) 30
days following foreclosure sale, (y) 30 days following payment of the claim by
any mortgage insurer, or (z) 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 borrower, 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, nor
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy its obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
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 prepayments 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 by the party that sold
the related mortgage loans to Freddie Mac. Freddie Mac is required to remit each
registered Freddie Mac certificateholder's pro rata share of principal payments
on
35
the underlying mortgage loans, interest at the Freddie Mac pass-through rate and
any other sums like 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, with respect to pools formed prior to
June 1, 1987, there is no limitation on be 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. With respect to Freddie Mac certificates
issued on or after June 1, 1987, the maximum interest rate on the mortgage loans
underlying the Freddie Mac certificates may exceed the pass-through rate of the
Freddie Mac certificates by 50 to 100 basis points. Under that program, Freddie
Mac purchases group 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 Freddie Mac certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac certificate
group 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 seller
and Freddie Mac. For Freddie Mac certificate group formed under the Guarantor
Program with certificate numbers beginning with 18-012, the range between the
lowest and the highest annual interest rates on the mortgage loans in a Freddie
Mac certificate group may not exceed two percentage points.
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 15 day
of the second month following the month in which the purchaser became a
registered holder of the Freddie Mac certificates. Subsequent remittances 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
on or after January 2, 1985, and makes payments of principal and interest each
month to the registered holders of Freddie Mac certificates in accordance with
the holders' instructions.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each 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 either the
principal distributions or the interest distributions, or in some specified
portion of the principal and interest distributions, on particular Freddie Mac,
Fannie Mae, Ginnie Mae or other government agency or government-sponsored agency
certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae, Ginnie Mae or another government agency or
government-sponsored agency, each as trustee, or by another trustee named in the
related prospectus supplement. Freddie Mac, Fannie Mae, Ginnie Mae or another
government agency or government-sponsored agency will guarantee each stripped
agency security to the same extent as the applicable entity guarantees the
underlying
36
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 Ginnie Mae, Fannie Mae, Freddie Mac or other government
agencies or government-sponsored agencies. The characteristics of any other
mortgage pass-through certificates issued or guaranteed by Ginnie Mae, Fannie
Mae, Freddie Mac or other government agencies or government-sponsored agencies
will be described in that prospectus supplement. If so specified, a combination
of different types of Agency Securities may be held in a trust fund.
Collection and Distribution Accounts
A separate collection account will be established by the trustee, or by
the servicer in the name of the trustee, for each series of securities for
receipt of
o the amount of any cash specified in the related prospectus
supplement to be initially deposited by the depositor in the
collection account,
o all amounts received with respect to the primary assets of the
related trust fund, and
o unless otherwise specified in the related prospectus supplement,
income earned on the foregoing amounts.
As provided in the related prospectus supplement, certain amounts on
deposit in the collection account and certain amounts available under any credit
enhancement for the securities of that series will be deposited into the
applicable distribution account for distribution to the holders of the related
securities. The trustee will establish a separate distribution account for each
series of securities. Unless otherwise specified in the related prospectus
supplement, the trustee will invest the funds in the collection account and the
distribution account in eligible investments including, among other investments,
obligations of the United States and certain of its agencies, federal funds,
certificates of deposit, commercial paper, demand and time deposits and banker's
acceptances, certain repurchase agreements of United States government
securities and certain guaranteed investment contracts, in each case acceptable
to the rating agencies named in the prospectus supplement. With certain
exceptions, all such eligible investments must mature, in the case of funds in
the collection account, not later than the day preceding the date when the funds
are due to be deposited into the distribution account or otherwise distributed
and, in the case of funds in the distribution account, not later than the day
preceding the next distribution date for the related series of securities.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement that may be specified in the related prospectus supplement.
If specified in the related prospectus supplement, a trust fund will
include one or more pre- funding accounts that are segregated trust accounts
established and maintained with the trustee for the related series. If specified
in the prospectus supplement, a portion of the proceeds of the sale of the
securities equal to the pre-funded amount will be deposited into the pre-funding
account on the closing
37
date and may be used to purchase additional primary assets during the
pre-funding period specified in the prospectus supplement. In no case will the
pre-funded amount exceed 50% of the total principal amount of the related
securities, and in no case will the pre-funding period exceed one year. The
primary assets to be purchased generally will be selected on the basis of the
same criteria as those used to select the initial primary assets of the trust
fund, and the same representations and warranties will be made with respect to
them. If any pre-funded amount remains on deposit in the pre-funding account at
the end of the pre-funding period, the remaining amount will be applied in the
manner specified in the related prospectus supplement to prepay the notes and/or
the certificates of that series.
If a pre-funding account is established, one or more capitalized interest
accounts that are segregated trust accounts may be established and maintained
with the trustee for the related series. On the closing date for the series, a
portion of the proceeds of the sale of the related securities will be deposited
into the capitalized interest account and used to fund the excess, if any, of
o the sum of
- the amount of interest accrued on the securities of the
series, and
- if specified in the related prospectus supplement, certain
fees or expenses during the pre-funding period,
over
o the amount of interest available from the primary assets in the
trust fund.
Any amounts on deposit in the capitalized interest account at the end of
the pre-funding period that are not necessary for these purposes will be
distributed to the person specified in the related prospectus supplement.
Credit Enhancement
If so provided in the prospectus supplement relating to a series of
securities, simultaneously with the depositor's assignment of the primary assets
to the trustee, the depositor will obtain from an institution or by other means
acceptable to the rating agencies named in the prospectus supplement one or more
types of credit enhancement in favor of the trustee on behalf of the holders of
the related series or designated classes of the series. The credit enhancement
will support the payment of principal of and interest on the securities, and may
be applied for certain other purposes to the extent and under the conditions set
forth in the prospectus supplement. Credit enhancement for a series may include
one or more of the forms described below or any other form as may be specified
in the related prospectus supplement. If so specified in the related prospectus
supplement, the credit enhancement may be structured so as to protect against
losses relating to more than one trust fund.
Subordinated Securities
If specified in the related prospectus supplement, credit enhancement for
a series may consist of one or more classes of subordinated securities. The
rights of the holders of subordinated securities to receive distributions on any
distribution date will be subordinate in right and priority to the rights of
38
holders of senior securities of the same series, but only to the extent
described in the related prospectus supplement.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or on specified
classes will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. In addition, if specified in the
related prospectus supplement, a trust fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of:
o maintaining timely payments or providing additional protection
against losses on the trust fund assets;
o paying administrative expenses; or
o establishing a minimum reinvestment rate on the payments made in
respect of those assets or principal payment rate on those assets.
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 related prospectus supplement. A copy of any
arrangement instrument for a series will be filed with the SEC as an exhibit to
a Current Report on Form 8-K to be filed with the SEC following issuance of the
securities of the related series.
Over-Collateralization
If so provided in the prospectus supplement for a series of securities, a
portion of the interest payment on each loan included in the trust fund may be
applied as an additional distribution in respect of principal to reduce the
principal balance of a class or classes of securities and, thus, accelerate the
rate of payment of principal on that class or those classes of securities.
Other Insurance Policies
If specified in the related prospectus supplement, credit enhancement for
a series may consist of pool insurance policies, special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets, as described below and in the related prospectus supplement.
Pool Insurance Policy. If so specified in the related prospectus
supplement, the depositor will obtain a pool insurance policy for the loans in
the related trust fund. The pool insurance policy will cover any loss (subject
to the limitations described in the prospectus supplement) by reason of default,
but will not cover the portion of the principal balance of any loan that is
required to be covered by any primary mortgage insurance policy. The amount and
terms of any pool insurance coverage will be set forth in the related prospectus
supplement.
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Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to property securing a defaulted or foreclosed loan (title
to which has been acquired by the insured) and to the extent the damage is not
covered by a standard hazard insurance policy (or any flood insurance policy, if
applicable) required to be maintained with respect to the property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of
o the cost of repair or replacement of the property, and
o upon transfer of the property to the special hazard insurer, the
unpaid principal balance of the loan at the time of acquisition of
the property by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement and certain
expenses incurred by the servicer with respect to the property.
If the unpaid principal balance of the loan plus accrued interest and
certain expenses is paid by the special hazard insurer, the amount of further
coverage under the special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the related property. Any amount
paid as the cost of repair of the property will reduce coverage by that amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the property with the proceeds described in the first
bullet of the second previous paragraph is expected to satisfy the condition
under any pool insurance policy that the property be restored before a claim
under the pool insurance policy may be validly presented with respect to the
defaulted loan secured by the property. The payment described in the second
bullet of the second previous paragraph will render unnecessary presentation of
a claim in respect of the loan under any pool insurance policy. Therefore, so
long as a pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related loan plus accrued interest and certain expenses will not affect the
total amount in respect of insurance proceeds paid to holders of the securities,
but will affect the relative amounts of coverage remaining under the special
hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
loan at an amount less than the then-outstanding principal balance of the loan.
The amount of the secured debt could be reduced to that value, and the holder of
the loan thus would become an unsecured creditor to the extent the principal
balance of the loan exceeds the value assigned to the property by the bankruptcy
court. In addition, certain other modifications of the terms of a loan can
result from a bankruptcy proceeding. See "Material Legal Aspects of the Loans"
in this prospectus. If the related prospectus supplement so provides, the
depositor or other entity specified in the prospectus supplement will obtain a
bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the Federal Bankruptcy Code. The
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a loan or
a reduction by the court of the principal amount of a
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loan and will cover certain unpaid interest on the amount of any principal
reduction from the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the prospectus supplement for all loans in the trust fund for the
related series. The amount will be reduced by payments made under the bankruptcy
bond in respect of the loans, unless otherwise specified in the related
prospectus supplement, and will not be restored.
Reserve Funds
If the prospectus supplement relating to a series of securities so
specifies, the depositor will deposit into one or more reserve funds cash, a
letter or letters of credit, cash collateral accounts, eligible investments, or
other instruments meeting the criteria of the rating agencies in the amount
specified in the prospectus supplement. Each reserve fund will be established by
the trustee as part of the trust fund for that series or for the benefit of the
credit enhancement provider for that series. In the alternative or in addition
to the initial deposit by the depositor, a reserve fund for a series may be
funded over time through application of all or a portion of the excess cash flow
from the primary assets for the series, to the extent described in the related
prospectus supplement. If applicable, the initial amount of the reserve fund and
the reserve fund maintenance requirements for a series of securities will be
described in the related prospectus supplement.
Amounts withdrawn from any reserve fund will be applied by the trustee to
make payments on the securities of the related series, to pay expenses, to
reimburse any credit enhancement provider for the series or for any other
purpose, in the manner and to the extent specified in the related prospectus
supplement.
Amounts deposited into a reserve fund will be invested by the trustee in
eligible investments maturing no later than the day specified in the related
prospectus supplement.
Cross-Collateralization
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 the related series of securities. In that case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
trust fund prior to distributions to subordinated securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within that trust fund. Cross-collateralization may be provided by
o the allocation of a portion of excess amounts generated by one or
more asset groups within the same trust fund to one or more other
asset groups within the same trust fund, or
o the allocation of losses with respect to one or more asset groups to
one or more other asset groups within the same trust fund.
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Excess amounts will be applied and/or losses will be allocated to the class or
classes of subordinated securities of the related series then outstanding having
the lowest rating assigned by any rating agency or the lowest payment priority,
in each case to the extent and in the manner more specifically described in the
related prospectus supplement. The prospectus supplement for a series which
includes a crosscollateralization feature will describe the manner and
conditions for applying the cross-collateralization feature.
If specified in the related prospectus supplement, the coverage provided
by one or more forms of credit support described in this prospectus may apply
concurrently to two or more related trust funds. If applicable, the related
prospectus supplement will identify the trust funds to which credit support
relates and the manner of determining the amount of coverage the credit support
provides to the identified trust funds.
Minimum Principal Payment Agreement
If provided in the prospectus supplement relating to a series of
securities, the depositor will enter into a minimum principal payment agreement
with an entity meeting the criteria of the rating agencies named in the
prospectus supplement under which the entity will provide certain payments on
the securities of the series in the event that aggregate scheduled principal
payments and/or prepayments on the primary assets for the series are not
sufficient to make payments on the securities of the series as provided in the
prospectus supplement.
Deposit Agreement
If specified in a prospectus supplement, the depositor and the trustee for
a series of securities will enter into a deposit agreement with the entity
specified in the prospectus supplement on or before the sale of the related
series of securities. The deposit agreement is intended to accumulate available
cash for investment so that the cash, together with income thereon, can be
applied to future distributions on one or more classes of securities. The
related prospectus supplement will describe the terms of any deposit agreement.
Financial Instruments
If provided in the related prospectus supplement, the trust fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the loans and Private
Label Securities from fixed to floating payments, or from floating
to fixed, or from floating based on a particular index to floating
based on another index;
o to provide payments if any index rises above or falls below
specified levels; or
o to provide protection against interest rate changes, certain types
of losses or other payment shortfalls to one or more classes of the
related series.
If a trust fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
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The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
Servicing of Loans
General
Under the pooling and servicing agreement or the servicing agreement for a
series of securities, the servicer will provide customary servicing functions
with respect to the loans comprising the primary assets of the related trust
fund.
Collection Procedures; Escrow Accounts
The servicer will make reasonable efforts to collect all payments required
to be made under the loans and will, consistent with the terms of the related
governing agreement for a series and any applicable credit enhancement, follow
such collection procedures as it follows with respect to comparable loans held
in its own portfolio. Consistent with the above, the servicer has the discretion
to
o waive any assumption fee, late payment charge, or other charge in
connection with a loan, and
o to the extent provided in the related agreement, arrange with a
borrower a schedule for the liquidation of delinquencies by
extending the due dates for scheduled payments on the loan.
If the related prospectus supplement so provides, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
with respect to loans in which borrower payments for taxes, assessments,
mortgage and hazard insurance policy premiums and other comparable items will be
deposited. In the case of loans that do not require such payments under the
related loan documents, the servicer will not be required to establish any
escrow or impound account for those loans. The servicer will make withdrawals
from the escrow accounts to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to borrowers amounts determined to be
overages, to pay interest to borrowers on balances in the escrow accounts to the
extent required by law, to repair or otherwise protect the related property and
to clear and terminate the escrow accounts. The servicer will be responsible for
the administration of the escrow accounts and generally will make advances to
the escrow accounts when a deficiency exists.
Deposits to and Withdrawals from the Collection Account
Unless the related prospectus supplement specifies otherwise, the trustee
or the servicer will establish a separate collection account in the name of the
trustee. Unless the related prospectus supplement provides otherwise, the
collection account will be
o an account maintained at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit are
rated by each rating agency named in the prospectus supplement at
levels satisfactory to the rating agency; or
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o an account the deposits in which are insured to the maximum extent
available by the Federal Deposit Insurance Corporation or an account
secured in a manner meeting requirements established by each rating
agency named in the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the funds
held in the collection account may be invested in eligible investments. If so
specified in the related prospectus supplement, the servicer will be entitled to
receive as additional compensation any interest or other income earned on funds
in the collection account.
Unless otherwise specified in the related prospectus supplement, the
servicer, the depositor, the trustee or the seller, as appropriate, will deposit
into the collection account for each series, on the business day following the
closing date, all scheduled payments of principal and interest on the primary
assets due after the related cut-off date but received by the servicer on or
before the closing date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
the servicer (other than, unless otherwise provided in the related prospectus
supplement, in respect of principal of and interest on the related primary
assets due on or before the cut-off date):
o all payments in respect of principal, including prepayments, on the
primary assets;
o all payments in respect of interest on the primary assets after
deducting, at the discretion of the servicer (but only to the extent
of the amount permitted to be withdrawn or withheld from the
collection account in accordance with the related agreement),
related servicing fees payable to the servicer;
o all Liquidation Proceeds after deducting, at the discretion of the
servicer (but only to the extent of the amount permitted to be
withdrawn from the collection account in accordance with the related
agreement), the servicing fee, if any, in respect of the related
primary asset;
o all Insurance Proceeds;
o all amounts required to be deposited into the collection account
from any reserve fund for the series pursuant to the related
agreement;
o all advances of cash made by the servicer in respect of delinquent
scheduled payments on a loan and for any other purpose as required
pursuant to the related agreement; and
o all repurchase prices of any primary assets repurchased by the
depositor, the servicer or the seller pursuant to the related
agreement.
Unless otherwise specified in the related prospectus supplement, the
servicer is permitted, from time to time, to make withdrawals from the
collection account for each series for the following purposes:
o to reimburse itself for advances that it made in connection with
that series under the related agreement; provided that the
servicer's right to reimburse itself is limited to amounts received
on or in respect of particular loans (including, for this purpose,
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Liquidation Proceeds and proceeds of insurance policies covering the
related loans and Mortgaged Properties ("Insurance Proceeds")) that
represent late recoveries of scheduled payments with respect to
which the Advance was made;
o to the extent provided in the related agreement, to reimburse itself
for any advances that it made in connection with the series which
the servicer determines in good faith to be nonrecoverable from
amounts representing late recoveries of scheduled payments
respecting which the advance was made or from Liquidation Proceeds
or Insurance Proceeds;
o to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection
with the restoration of damaged property and, in the event deposited
into the collection account and not previously withheld, and to the
extent that Liquidation Proceeds after such reimbursement exceed the
principal balance of the related loan, together with accrued and
unpaid interest thereon to the due date for the loan next succeeding
the date of its receipt of the Liquidation Proceeds, to pay to
itself out of the excess the amount of any unpaid servicing fee and
any assumption fees, late payment charges, or other charges on the
related loan;
o in the event the servicer has elected not to pay itself the
servicing fee out of the interest component of any scheduled
payment, late payment or other recovery with respect to a particular
loan prior to the deposit of the scheduled payment, late payment or
recovery into the collection account, to pay to itself the servicing
fee, as adjusted pursuant to the related agreement, from any
scheduled payment, late payment or other recovery to the extent
permitted by the related agreement;
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related agreement;
o to pay to the applicable person with respect to each primary asset
or related real property that has been repurchased or removed from
the trust fund by the depositor, the servicer or the seller pursuant
to the related agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
o to make payments to the trustee of the series for deposit into the
related distribution account or for remittance to the holders of the
series in the amounts and in the manner provided for in the related
agreement; and
o to clear and terminate the collection account pursuant to the
related agreement.
In addition, if the servicer deposits into the collection account for a
series any amount not required to be deposited therein, the servicer may, at any
time, withdraw the amount from the collection account.
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Advances and Limitations on Advances
The related prospectus supplement will describe the circumstances, if any,
under which the servicer will make advances with respect to delinquent payments
on loans. If specified in the related prospectus supplement, the servicer will
be obligated to make advances. Its obligation to make advances may be limited in
amount, or may not be activated until a certain portion of a specified reserve
fund is depleted. Advances are intended to provide liquidity and, except to the
extent specified in the related prospectus supplement, not to guarantee or
insure against losses. Accordingly, any funds advanced are recoverable by the
servicer out of amounts received on particular loans that represent late
recoveries of scheduled payments, Insurance Proceeds or Liquidation Proceeds
respecting which an advance was made. If an advance is made and subsequently
determined to be nonrecoverable from late collections, Insurance Proceeds or
Liquidation Proceeds from the related loan, the servicer may be entitled to
reimbursement from other funds in the collection account or distribution
account(s), as the case may be, or from a specified reserve fund, as applicable,
to the extent specified in the related prospectus supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related prospectus supplement, the servicer will be required to maintain
(or to cause the borrower under each loan to maintain) a standard hazard
insurance policy providing the standard form of fire insurance coverage with
extended coverage for certain other hazards as is customary in the state in
which the related property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to, or destruction of, the related
property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions in each
policy. Because the standard hazard insurance policies relating to the loans
will be underwritten by different hazard insurers and will cover properties
located in various states, the policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit enhancement will adversely affect distributions to
holders. When a property securing a loan is located in a flood area identified
by HUD pursuant to the Flood Disaster Protection Act of 1973, as amended, the
servicer will be required to cause flood insurance to be maintained with respect
to the property, to the extent available.
The standard hazard insurance policies covering properties typically will
contain a "coinsurance" clause, which in effect will require that the insured at
all times carry hazard insurance of a specified percentage (generally 80% to
90%) of the full replacement value of the property, including any improvements
on the property, in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, the coinsurance clause
will provide that the hazard insurer's liability in the event of partial loss
will not exceed the greater of
46
o the actual cash value (i.e., replacement cost less physical
depreciation) of the property, including the improvements, if any,
damaged or destroyed, and
o such proportion of the loss, without deduction for depreciation, as
the amount of insurance carried bears to the specified percentage of
the full replacement cost of the property and improvements.
Since the amount of hazard insurance to be maintained on the improvements
securing the loans declines as their principal balances decrease, and since the
value of the properties will fluctuate over time, the effect of this requirement
in the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damage to the affected property.
Unless otherwise specified in the related prospectus supplement, coverage
will be in an amount at least equal to the greater of
o the amount necessary to avoid the enforcement of any co-insurance
clause contained in the policy, and
o the outstanding principal balance of the related loan.
Unless otherwise specified in the related prospectus supplement, the
servicer will also maintain on REO property a standard hazard insurance policy
in an amount that is at least equal to the maximum insurable value of the REO
property. No earthquake or other additional insurance will be required of any
borrower or will be maintained on REO property other than pursuant to such
applicable laws and regulations as shall at any time be in force and shall
require the additional insurance.
Any amounts collected by the servicer under insurance policies (other than
amounts to be applied to the restoration or repair of the property, released to
the borrower in accordance with normal servicing procedures or used to reimburse
the servicer for amounts to which it is entitled to reimbursement) will be
deposited into the collection account. In the event that the servicer obtains
and maintains a blanket policy insuring against hazard losses on all of the
loans, written by an insurer then acceptable to each rating agency named in the
prospectus supplement, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each loan or related REO property. This blanket policy may contain a deductible
clause, in which case the servicer will be required, in the event that there has
been a loss that would have been covered by the policy absent the deductible
clause, to deposit into the collection account the amount not otherwise payable
under the blanket policy because of the application of the deductible clause.
Realization upon Defaulted Loans
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the properties
securing the related loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, the servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in its
servicing activities with respect to comparable loans that it services. However,
the servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of the property unless it determines that
47
o the restoration or foreclosure will increase the Liquidation
Proceeds of the related loan available to the holders after
reimbursement to itself for its expenses, and
o its expenses will be recoverable either through Liquidation Proceeds
or Insurance Proceeds.
However, in the case of a trust fund for which a REMIC election has been
made, the servicer will be required to liquidate any REO property by the end of
the third calendar year after the trust fund acquires beneficial ownership of
the REO property. While the holder of an REO property can often maximize its
recovery by providing financing to a new purchaser, the trust fund will have no
ability to do so and neither the servicer nor the depositor will be required to
do so.
The servicer may arrange with the borrower on a defaulted loan a change in
the terms of the loan to the extent provided in the related prospectus
supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meets the other conditions set forth in the
related prospectus supplement.
Enforcement of Due-on-Sale Clauses
Unless otherwise specified in the related prospectus supplement for a
series, when any property is about to be conveyed by the borrower, the servicer
will, to the extent it has knowledge of the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if enforcement of the clause would result in loss of coverage
under any primary mortgage insurance policy. In that event, the servicer is
authorized to accept from or enter into an assumption agreement with the person
to whom the property has been or is about to be conveyed. Under the assumption,
the transferee of the property becomes liable under the loan and the original
borrower is released from liability and the transferee is substituted as the
borrower and becomes liable under the loan. Any fee collected in connection with
an assumption will be retained by the servicer as additional servicing
compensation. The terms of a loan may not be changed in connection with an
assumption.
Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related prospectus supplement, the
servicer will be entitled to a periodic servicing fee in an amount to be
determined as specified in the related prospectus supplement. The servicing fee
may be fixed or variable, as specified in the related prospectus supplement. In
addition, unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to additional servicing compensation in the form of
assumption fees, late payment charges and similar items, and excess proceeds
following disposition of property in connection with defaulted loans.
Unless otherwise specified in the related prospectus supplement, the
servicer will pay certain expenses incurred in connection with the servicing of
the loans, including, without limitation, the payment of the fees and expenses
of each trustee and independent accountants, payment of security policy and
insurance policy premiums, if applicable, and the cost of any credit
enhancement, and payment of expenses incurred in preparation of reports to
holders.
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When a borrower makes a principal prepayment in full between due dates on
the related loan, the borrower generally will be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related prospectus supplement, in order that one or more classes of the
securities of a series will not be adversely affected by any resulting shortfall
in interest, the amount of the servicing fee may be reduced to the extent
necessary to include in the servicer's remittance to the applicable trustee for
deposit into the related distribution account an amount equal to one month's
interest on the related loan (less the servicing fee). If the total amount of
these shortfalls in a month exceeds the servicing fee for that month, a
shortfall to holders may occur.
Unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to reimbursement for certain expenses that it incurs
in connection with the liquidation of defaulted loans. The related holders will
suffer no loss by reason of the servicer's expenses to the extent the expenses
are covered under related insurance policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage under the policies has been exhausted, the related
holders will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the servicer's expenses, are less than the principal balance of
and unpaid interest on the related loan that would be distributable to holders.
In addition, the servicer will be entitled to reimbursement of its expenses in
connection with the restoration of REO property This right of reimbursement is
prior to the rights of the holders to receive any related Insurance Proceeds,
Liquidation Proceeds or amounts derived from other credit enhancement. The
servicer generally is also entitled to reimbursement from the collection account
for advances.
Unless otherwise specified in the related prospectus supplement, the
rights of the servicer to receive funds from the collection account for a
series, whether as the servicing fee or other compensation, or for the
reimbursement of advances, expenses or otherwise, are not subordinate to the
rights of holders of securities of the series.
Evidence as to Compliance
If so specified in the related prospectus supplement, the applicable
governing agreement will provide that, each year, a firm of independent public
accountants will furnish a statement to the trustee to the effect that the firm
has examined certain documents and records relating to the servicing of the
loans by the servicer and that, on the basis of the examination, the firm is of
the opinion that the servicing has been conducted in compliance with the
agreement, except for such exceptions as the firm believes to be immaterial and
any other exceptions set forth in the statement.
If so specified in the related prospectus supplement, the applicable
agreement will also provide for delivery to the trustee of an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its obligations under the agreement throughout the preceding calendar
year.
Certain Matters Regarding the Servicer
The servicer for each series will be identified in the related prospectus
supplement. The servicer may be an affiliate of the depositor and may have other
business relationships with the depositor and its affiliates.
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If an event of default occurs under either a servicing agreement or a
pooling and servicing agreement, the servicer may be replaced by the trustee or
a successor servicer. Unless otherwise specified in the related prospectus
supplement, the events of default and the rights of a trustee upon a default
under the agreement for the related series will be substantially similar to
those described under "The Agreements--Events of Default; Rights upon Event of
Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the prospectus supplement, the servicer does
not have the right to assign its rights and delegate its duties and obligations
under the related agreement unless the successor servicer accepting such
assignment or delegation
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the trustee;
o has a net worth of not less than the amount specified in the
prospectus supplement;
o would not cause the rating of the related securities by a rating
agency named in the prospectus supplement, as such rating is in
effect immediately prior to the assignment, sale or transfer, to be
qualified, downgraded or withdrawn as a result of the assignment,
sale or transfer; and
o executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, that contains an
assumption by the successor servicer of the due and punctual
performance and observance of each covenant and condition required
to be performed or observed by the servicer under the agreement from
and after the date of the agreement.
No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the related
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the criteria set forth above. In this instance, however, the assigning
servicer will remain liable for the servicing obligations under the agreement.
Any entity into which the servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the servicer's obligations under the agreement provided that the successor or
surviving entity meets the requirements for a successor servicer set forth
above.
Except to the extent otherwise provided, each agreement will provide that
neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the related trust fund, the depositor or
the holders for any action taken or for failing to take any action in good faith
pursuant to the related agreement, or for errors in judgment. However, neither
the servicer nor any such person will be protected against any breach of
warranty or representations made under the agreement, or the failure to perform
its obligations in compliance with any standard of care set forth in the
agreement, or liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of their duties or by
reason of reckless disregard of their obligations and duties under the
agreement. Each agreement will further provide that the servicer and any
director, officer, employee or agent of the servicer is entitled to
indemnification from the related trust fund and will be held harmless
50
against any loss, liability or expense incurred in connection with any legal
action relating to the agreement or the securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties under the agreement or by reason of
reckless disregard of those obligations and duties. In addition, the agreement
will provide that the servicer is not under any obligation to appear in,
prosecute or defend any legal action that is not incidental to its servicing
responsibilities under the agreement that, in its opinion, may involve it in any
expense or liability. The servicer may, in its discretion, undertake any such
action that it may deem necessary or desirable with respect to the agreement and
the rights and duties of the parties thereto and the interests of the holders
thereunder. In that event, the legal expenses and costs of the action and any
resulting liability may be expenses, costs, and liabilities of the trust fund
and the servicer may be entitled to be reimbursed therefor out of the collection
account.
The Agreements
The following summaries describe the material provisions of the pooling
and servicing agreement or trust agreement, in the case of a series of
certificates, and the indenture and servicing agreement, in the case of a series
of notes. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the agreements
applicable to the particular series of securities. Where particular provisions
or terms used in the agreements are referred to, the provisions or terms are as
specified in the agreements.
Assignment of Primary Assets
General. At the time of issuance of the securities of a series, the
depositor will transfer, convey and assign to the related trust fund all right,
title and interest of the depositor in the primary assets and other property to
be transferred to the trust fund. This assignment will include all principal and
interest due on or with respect to the primary assets after the cut-off date
(except for any retained interests). The trustee will, concurrently with the
assignment, execute and deliver the securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
prospectus supplement, the depositor will deliver to the trustee (or, if
specified in the prospectus supplement, a custodian on behalf of the trustee),
as to each Residential Loan and Home Equity Loan, the related note endorsed
without recourse to the order of the trustee or in blank, the original mortgage,
deed of trust or other security instrument with evidence of recording indicated
thereon (except for any mortgage not returned from the public recording office,
in which case a copy of the mortgage will be delivered, together with a
certificate that the original of the mortgage was delivered to such recording
office), and an assignment of the mortgage in recordable form. The trustee or,
if so specified in the related prospectus supplement, the custodian will hold
these documents in trust for the benefit of the holders.
If so specified in the related prospectus supplement, at the time of
issuance of the securities, the depositor will cause assignments to the trustee
of the mortgages relating to the loans to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the trustee, recording is not required to protect the
trustee's interest in the related loans. If specified in the prospectus
supplement, the depositor will cause the assignments to be recorded within the
time after issuance of the securities as is specified in the related prospectus
supplement. In this event, the prospectus supplement will specify whether the
agreement requires the depositor to repurchase from the trustee any loan the
related mortgage of which is not recorded within that time, at the price
described
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below with respect to repurchases by reason of defective documentation. Unless
otherwise provided in the prospectus supplement, the enforcement of the
repurchase obligation would constitute the sole remedy available to the holders
or the trustee for the failure of a mortgage to be recorded.
Assignment of Home Improvement Contracts. Unless otherwise specified in
the related prospectus supplement, the depositor will deliver to the trustee or
the custodian each original Home Improvement Contract and copies of related
documents and instruments and, except in the case of unsecured Home Improvement
Contracts, the security interest in the related home improvements. In order to
give notice of the right, title and interest of holders to the Home Improvement
Contracts, the depositor will cause a UCC-1 financing statement to be executed
by the depositor or the seller identifying the trustee as the secured party and
identifying all Home Improvement Contracts as collateral. Unless otherwise
specified in the related prospectus supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the trust
fund. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of the assignment, the interest of holders in the Home
Improvement Contracts could be defeated. See "Material Legal Aspects of the
Loans--The Home Improvement Contracts" in this prospectus.
Assignment of Manufactured Housing Contracts. If specified in the related
prospectus supplement, the depositor or the seller will deliver to the trustee
the original contract as to each Manufactured Housing Contract and copies of
documents and instruments related to each contract and, other than in the case
of unsecured contracts, the security interest in the property securing that
contract. In order to give notice of the right, title and interest of
securityholders to the contracts, if specified in the related prospectus
supplement, the depositor or the seller will cause a UCC-1 financing statement
to be executed by the depositor or the seller identifying the trustee as the
secured party and identifying all contracts as collateral. If so specified in
the related prospectus supplement, the contracts will not be stamped or
otherwise marked to reflect their assignment 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 the assignment, the
interest of securityholders in the contracts could be defeated. See "Material
Legal Aspects of the Loans -- The Contracts."
Loan Schedule. Each loan will be identified in a schedule appearing as an
exhibit to the related and will specify with respect to each loan:
o the original principal amount,
o its unpaid principal balance as of the cut-off date,
o the current interest rate,
o the current scheduled payment of principal and interest,
o the maturity date, if any, of the related note, and
o if the loan is an adjustable rate loan, the lifetime rate cap, if
any, and the current index.
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Assignment of Agency and Private Label Securities. The depositor will
cause the Agency and Private Label Securities to be registered in the name of
the trustee (or its nominee or correspondent). The trustee (or its nominee or
correspondent) will take possession of any certificated Agency or Private Label
Securities. Unless otherwise specified in the related prospectus supplement, the
trustee will not be in possession of, or be assignee of record of, any loans
underlying the Agency or Private Label Securities. See "The Trust Funds--Private
Label Securities" in this prospectus. Each Agency and Private Label Security
will be identified in a schedule appearing as an exhibit to the related
agreement, which will specify the original principal amount, principal balance
as of the cut-off date, annual pass-through rate or interest rate and maturity
date for each Agency and Private Label Security conveyed to the related trust
fund. In the agreement, the depositor will represent and warrant to the trustee
that:
o the information contained in the Agency or Private Label Securities
schedule is true and correct in all material respects,
o immediately prior to the conveyance of the Agency or Private Label
Securities, the depositor had good title and was the sole owner of
the Agency or Private Label Securities (subject to any retained
interest),
o there has been no other sale of the Agency or Private Label
Securities, and
o there is no existing lien, charge, security interest or other
encumbrance on the Agency or Private Label Securities (other than
any retained interest).
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related prospectus supplement, if any document in the
file relating to the primary assets delivered by the depositor to the trustee
(or custodian) is found by the trustee, within 90 days of the execution of the
related agreement (or promptly after the trustee's receipt of any document
permitted to be delivered after the closing date), to be defective in any
material respect and the depositor or seller does not cure such defect within 90
days (or within any other period specified in the related prospectus supplement)
the depositor or seller will, not later than 90 days (or within such any period
specified in the related prospectus supplement), after the trustee's notice to
the depositor or the seller, as the case may be, of the defect, repurchase from
the trustee the related primary asset or any property acquired in respect of the
asset. Unless otherwise specified in the related prospectus supplement, the
repurchase shall be effected at a price equal to the sum of:
o the lesser of
- the principal balance of the primary asset, and
- the trust fund's federal income tax basis in the primary
asset;
plus
o accrued and unpaid interest to the date of the next scheduled
payment on the primary asset at the rate set forth in the related
agreement.
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However, the purchase price shall not be limited to the trust fund's
federal income tax basis in the asset, if the repurchase at a price equal to the
principal balance of the repurchased primary asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related prospectus supplement, the depositor or seller,
as the case may be, may, rather than repurchase the primary asset as described
above, remove the non-conforming primary asset from the trust fund and
substitute in its place one or more other qualifying substitute primary assets.
If no REMIC election is made with respect to the trust fund, the substitution
must be effected within 120 days of the date of initial issuance of the
securities. If a REMIC election is made with respect to the trust fund the
trustee must have received after a specified time period a satisfactory opinion
of counsel that the substitution will not cause the trust fund to lose its
status as a REMIC or otherwise subject the trust fund to a prohibited
transaction tax.
Unless otherwise specified in the related prospectus supplement, any
qualifying substitute primary asset will, on the date of substitution, meet the
following criteria:
o it has a principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of the
principal balance of the deleted primary asset (the amount of any
shortfall to be deposited to the collection account in the month of
substitution for distribution to holders),
o it has an interest rate not less than (and not more than 2% greater
than) the interest rate of the deleted primary asset,
o it has a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the deleted primary asset;
and
o it complies with all of the representations and warranties set forth
in the applicable agreement as of the date of substitution.
Unless otherwise provided in the related prospectus supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the holders or the trustee for a material defect in the
documentation for a primary asset.
The depositor or another entity will make representations and warranties
with respect to primary assets for each series. If the depositor or the other
entity cannot cure a breach of any such representations and warranties in all
material respects within the time period specified in the related prospectus
supplement after notification by the trustee of such breach, and if the breach
is of a nature that materially and adversely affects the value of the primary
asset, the depositor or the other entity will be obligated to repurchase the
affected primary asset or, if provided in the prospectus supplement, provide a
qualifying substitute primary asset, subject to the same conditions and
limitations on purchases and substitutions as described above.
The depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of the non-conforming primary
assets. See "Risk Factors--Only the assets of the related trust fund are
available to pay your certificates" in this prospectus.
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No holder of securities of a series, solely by virtue of the holder's
status as a holder, will have any right under the applicable agreement to
institute any proceeding with respect to agreement, unless holder previously has
given to the trustee for the series written notice of default and unless the
holders of securities evidencing not less than 51% of the aggregate voting
rights of the securities of the series have made written request upon the
trustee to institute the proceeding in its own name as trustee thereunder and
have offered to the trustee reasonable indemnity, and the trustee for 60 days
has neglected or refused to institute the proceeding.
Reports to Holders
The applicable trustee or other entity specified in the related prospectus
supplement will prepare and forward to each holder on each distribution date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any series, among other things:
o the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the securities
following the distribution;
o the amount of interest distributed to holders of the related
securities and the current interest on the securities;
o the amount of any overdue accrued interest included in such
distribution, any remaining overdue accrued interest with respect to
the securities, or any current shortfall in amounts to be
distributed as accrued interest to holders of the securities;
o the amount of any overdue payments of scheduled principal included
in the distribution, any remaining overdue principal amounts with
respect to the securities, any current shortfall in receipt of
scheduled principal payments on the related primary assets, or any
realized losses or Liquidation Proceeds to be allocated as
reductions in the outstanding principal balances of the securities;
o the amount received under any related credit enhancement, and the
remaining amount available under the credit enhancement;
o the amount of any delinquencies with respect to payments on the
related primary assets;
o the book value of any REO property acquired by the related trust
fund; and
o other information specified in the related agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable trustee, unless otherwise specified in the related
prospectus supplement, will furnish to each holder of record at any time during
the calendar year:
o the total of the amounts reported pursuant to clauses under the
first and second bullets above and under the last clause of the
fourth bullet above for the calendar year, and
55
o the information specified in the related agreement to enable holders
to prepare their tax returns including, without limitation, the
amount of any original issue discount accrued on the securities.
Information in the distribution date statements and annual statements
provided to the holders will not have been examined and reported upon by an
independent public accountant. However, the servicer will provide to the trustee
a report by independent public accountants with respect to its servicing of the
loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the prospectus supplement, the related series of
securities (or one or more classes of the series) will be issued in book-entry
form. In that event, owners of beneficial interests in those securities will not
be considered holders and will not receive such reports directly from the
trustee. The trustee will forward reports only to the entity or its nominee that
is the registered holder of the global certificate that evidences the book-entry
securities. Beneficial owners will receive reports from the participants and
indirect participants of the applicable book-entry system in accordance with the
policies and procedures of the participants and indirect participants.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related prospectus supplement, "events of default" under the
pooling and servicing agreement for each series of certificates include:
o any failure by the servicer to deposit amounts in the collection
account and distribution account(s) to enable the trustee to
distribute to holders of securities of the series any required
payment, provided that this failure continues unremedied for the
number of days specified in the related prospectus supplement after
the giving of written notice to the servicer by the trustee, or to
the servicer and the trustee by holders having not less than 25% of
the total voting rights of the series;
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
agreement provided that this failure continues unremedied for the
number of days specified in the related prospectus supplement after
the giving of written to the servicer by the trustee, or to the
servicer and the trustee by the holders having not less than 25% of
the total voting rights of the of the series; and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
the servicer indicating its insolvency, reorganization or inability
to pay its obligations.
So long as an event of default remains unremedied under the applicable
agreement for a series of securities relating to the servicing of loans, unless
otherwise specified in the related prospectus supplement, the trustee or holders
of securities of the series having not less than 51% of the total voting rights
of the series may terminate all of the rights and obligations of the servicer as
servicer under the applicable agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of the agreement,
which rights the servicer will retain under all circumstances), whereupon the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the
56
agreement and will be entitled to reasonable servicing compensation not to
exceed the applicable servicing fee, together with other servicing compensation
in the form of assumption fees, late payment charges or otherwise as provided in
the agreement.
In the event that the trustee is unwilling or unable so to act, it may
select (or petition a court of competent jurisdiction to appoint) a finance
institution, bank or loan servicing institution with a net worth specified in
the related prospectus supplement to act as successor servicer under the
provisions of the agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
as set forth in the related prospectus supplement, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise,
as provided in the agreement.
During the continuance of any event of default of a servicer under an
agreement for a series of securities, the trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the holders of securities of the series, and, unless otherwise
specified in the related prospectus supplement, holders of securities having not
less than 51% of the total voting rights of the series may direct the time,
method and place of conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred upon the trustee. However,
the trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the holders have offered the
trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the trustee as a result. The trustee may
decline to follow any such direction if it determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting holders.
Indenture. Unless otherwise specified in the related prospectus
supplement, "events of default" under the indenture for each series of notes
include:
o a default for thirty (30) days or more in the payment of any
principal of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture, provided that the failure continues for a
period of sixty (60) days after notice is given in accordance with
the procedures described in the related prospectus supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
delivered pursuant to it or in connection with it with respect to or
affecting such series having been incorrect in a material respect as
of the time made, provided that the breach is not cured within sixty
(60) days after notice is given in accordance with the procedures
described in the related prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the depositor or the trust fund; and
o any other event of default specified with respect to notes of that
series.
If an event of default with respect to the then-outstanding notes of any
series occurs and is continuing, either the indenture trustee or the holders of
a majority of the total amount of those notes may
57
declare the principal amount of all the notes of the series (or, if the notes of
that series are zero coupon securities, such portion of the principal amount as
may be specified in the related prospectus supplement) to be due and payable
immediately. Under certain circumstances of this type the declaration may be
rescinded and annulled by the holders of a majority of the total amount of those
notes.
If, following an event of default with respect to any series of notes, the
related notes have been declared to be due and payable, the indenture trustee
may, in its discretion, and notwithstanding such acceleration, elect to maintain
possession of the collateral securing the notes and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the notes as they would have
become due if there had not been a declaration. In addition, the indenture
trustee may not sell or otherwise liquidate the collateral securing the notes of
a series following an event of default (other than a default in the payment of
any principal of or interest on any note of the series for thirty (30) days or
more), unless:
o the holders of 100% of the total amount of the then-outstanding
notes of the series consent to the sale; or
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest due and unpaid on the
outstanding notes of the series at the date of sale; or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
such payments would have become due if the notes had not been
declared due and payable, and the indenture trustee obtains the
consent of the holders of 66 2/3% of the total amount of the
then-outstanding notes of the series.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days or
more in the payment of principal of or interest on the notes of a series, the
indenture provides that the indenture trustee will have a prior lien on the
proceeds of any liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an event of default of this type, the amount available for
distribution to the noteholders may be less than would otherwise be the case.
However, the indenture trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the event of default.
Unless otherwise specified in the related prospectus supplement, in the
event that the principal of the notes of a series is declared due and payable as
described above, holders of the notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those notes less the amount of the discount that remains unamortized.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default shall occur and be continuing
with respect to a series of notes, the indenture trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request or direction of any of the holders of notes of the series, unless the
holders offer security or indemnity satisfactory to the indenture trustee
against the costs, expenses and liabilities it might incur in complying
58
with their request or direction. Subject to the provisions for indemnification
and certain limitations contained in the indenture, the holders of a majority of
amount of the then-outstanding notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee or exercising any trust or power conferred on
the indenture trustee with respect to those notes, and the holders of a majority
of the amount of the amount of the then outstanding notes of the series may, in
certain cases, waive any default with respect to the notes, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all affected holders of the outstanding notes.
The Trustees
The identity of the commercial bank, savings and loan association or trust
company named as the trustee or indenture trustee, as the case may be, for each
series of securities will be set forth in the related prospectus supplement.
Entities serving as trustee may have normal banking relationships with the
depositor or the servicer. In addition, for the purpose of meeting the legal
requirements of certain local jurisdictions, each trustee will have the power to
appoint co-trustees or separate trustees. In the event of an appointment, all
rights, powers, duties and obligations conferred or imposed upon the trustee by
the related agreement will be conferred or imposed upon that trustee and each
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
trustee shall be incompetent or unqualified to perform certain acts, singly upon
the separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the trustee. The
trustee may also appoint agents to perform any of its responsibilities, which
agents will have any or all of the rights, powers, duties and obligations of the
trustee conferred on them by their appointment; provided, however, that the
trustee will continue to be responsible for its duties and obligations under the
agreement.
Duties of Trustees
No trustee will make any representations as to the validity or sufficiency
of the related agreement, the securities or of any primary asset or related
documents. If no event of default (as defined in the related agreement) has
occurred, the applicable trustee will be required to perform only those duties
specifically required of it under the agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the trustee will be required to examine them to determine whether they
are in the form required by the related agreement. However, the trustee will not
be responsible for the accuracy or content of any documents furnished to it by
the holders or the servicer under the agreement.
Each trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that no trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the related
holders in an event of default. No trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
Resignation of Trustees
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Each trustee may, upon written notice to the depositor, resign at any
time, in which event the depositor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. Each trustee may also be
removed at any time
o if the trustee ceases to be eligible to continue as such under the
related agreement, or
o if the trustee becomes insolvent, or
o the holders of securities having more than over 50% of the total
voting rights of the securities in the trust fund give written
notice to the trustee and to the depositor.
Any resignation or removal of a trustee and appointment of a successor
trustee will not become effective until the successor trustee accepts its
appointment.
Amendment of Agreement
Unless otherwise specified in the prospectus supplement, the Agreement for
each series of securities may be amended by the depositor, the servicer (with
respect to a series relating to loans), and the trustee, without notice to or
consent of the holders, for the following purposes:
o to cure any ambiguity,
o to correct any defective provisions or to correct or supplement any
provision in the agreement,
o to add to the duties of the depositor, the applicable trustee or the
servicer,
o to add any other provisions with respect to matters or questions
arising under the agreement or related credit enhancement,
o to add or amend any provisions of the agreement as required by any
rating agency named in the prospectus supplement in order to
maintain or improve the rating of the securities (it being
understood that none of the depositor, the seller, the servicer or
any trustee is obligated to maintain or improve the rating), or
o to comply with any requirements imposed by the Code.
In no event, however, shall any amendment (other than an amendment to
comply with Code requirements) adversely affect in any material respect the
interests of any holders of the series, as evidenced by an opinion of counsel
delivered to the trustee. Unless otherwise specified in the prospectus
supplement, an amendment shall be deemed not to adversely affect in any material
respect the interests of any holder if the trustee receives written confirmation
from each rating agency named in the prospectus supplement that the amendment
will not cause the rating agency to reduce its then-current rating. Unless
otherwise specified in the prospectus supplement, each agreement for a series
may also be amended by the applicable trustee, the servicer, if applicable, and
the depositor with the consent of the holders
60
possessing not less than 66 2/3% of the total outstanding principal amount of
the securities of the series (or, if only certain classes are affected by the
amendment, 66 2/3% of the total outstanding principal amount of each affected
class), for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the agreement, or modifying in any manner
the rights of holders of the series. In no event, however, shall any amendment
o reduce the amount or delay the timing of payments on any security
without the consent of the holder of the security, or
o reduce the percentage of the total outstanding principal amount of
securities of each class, the holders of which are required to
consent to any such amendment, without the consent of the holders of
100% of the total outstanding principal amount of each affected
class.
Voting Rights
The prospectus supplement will set forth the method of determining
allocation of voting rights with respect to the related series of securities.
List of Holders
Upon written request of three or more holders of record of a series for
purposes of communicating with other holders with respect to their rights under
the agreement (which request is accompanied by a copy of the communication such
holders propose to transmit), the trustee will afford them access during
business hours to the most recent list of holders of that series held by the
trustee.
No agreement will provide for the holding of any annual or other meeting
of holders.
Book-Entry Securities
If specified in the related prospectus supplement for a series of
securities, the securities (or one or more of the securities) may be issued in
book-entry form. In that event, beneficial owners of those securities will not
be considered "Holders" under the agreements and may exercise the rights of
holders only indirectly through the participants in the applicable book-entry
system.
REMIC Administrator
For any series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
trust fund may be performed by a REMIC administrator, which may be an affiliate
of the depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the pooling and servicing agreement or trust agreement for a series will
terminate upon the distribution to holders of all amounts distributable to them
under the agreement in the circumstances described in the related
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prospectus supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" in this prospectus.
Indenture. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the notes of that series or, with certain limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
notes of the series.
In addition to such discharge with certain limitations, if so specified
with respect to the notes of any series, the indenture will provide that the
related trust fund will be discharged from any and all obligations in respect of
the notes of that series (except for certain obligations relating to temporary
notes and exchange of notes, registration of the transfer or exchange of those
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the indenture
trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America that, through the payment of interest
and principal in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and each installment of interest on the notes
on the final scheduled distribution date for the notes and any installment of
interest on the notes in accordance with the terms of the indenture and the
notes. In the event of any such defeasance and discharge of notes of a series,
holders of notes of that series would be able to look only to such money and/or
direct obligations for payment of principal of and interest on, if any, their
notes until maturity.
Material Legal Aspects of the Loans
The following discussion contains general summaries of material legal
matters mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. 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 the properties securing the loans may be situated.
Mortgages
The Residential Loans and Home Equity Loans for a series will, and the
Home Improvement Contracts for a series may, be secured by mortgages or deeds of
trust or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. We refer to
Residential Loans, Home Equity Loans and Home Improvement Contracts that are
secured by mortgages as "mortgage loans." The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by that instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers and may also be subject to
other liens pursuant to the laws of the jurisdiction in which the mortgaged
property is located. Priority with respect to the instruments depends on their
terms, the knowledge of the parties to the mortgage and generally on the order
of recording with the applicable state, county or municipal office. There are
two parties to a mortgage: the mortgagor, who is the borrower/property owner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a
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land trust, there are three parties because title to the property is held by a
land trustee under a land trust agreement of which the borrower/property owner
is the beneficiary; at origination of a mortgage loan, the borrower executes a
separate undertaking to make payments on the mortgage note. A deed of trust
transaction normally has three parties: the trustor, who is the
borrower/property owner; the beneficiary, who is the lender; and the trustee, a
third-party grantee. Under a deed of trust, the trustor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The mortgagee's authority under
a mortgage and the trustee's authority under a deed of trust are governed by the
law of the state in which the real property is located, the express provisions
of the mortgage or deed of trust, and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust generally is accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, foreclosure also may be
accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower or any person having a
junior encumbrance on the real estate may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised its rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct
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such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances, a court of equity may relieve the
mortgagor from an entirely technical default where the default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, and sometimes
requires up to several years to complete. Moreover, a non-collusive, regularly
conducted foreclosure sale may be challenged as a fraudulent conveyance,
regardless of the parties' intent, if a court determines that the sale was for
less than fair consideration and the sale occurred while the mortgagor was
insolvent and within one year (or within the state statute of limitations if the
trustee in bankruptcy elects to proceed under state fraudulent conveyance law)
of the filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, a
public sale is conducted by the referee or other designated officer or by the
trustee. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished. The lender may purchase the property
for a lesser amount in order to preserve its right against the borrower to seek
a deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the loans. The failure to comply with these laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs.
Liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of hazardous substances, and could
exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of
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hazardous substances, or arrange for the transportation, disposal or treatment
of hazardous substances, at off-site locations may also be held liable if there
are releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against the property. Under CERCLA, the
clean-up 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 the current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (SWDA) provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency (EPA)
in April 1992 attempted to clarify the activities in which lenders could engage
both prior to and subsequent to foreclosure of a security interest without
forfeiting the secured creditor exemption under CERCLA. The rule was struck down
in 1994 by the United States Court of Appeals for the District of Columbia
Circuit in Kelley ex rel State of Michigan v. Environmental Protection Agency,
15 F.3d 1100 (D.C. Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied sub nom.
Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA regulation
promulgated in 1995 clarifies the activities in which lenders may engage without
forfeiting the secured creditor exemption under the underground storage tank
provisions of SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which amended both CERCLA
and SWDA to provide additional clarification regarding the scope of the lender
liability exemptions under the two statutes. Among other things, ACA specifies
the circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, ACA states that a lender who holds indicia of ownership
primarily to protect a security interest in a facility will be considered to
participate in management only if, while the borrower is still in possession of
the facility encumbered by the security interest, the lender
o exercises decision-making control over environmental compliance
related to the facility such that the lender has undertaken
responsibility for hazardous substance handling or disposal
practices related to the facility or
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o exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested
responsibility for (a) overall management of the facility
encompassing daily decision-making with respect to environmental
compliance or (b) overall or substantially all of the operational
functions (as distinguished from financial or administrative
functions) of the facility other than the function of environmental
compliance.
ACA also specifies certain activities that are not considered to be
"participation in management," including monitoring or enforcing the terms of
the extension of credit or security interest, inspecting the facility, and
requiring a lawful means of addressing the release or threatened release of a
hazardous substance.
ACA also specifies that a lender who did not participate in management of
a facility prior to foreclosure will not be considered an "owner or operator,"
even if the lender forecloses on the facility and after foreclosure sells or
liquidates the facility, maintains business activities, winds up operations,
undertakes an appropriate response action, or takes any other measure to
preserve, protect, or prepare the facility prior to sale or disposition, if the
lender seeks to sell or otherwise divest the facility at the earliest
practicable, commercially reasonable time, on commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements.
ACA specifically addresses the potential liability of lenders who hold
mortgages or similar conventional security interests in real property, such as
the trust fund does in connection with the mortgage loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, 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 would be imposed on the related trust fund, and thus occasion a loss to
the holders, therefore depends on the specific factual and legal circumstances
at issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
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Junior Mortgages; Rights of Senior Mortgages
The mortgage loans comprising or underlying the primary assets included in
the trust fund for a series will be secured by mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the related trust fund (and
therefore of the security holders), as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to be
sold upon default of the mortgagor, thereby extinguishing the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in
some states, may cure the default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in such order as the mortgagee may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
other states, the lender has the option of bringing a
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personal action against the borrower on the debt without first exhausting the
security. However, in some of these states, the lender, following judgment on
the personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the Federal Bankruptcy Code, the Soldiers'
and Sailors' Relief Act of 1940 and state laws affording relief to debtors, may
interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
Federal Bankruptcy Code, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a rehabilitation plan under
chapter 13 of the Federal Bankruptcy Code to cure a monetary default with
respect to a loan on his residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon its
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a chapter 11 case under the Federal Bankruptcy Code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Federal Bankruptcy Code provides priority to certain tax liens over
the lender's security. This may delay or interfere with the enforcement of
rights in respect of a defaulted mortgage loan. In addition, substantive
requirements are imposed upon lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. The laws
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include the federal Truth in Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations.
These federal laws impose specific statutory liabilities upon lenders that
originate loans and that fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the loans.
Due-on-Sale Clauses in Mortgage Loans
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 preempts state constitutional, statutory and case law that prohibits
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain exceptions. As a
result, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act,
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. Freddie Mac has taken the position in its published mortgage
servicing standards that, out of a total of eleven "window period states," five
states (Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories of window
period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under the Federal Bankruptcy Code, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from bankruptcy
proceedings.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his default
under the loan documents. Examples of judicial remedies that have been
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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 adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Office of Thrift Supervision
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that state usury limitations shall not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. Similar federal statutes were in effect with respect to mortgage
loans made during the first three months of 1980. The 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.
Title V authorizes any state to reimpose interest rate limits by adopting
a state law before April 1, 1983 or by certifying that the voters of such state
have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V.
The Home Improvement Contracts and the Manufactured Housing Contracts
General
The Home Improvement Contracts and Manufactured Housing 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 Uniform Commercial Code (UCC) in effect in the applicable
jurisdiction. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar
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to perfection of a security interest in chattel paper. Under the related
agreement, the depositor will transfer physical possession of the contracts to
the trustee or a custodian or may retain possession of the contracts as
custodian for the trustee. In addition, the depositor will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the trustee's ownership of the contracts. Unless otherwise specified in the
related prospectus supplement, the 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
A Home Improvement Contract that is secured by the related home
improvements grants to the originator of the contract a purchase money security
interest in the related 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. Purchase money security interests of this type are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of 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, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose their characterization,
upon incorporation of the 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 real estate law,
a creditor can repossess a home improvement securing a Home Improvement Contract
by voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a Home Improvement Contract must give the debtor a number of days'
notice, which varies from ten 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 the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit that the debtor may redeem it at or before 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 will have no assets from which to pay a judgment.
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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.
Security Interests in the Manufactured Homes
The manufactured homes securing the Manufactured Housing Contracts may be
located in all 50 states and the District of Columbia. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
The security interests of the trustee in the manufactured homes will not be
noted on the certificates of title or by delivery of the required documents and
payment of fees to the applicable state motor vehicle authorities unless the
related prospectus supplement so requires. With respect to each transaction, a
decision will be made as to whether or not the security interests of the trustee
in the manufactured homes will be noted on the certificates of title and the
required documents and fees will be delivered to the applicable state motor
vehicle authorities based upon, among other things, the practices and procedures
of the related originator and servicer and after consultation with the
applicable rating agency or rating agencies. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. As manufactured homes have
become large and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured homes,
under particular circumstances, may become governed by 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 manufactured home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate laws, the
secured party must file either a "fixture filing" under the provisions of the
UCC or a real estate mortgage under the real estate laws of the state where the
home is located. These filings must be made in the real estate records office of
the county where the manufactured home is located. If so specified in the
related prospectus supplement, the Manufactured Housing Contracts may 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, the
related lender may be required to perfect a security interest in the
manufactured home under applicable real estate laws.
In the event that the owner of a manufactured home moves it to a state
other than the state in which the manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and, after
expiration of the four months, only if and after the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and not re-register a security interest in that state, the
security interest in the manufactured home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a manufactured home. Accordingly, the secured party 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 on the certificate of title, notice of surrender would be given to the
secured party noted on the certificate of title. In states which do not require
a certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
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Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest in the manufactured home.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods that gave rise to the transaction (and
certain related lenders and assignees) to transfer the contract free of notice
of claims by the related debtor. The effect of this rule is to subject the
assignee of the contract to all claims and defenses the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that, subject to the following conditions, state usury
limitations shall not apply to any contract that is secured by a first lien on
certain kinds of consumer goods. The Home Improvement Contracts or Manufactured
Housing Contracts would be covered if they satisfy certain conditions, among
other things, governing the terms of any prepayments, late charges and deferral
fees and requiring a 30-day notice period prior to instituting any action
leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Sales Contracts
The loans may also consist of installment sales contracts. Under an
installment sales contract the seller/lender 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 purchaser/borrower of the contract is the seller/lender
obligated to convey title to the property to the borrower. As with mortgage or
deed of trust financing, during the effective period of the installment sales
contract, the borrower is generally responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance policy premiums associated with the property.
The method of enforcing the rights of the seller/lender under an
installment sales contract varies on a state-by-state basis depending upon the
extent to which state courts are willing, or able pursuant to
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state statute, to enforce the contract strictly according to the terms. The
terms of installment sales contracts generally provide that upon a default by
the borrower, the borrower loses his right to occupy the property, the entire
indebtedness is accelerated, and the borrower's equitable interest in the
property is forfeited. The seller/lender in such a situation does not have to
foreclose in order to obtain title to the property, although in some cases a
quiet title action is in order if the borrower has filed the installment sales
contract in local land records and an ejectment action may be 60 necessary to
recover possession. In a few states, particularly in cases of borrower default
during the early years of an installment sales contract, the courts will permit
ejectment of the buyer and a forfeiture of his interest in the property.
However, most state legislatures have enacted provisions by analogy to mortgage
law protecting borrowers under installment sales contracts from the harsh
consequences of forfeiture. Under these statutes, a judicial or nonjudicial
foreclosure may be required, the lender may be required to give notice of
default and the borrower may be granted some grace period during which the
installment sales contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an installment sales contract for the sale of
real estate to share in the proceeds of sale of the property after the
indebtedness is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an installment sales contract in a given state
are simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service,
o are entitled to have their interest rates reduced and capped at 6%
per year, on obligations (including loans) incurred prior to the
commencement of military service for the duration of military
service,
o and may be entitled to a stay of proceedings on any kind of
foreclosure or repossession action in the case of defaults on such
obligations entered into prior to military service for the duration
of military service, and
o may have the maturity of their obligations incurred prior to
military service extended, the payments lowered and the payment
schedule readjusted for a period of time after the completion of
military service.
However, these benefits are subject to challenge by creditors and if, in
the opinion of the court, the ability of a person to comply with his obligations
is not materially impaired by military service, the court may apply equitable
principles accordingly.
If a borrower's obligation to repay amounts otherwise due on a loan
included in a trust fund for a series is relieved pursuant to the Relief Act,
none of the trust fund, the servicer, the depositor or the trustee will be
required to advance such amounts, and any related loss may reduce the amounts
available to be paid to the holders of the related securities. Unless otherwise
specified in the related prospectus supplement, any shortfalls in interest
collections on loans (or underlying loans), included in a trust fund
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for a series resulting from application of the Relief Act will be allocated to
each class of securities of the series that is entitled to receive interest in
respect of the loans (or underlying loans) in proportion to the interest that
each class of securities would have otherwise been entitled to receive in
respect of the loans (or underlying loans) had the interest shortfall not
occurred.
The Depositor
The depositor, Bear Stearns Asset Backed Securities, Inc., was
incorporated in the state of Delaware in June 1995, and is a wholly-owned
subsidiary of The Bear Stearns Companies Inc. The depositor's principal
executive offices are located at 245 Park Avenue, New York, New York 10167. Its
telephone number is (212) 272-4095.
The depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts,
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments. The depositor securities must be
collateralized or otherwise secured or backed by, or otherwise represent an
interest in, among other things, receivables or pass-through certificates or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by senior or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness. The depositor
may purchase, acquire, own, hold, transfer, convey, service, sell, pledge,
assign, finance and otherwise deal with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the depositor's Certificate of Incorporation limits
the depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to depositor securities, and
to any activities incidental to and necessary or convenient for the
accomplishment of those purposes.
Use of Proceeds
The depositor will apply all or substantially all of the net proceeds from
the sale of each of the related trust fund series of securities for one or more
of the following purposes:
o to purchase the primary assets of the related trust fund,
o to repay indebtedness incurred to obtain funds to acquire the
primary assets of the related trust fund,
o to establish any reserve funds described in the related prospectus
supplement, and
o to pay costs of structuring and issuing the securities, including
the costs of obtaining any credit enhancement.
If specified in the related prospectus supplement, the purchase of the
primary assets for a series may be effected by delivering the securities to the
seller in exchange for the primary assets.
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Material Federal Income Tax Considerations
General
The following summary of the material federal income tax consequences of
the purchase, ownership, and disposition of the securities is based on the
opinion of Sidley Austin Brown & Wood LLP, Thacher Proffitt & Wood, Stroock &
Stroock & Lavan LLP or other tax counsel designated in the prospectus
supplement, as special counsel to the depositor. This summary is based upon the
provisions of the Internal Revenue Code, the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions now in effect, all of which are subject to
change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change either prospectively or retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
securities as "capital assets" (generally, property held for investment) within
the meaning of section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the securities.
The federal income tax consequences to security holders will vary depending on
whether
o the securities of a series are classified as indebtedness;
o an election is made to treat the trust fund relating to a particular
series of securities as a real estate mortgage investment conduit or
REMIC under the Code;
o the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series;
o an election is made to treat the trust fund relating to a particular
series of certificates as a partnership; or
o an election is made to treat the Trust Fund relating to a particular
series of securities as a Financial Asset Securitization Investment
Trust or FASIT under the Code.
The prospectus supplement for each series of securities will specify how
the securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series.
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:
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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 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 holders thereof 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
77
nonpayment is a remote contingency or reasonable remedies exist to compel
payment. Debt securities may provide for default remedies in the event of late
payment or nonpayment of interest. Interest is payable at a single fixed rate
only if the rate appropriately takes into account the length of the interval
between payments. Distributions of interest on debt securities with respect to
which deferred interest will accrue will not constitute qualified stated
interest payments, in which case the stated redemption price at maturity of such
debt securities includes all distributions of interest as well as principal
thereon. Where the interval between the issue date and the first distribution
date on a debt security is 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 Code Section
1272(a)(6), there can be no assurance that such methodology represents the
correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross
income, for all days during its taxable year on which it holds 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 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) would 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 a debt instrument's issue price plus prior
accruals of OID, reduced by the total payments made with respect to the debt
instrument in all prior periods, other than qualified stated interest payments.
The debt securities will 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
(a) the present value of all payments remaining to be made on the
pay-through security as of the close of the accrual period and
(b) the payments during the accrual period of amounts included in the
stated redemption price of the pay-through security,
over
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:
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),
79
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.
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.
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 whose interest is determined based on the principal
balance, 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
80
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 "--Tax Status as a Grantor
Trust--Discount or Premium on Pass-Through Securities" 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 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 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, the excess of interest paid or accrued to purchase or
carry the security 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. 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 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
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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 67 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. Prospective purchasers of the debt securities should consult their
tax advisors regarding the possible application of rules analogous to 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 as
interest, based on a constant yield method for Debt securities acquired on or
after April 4, 1994. If such an election were to be made with respect to a debt
security with market discount, the holder of the debt security would be deemed
to have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such holder of
the debt security acquires during the year of the election or thereafter.
Similarly, 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.
Taxation of the REMIC and its Holders
General. In the opinion of tax counsel, if a REMIC election is made with
respect to a series of securities, then the arrangement by which the securities
of that series are issued will be treated as a REMIC as long as all of the
provisions of the applicable governing agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "regular interests" or "residual interests" in a REMIC, as
specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made with respect to a series of securities, in the opinion of
tax counsel:
o securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the
meaning of Section 7701(a)(19)(C)(xi) of the Code (assuming that at
least 95% of the REMIC's assets consist of cash, government
securities, "loans secured by an interest in real property," and
other types of assets described in Code Section 7701(a)(19)(C)); and
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 income with respect to the
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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 (assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying
assets).
If less than 95% of the REMIC's assets consist of assets described in the
immediately preceding bullets, then a security will qualify for the tax
treatment described in the previous sentence in the proportion that such REMIC's
assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, in the opinion of tax counsel, all of the expenses of a
REMIC will be taken into account by holders of the residual interest securities.
In the case of a "single class REMIC," however, the expenses will be allocated
under Treasury regulations among the holders of the REMIC regular interest
securities and the holders of the REMIC residual interest securities on a daily
basis in proportion to the relative amounts of income accruing to each holder on
that day. In the case of a holder of a REMIC regular interest security who is an
individual or a "pass-through interest holder" (including certain pass-through
entities but not including real estate investment trusts), the expenses will be
deductible only to the extent that the expenses, plus other "miscellaneous
itemized deductions" of the holder, exceed 2% of the holder's adjusted gross
income. In addition, the amount of itemized deductions otherwise allowable for
the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation for taxable years
beginning after 1990) will be reduced by the lesser of
o 3% of the excess of adjusted gross income over the applicable
amount, or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
The reduction or disallowance of this deduction may have a significant
impact on the yield of the REMIC regular interest security to the holder. In
general terms, a single class REMIC is one that either
o 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
o is similar to such a trust and is structured with the principal
purpose of avoiding the single class REMIC rules.
Unless otherwise specified in the related prospectus supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC residual
interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of tax counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of the REMIC residual interests. As described above,
the REMIC regular interests are generally taxable as debt of the REMIC.
Qualification as a
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REMIC requires ongoing compliance with certain conditions. Although a REMIC is
not generally subject to federal income tax, the Code provides that failure to
comply with one or more of the ongoing requirements of the Code for REMIC status
during any taxable year, including the implementation of restrictions on the
purchase and transfer of the residual interests in a REMIC as described below
under "--Taxation of Owners of Residual Interest Securities", would cause the
trust not to be treated as a REMIC for that year and thereafter. In this event,
the entity may be taxable as a separate corporation and the related certificates
may not be accorded the status or given the tax treatment described below.
Calculation of REMIC Income. In the opinion of tax counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets,
and
o deductions, including stated interest and original issue discount
accrued on the REMIC regular interest securities, amortization of
any premium with respect to loans, and servicing fees and other
expenses of the REMIC.
The holder of a REMIC residual interest security that is an individual or
a "pass-through interest holder" (including certain pass-through entities, but
not including real estate investment trusts) will be unable to deduct servicing
fees payable on the loans or other administrative expenses of the REMIC for a
given taxable year, to the extent that these expenses, when aggregated with the
holder's other miscellaneous itemized deductions for that year, do not exceed 2%
of the holder's adjusted gross income and not at all for AMT purposes.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the startup
day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of pay-through securities
accrue OID (i.e., under the constant yield method taking into account the
prepayment assumption). The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include such discount in income, but without regard to the de minimis
rules. See "--Taxation of Debt Securities" above. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the prepayment assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans
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originated on or before that date, it is possible that the premium may be
recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
o subject to a limited exception, the sale or other disposition of a
cash flow investment;
o the receipt of any income from assets not permitted to be held by
the REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services rendered
by the REMIC.
It is anticipated that a REMIC will not engage in any prohibited
transactions in which it would recognize a material amount of net income. In
addition, subject to a number of exceptions, a tax is imposed at the rate of
100% on amounts contributed to a REMIC after the close of the three-month period
beginning on the startup day. Taxes will be paid out of the trust fund and will
be allocated first to the residual interest securities and, to the extent not
paid, pro rata to all other outstanding classes of securities of the REMIC.
Taxation of Holders of Residual Interest Securities
In the opinion of tax counsel, the holder of a certificate representing a
REMIC residual interest will take into account the "daily portion" of the
taxable income or net loss of the REMIC for each day during the taxable year on
which the holder held the residual interest security. The daily portion is
determined by allocating to each day in any calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for that quarter, and by
allocating that amount among the holders (on that day) of the residual interest
securities in proportion to their respective holdings on that day.
In the opinion of tax counsel, the holder of a residual interest security
must report its proportionate share of the taxable income of the REMIC whether
or not it receives cash distributions from the REMIC attributable to income or
loss. The reporting of taxable income without corresponding distributions could
occur, for example, if the loans held by the REMIC were issued or acquired at a
discount, since mortgage prepayments cause recognition of discount income, while
the corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC regular interests securities issued without any
discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income of
a REMIC may also be greater in earlier years as a result of the fact that
interest expense deductions, as a percentage of outstanding principal on the
REMIC regular interest securities, will typically increase over time as lower
yielding securities are 70 paid, whereas interest income with respect to each
fixed rate loan will generally remain constant over time as a percentage of loan
principal.
85
In any event, because the holder of a REMIC residual interest security is
taxed on the net income of the REMIC, the taxable income derived from the
residual interest security in a given taxable year will not be equal to the
taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pretax yield. The
after-tax yield on a residual interest security may be less than that of a
corporate bond or stripped instrument and, if no payment expected, generally
would be negotiable.
Limitation on Losses. In the opinion of tax counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of the calendar quarter in which the loss
arises. A holder's basis in a REMIC residual interest security will initially
equal the holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased (but
not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income of the REMIC
generated by the same REMIC. The ability of holders of residual interest
securities to deduct net losses may be subject to additional limitations under
the Code. Holders should consult their tax advisers with respect to such
additional limitations.
Distributions. In the opinion of tax counsel, distributions on a REMIC
residual interest security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of the residual interest security. If the amount of the payment
exceeds the holder's adjusted basis in the residual interest security, however,
the holder will recognize gain (treated as gain from the sale of the residual
interest security) to the extent of the excess.
Sale or Exchange. In the opinion of tax counsel, the holder of a residual
interest security will recognize gain or loss on the sale or exchange of the
residual interest security equal to the difference, if any, between the amount
realized and the holder's adjusted basis in the residual interest security at
the time of sale or exchange. A holder's adjusted basis in a residual interest
security generally equals the cost of the residual interest security increased
by the taxable income of the REMIC that was included in the income of the holder
and decreased by distributions received thereon by the holder. Except to the
extent provided in regulations which have not yet been issued, any loss upon
disposition of a residual interest security will be disallowed if the selling
holder acquires any residual interest in a REMIC or similar mortgage pool within
six months before or after disposition. In that event, the loss will be used to
increase the residual interest security holder's adjusted basis in the newly
acquired asset.
Excess Inclusions. In the opinion of tax counsel, the portion of the REMIC
taxable income of a holder of a residual interest security consisting of "excess
inclusion" income may not be offset by other deductions or losses, including net
operating losses, on the holder's federal income tax return. Further, if the
holder of a residual interest security is an organization subject to the tax on
unrelated business income imposed by Section 511 of the Code, the holder's
excess inclusion income will be treated as unrelated business taxable income of
the holder. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, a regulated investment company, a common trust fund, or
certain cooperatives were to own a residual interest security, a portion of
dividends (or other distributions) paid by the real estate investment trust (or
other entity) would be treated as excess inclusion income. If a residual
interest security is owned by a foreign person, excess inclusion income is
subject to tax at a rate of 30%, which may not be reduced by treaty, is not
eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "--Tax Treatment of Foreign Investors" below. The
Small
86
Business Job Protection Act of 1996 has eliminated the special rule permitting
Section 593 thrift institutions to use net operating losses and other allowable
deductions to offset their excess inclusion income from residual interest
securities that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except with respect to residual interest securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder.
o First, alternative minimum taxable income for the residual holder is
determined without regard to the special rule that taxable income
cannot be less than excess inclusions.
o Second, the residual holder's alternative minimum taxable income for
a tax year cannot be less than excess inclusions for the year.
o Third, the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions.
These rules are effective for tax years beginning after December 31, 1986,
unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of
o REMIC taxable income for the quarterly period allocable to a
residual interest security, over
o the daily accruals for such quarterly period of (i) 120% of the long
term applicable federal rate on the startup day multiplied by (ii)
the adjusted issue price of the residual interest security at the
beginning of the quarterly period.
The adjusted issue price of a residual interest security at the beginning
of each calendar quarter will equal its issue price (calculated in a manner
analogous to the determination of the issue price of a regular interest
security), increased by the aggregate of the daily accruals for prior calendar
quarters, and decreased (but not below zero) by the amount of loss allocated to
a holder and the amount of distributions made on the residual interest security
before the beginning of the quarter. The long-term federal rate, which is
announced monthly by the Treasury Department, is an interest rate that is based
on the average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, transfers of residual interest securities may
be disregarded in certain circumstances. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "disqualified
organization" including the United States, any State or political subdivision
thereof, any foreign government, any international organization, or any agency
or
87
instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in Section 1381(a)(2)(C) of the Code, or any entity exempt
from the tax imposed by sections 1 through 1399 of the Code, if the entity is
not subject to tax on its unrelated business income. Accordingly, the applicable
pooling and servicing agreement will prohibit disqualified organizations from
owning a residual interest security. In addition, no transfer of a residual
interest security will be permitted unless the proposed transferee shall have
furnished to the trustee an affidavit representing and warranting that it is
neither a disqualified organization nor an agent or nominee acting on behalf of
a disqualified organization.
If a residual interest security is transferred to a disqualified
organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of the residual
interest security at the time of the transfer. In addition, if a disqualified
organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
residual interest security, the pass-through entity will be required to pay an
annual tax on an allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a residual interest security is a
"noneconomic residual interest" as described below, the transfer of a residual
interest security to a U.S. Person will be disregarded for all federal tax
purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. Such a purpose 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 (i.e., the transferor had"improper knowledge"). However, a safe harbor
exists under which a transferor is presumed to lack such knowledge provided that
the following two conditions are met:
o the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found
that the transferee had historically paid its debts as they became
due and found no significant evidence to indicate that the
transferee will not continue to pay its debts as they become due;
and
o the transferee represents to the transferor that it understands
that, as the holder of the noneconomic residual interest, it may
incur tax liabilities in excess of any cash flows generated by the
interest and that it intends to pay taxes associated with holding
the residual interest as they become due.
A residual interest security is a "noneconomic residual interest" unless, at the
time of the transfer:
o the present value of the expected future distributions on the
residual interest security at least equals the product of the
present value of the anticipated excess inclusions and the highest
rate of tax for the year in which the transfer occurs; and
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes
accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes.
If a transfer of a residual interest security is disregarded, the
transferor would be liable for any federal income tax imposed upon taxable
income derived by the transferee from the REMIC. A similar
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type of limitation exists with respect to certain transfers of residual
interests by foreign persons to U.S. Persons. See "--Tax Treatment of Foreign
Investors" below.
New proposed Treasury regulations issued on February 4, 2000 would add a
third condition to the safe harbor under which transfers of noneconomic residual
interests would not be disregarded for federal income tax purposes. Under the
new proposed regulations, a transfer of a noneconomic residual interest will
qualify under this safe harbor only if 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;
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 generally is calculated using a discount rate equal to
the applicable federal rate. The new proposed regulations have a
proposed effective date of February 4, 2000.
A recently issued revenue procedure provides that, during the period in
which the IRS and Treasury consider comments on the new proposed regulations, a
transferor will be presumed to lack improper knowledge if:
o both conditions specified in the third preceding paragraph are
satisfied; and
o either (x) the safe harbor formula specified in the immediately
preceding paragraph is satisfied or (y) the following three
conditions are satisfied:
o for financial reporting purposes, the transferee's gross assets
exceed $100 million and its net assets exceed $10 million for the
current year and prior two fiscal years, excluding certain related
party obligations;
o the transferee is an eligible corporation (i.e., a U.S. branch of a
domestic corporation (other than a tax-exempt corporation, a RIC, a
REIT, a REMIC or cooperative)) that will not be subject to net tax
by a foreign country or U.S. possession in respect of the residual
interest security and agrees in writing that any subsequent transfer
of the residual interest will be to an eligible corporation that
satisfies this safe harbor; and
o the facts and circumstances known to the transferor, including any
payment actually made to the transferee, must not reasonably
indicate that the taxes associated with the residual interest will
not be paid. Prospective investors should consult their own tax
advisors as to the applicability and effect of the new proposed
regulations and the Revenue Procedure.
Mark-to-Market Rules. Prospective purchasers of a REMIC residual interest
security should be aware that the IRS recently issued final mark-to-market
regulations which provide that a REMIC residual interest security acquired after
January 3, 1995 cannot be mark-to-market.
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Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related prospectus supplement, if a
REMIC election is not made and the trust fund is not structured as a
partnership, then, in the opinion of tax counsel, the trust fund relating to a
series of securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation. We refer to the securities of a series of
this type as ("pass-through securities"). In some series there will be no
separation of the principal and interest payments on the loans. In these
circumstances, a holder will be considered to have purchased a pro rata
undivided interest in each of the loans. In the case of ("stripped securities"),
sale of the securities will produce a separation in the ownership of all or a
portion of the principal payments from all or a portion of the interest payments
on the loans.
In the opinion of tax counsel, each holder must report on its federal
income tax return its share of the gross income derived from the loans (not
reduced by the amount payable as trust expense fees to the applicable trustee
and the servicer and similar fees), at the same time and in the same manner as
the items would have been reported under the holder's tax accounting method had
it held its interest in the loans directly, received directly its share of the
amounts received with respect to the loans, and paid directly its share of the
trust expense fees. In the case of pass-through securities other than stripped
securities, income will consist of a pro rata share of all of the income derived
from all of the loans and, in the case of stripped securities, income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the holder owns an interest. The holder of a security
will generally be entitled to deduct trust expense fees under section 162 or
section 212 of the Code to the extent that such fees represent "reasonable"
compensation for the services rendered by the applicable trustee and the
servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, trust expense fees (to
the extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing the holder's regular tax liability
only to the extent that the fees, when added to other miscellaneous itemized
deductions, exceed 2% of adjusted gross income and may not be deductible to any
extent in computing the holder's alternative minimum tax liability. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced by
the lesser of:
o 3% of the excess of adjusted gross income over the applicable
amount, or
o 80% of the amount of itemized deductions otherwise allowable for
that taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of tax
counsel, the holder's purchase price of a pass-through security is to be
allocated among the loans in proportion to their fair
90
market values, determined as of the time of purchase of the securities. In the
typical case, the trustee (to the extent necessary to fulfill its reporting 74
obligations) will treat each loan as having a fair market value proportional to
the share of the aggregate principal balances of all of the loans that it
represents, since the securities, unless otherwise specified in the related
prospectus supplement, will have a relatively uniform interest rate and other
common characteristics. To the extent that the portion of the purchase price of
a pass-through security allocated to a loan (other than to a right to receive
any accrued interest thereon and any undistributed principal payments) is less
than or greater than the portion of the principal balance of the loan allocable
to the security, the interest in the loan allocable to the pass-through security
will be deemed to have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a stripped security, a holder of the security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a loan could arise, for example, by virtue of the financing
of points by the originator of the loan, or by virtue of the charging of points
by the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of pass-through securities, market discount is calculated with
respect to the loans underlying the security, rather than with respect to the
security itself. A holder that acquires an interest in a loan originated after
July 18, 1984 with more than a de minimis amount of market discount (generally,
the excess of the principal amount of the loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities --Market
Discount" and "--Premium" above.
In the case of market discount on a pass-through security attributable to
loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. This treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A stripped security may represent a right to receive
only a portion of the interest payments on the loans, a right to receive only
principal payments on the loans, or a right to receive certain payments of both
interest and principal. Ratio stripped securities may represent a right to
receive differing percentages of both the interest and principal on each loan.
Pursuant to section 1286 of the Code, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from ownership
of the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. Section 1286 of the Code applies the
OID rules to stripped bonds and stripped coupons. For purposes of computing OID,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to the stripped interest.
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Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If the excess servicing fee is less than 100
basis points (i.e., 1% interest on the loan's principal balance) or the
securities are initially sold with a de minimis discount (assuming no prepayment
assumption is required), any non-de minimis discount arising from a subsequent
transfer of the securities should be treated as market discount. The IRS appears
to require that reasonable servicing fees be calculated on a loan by loan basis,
which could result in some loans being treated as having more than 100 basis
points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and OID rules are to apply to stripped
securities and other pass-through securities. Under the cash flow bond method
described above for pay-through securities, a prepayment assumption is used and
periodic recalculations are made that take into account with respect to each
accrual period the effect of prepayments during such period. However, the 1986
Act does not, absent Treasury regulations, appear specifically to cover
instruments such as stripped securities, which technically represent ownership
interests in the underlying loans, rather than being debt instruments "secured
by" those loans.
Nevertheless, it is believed that the cash flow bond method is a
reasonable method of reporting income for such securities, and it is expected
that OID will be reported on that basis unless otherwise specified in the
related prospectus supplement. In applying the calculation to pass-through
securities, the trustee will treat all payments to be received by a holder with
respect to the underlying loans as payments on a single installment obligation.
The IRS could, however, assert that OID must be calculated separately for each
loan underlying a security.
Under certain circumstances, if the loans prepay at a rate faster than the
prepayment assumption, the use of the cash flow bond method may accelerate the
holder's recognition of income. If, however, the loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate the holder's recognition of income.
In the case of a stripped security that is an interest weighted security,
the applicable trustee intends, absent contrary authority, to report income to
holders as OID, in the manner described above for interest weighted securities.
Possible Alternative Characterizations. The characterizations of the
stripped securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that:
o in certain series, each non-interest weighted security is composed
of an unstripped undivided ownership interest in loans and an
installment obligation consisting of stripped principal payments;
o the non-Interest Weighted securities are subject to the contingent
payment provisions of the new proposed regulations; or
o each interest weighted stripped security is composed of an
unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped interest payments.
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Given the variety of alternatives for treatment of the stripped securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying loans. In the case of stripped securities, there
is no specific legal authority existing regarding whether the character of the
securities, for federal income tax purposes, will be the same as the loans. The
IRS could take the position that the loans' character is not carried over to the
securities in such circumstances. Pass-through securities will be, and, although
the matter is not free from doubt, stripped securities should be considered to
represent:
o "real estate assets" within the meaning of section 856(c)(4)(A) of
the Code; and
o "loans secured by an interest in real property" within the meaning
of section 7701(a)(19)(C)(v) of the Code.
Interest income attributable to pass-through securities and stripped
securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of section 856(c)(3)(B) of the Code. Reserves or funds underlying the securities
may cause a proportionate reduction in the above-described qualifying status
categories of securities.
Sale or Exchange
Subject to the discussion below with respect to any trust fund as to which
a partnership election is made, in the opinion of tax counsel, a holder's tax
basis in a security is the price the holder pays for the security, increased by
amounts of OID or market discount included in income, and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a security, measured by the difference between the amount realized and the
security's basis as so adjusted, will generally be capital gain or loss,
assuming that the security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the security is more
than one year and short-term capital gain or loss if the holding period of the
Security is one year or less. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
In the case of a security held by a bank, thrift, or similar institution
described in section 582 of the Code, however, gain or loss realized on the sale
or exchange of a REMIC regular interest security will be taxable as ordinary
income or loss. In addition, gain from the disposition of a regular interest
security that might otherwise be capital gain will be treated as ordinary income
to the extent of the excess, if any, of:
o the amount that would have been includible in the holder's income if
the yield on the regular interest security had equaled 110% of the
applicable federal rate as of the beginning of such holder's holding
period,
over
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o the amount of ordinary income actually recognized by the holder with
respect to the regular interest security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to any
trust fund as to which a partnership election is made, a holder, other than a
holder of a REMIC residual interest security, may, under certain circumstances,
be subject to "backup withholding" at a rate of 31% with respect to
distributions or the proceeds of a sale of certificates to or through brokers
that represent interest or original issue discount on the securities. This
withholding generally applies if the holder of a security:
o fails to furnish the applicable trustee with its taxpayer
identification number;
o furnishes the applicable trustee an incorrect TIN;
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
o under certain circumstances, fails to provide the applicable trustee
or such holder's securities broker with a certified statement,
signed under penalty of perjury, that the TIN provided is its
correct number and that the holder is not subject to backup
withholding.
Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain nonresident alien individuals, foreign
partnerships or foreign corporations. Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The applicable trustee will report to the holders and to the servicer for
each calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to any trust fund as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a security (other than a residual interest security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation,
in the opinion of tax counsel, interest will normally qualify as portfolio
interest, and will be exempt from federal income tax. However, interest will not
qualify as portfolio interest where:
o the recipient is a holder, directly or by attribution of 10% or more
of the capital or profits interest in the issuer, or
o the recipient is a controlled foreign corporation to which the
issuer is a related person.
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For interest to qualify for the portfolio interest exemption from U.S.
withholding tax, the holder must generally complete a Form W-8BEN indicating
that the holder is a non-U.S. Person. The Form W-8BEN, or in certain
circumstances other documentation, must be provided to the person otherwise
required to withhold U.S. tax. If a foreign holder is a partnership or other
type of pass-through entity that is not treated for U.S. withholding tax
purposes as the beneficial owner of the income with respect to the security, the
holder generally must receive the Form W-8BEN as described in the previous
sentence from the holder's partners or other beneficial owners of the income
with respect to the security and may be required to provide the forms, and
certain additional information, to the person through whom the holder holds the
security. The forms provided by the holder or its interestholders regarding
status as a non-U.S. Person must generally be passed through the ownership chain
to the person otherwise required to withhold tax in order for the exemption to
apply. These provisions supersede the generally applicable provisions of United
States law that would otherwise require the issuer to withhold at a 30% rate
(unless such rate were reduced or eliminated by an applicable tax treaty) on,
among other things, interest and other fixed or determinable, annual or periodic
income paid to nonresident alien individuals, foreign partnerships or foreign
corporations. Holders of pass-through securities and stripped securities,
including ratio strip securities, however, may be subject to withholding to the
extent that the loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and appropriate documentation is provided to the person
otherwise required to withhold. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of REMIC residual interest securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, the
holder of a residual interest security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the residual interest security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Regulations could, for example, require withholding prior to
the distribution of cash in the case of residual interest securities that do not
have significant value. Under the REMIC Regulations, if a residual interest
security has tax avoidance potential, a transfer of a residual interest security
to a nonresident alien individual, foreign partnership or foreign corporation
will be disregarded for all federal tax purposes. A residual interest security
has tax avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a nonresident alien individual, foreign partnership
or foreign corporation transfers a residual interest security to a U.S. Person,
and if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, then the transfer is disregarded and the transferor
continues to be treated as the owner of the residual interest security for
purposes of the withholding tax provisions of the Code. See "--Excess
Inclusions" above.
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Tax Characterization of the Trust Fund as a Partnership
Tax counsel is of the opinion that a trust fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the trust agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates has
been structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, in the opinion of tax counsel, the trust fund would be subject to
corporate income tax on its taxable income. The trust fund's taxable income
would include all its income, possibly reduced by its interest expense on the
notes. Any such corporate income tax could materially reduce cash available to
make payments on the notes and distributions on the certificates, and holders of
certificates could be liable for any such tax that is unpaid by the trust fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The trust fund will agree, and the
noteholders will agree by their purchase of notes, to treat the notes as debt
for federal income tax purposes. As a result, tax counsel is, (except as
otherwise provided in the related prospectus supplement,) of the opinion that
the notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not "indexed securities" or "strip notes." Moreover, the discussion assumes that
the interest formula for the notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the notes (i.e., any
excess of the principal amount of the notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID Regulations. If these conditions are not satisfied with respect to any given
series of notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of tax counsel, the notes
will not be considered issued with OID. The stated interest in the notes will be
taxable to a noteholder as ordinary interest income when received or accrued in
accordance with the noteholder's method of tax accounting. Under the OID
Regulations, a holder of a note issued with a de minimis amount of OID must
include the OID in income, on a pro rata basis, as principal payments are made
on the note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a note that is a "short-term note" (i.e., it has a fixed
maturity date of not more than one year from the issue date) may be subject to
special rules. An accrual basis holder of a short-term note
96
(and certain cash method holders, including regulated investment companies, as
set forth in section 1281 of the Code) generally would be required to report
interest income as interest accrues on a straight-line basis over the term of
each interest period. Other cash basis holders of a short-term note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the short-term note). However, a cash
basis holder of a short-term note reporting interest income as it is paid may be
required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the short-term note until the taxable
disposition of the short-term note. A cash basis taxpayer may elect under
section 1281 of the Code to accrue interest income on all nongovernment debt
obligations with a term of one year or less, in which case the taxpayer would
include interest on the short-term note in income as it accrues, but would not
be subject to the interest expense deferral rule referred to in the preceding
sentence. Certain special rules apply if a short-term note is purchased for more
or less than its principal amount.
Sale or Other Disposition. In the opinion of tax counsel, if a noteholder
sells a note, the holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted tax
basis in the note. The adjusted tax basis of a note to a particular noteholder
will equal the holder's cost for the note, increased by any market discount,
acquisition discount, OID and gain previously included by the noteholder in
income with respect to the note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments previously
received by the noteholder with respect to the note. Any such gain or loss will
be capital gain or loss if the note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Foreign Holders. In the opinion of tax counsel, interest payments made (or
accrued) to a noteholder who is a "foreign person" (i.e., nonresident alien,
foreign corporation or other non-U.S. Person) generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person:
o is not actually or constructively a "10 percent shareholder" of the
trust fund or the seller (including a holder of 10% of the
outstanding certificates) or a "controlled foreign corporation" with
respect to which the trust fund or the seller is a "related person"
within the meaning of the Code; and
o provides the trustee or other person who is otherwise required to
withhold U.S. tax with respect to the notes with an appropriate
statement (on Form W-8BEN), signed under penalties of perjury,
certifying that the beneficial owner of the note is a foreign person
and providing the foreign person's name and address.
If a foreign holder is a partnership or other type of pass-through entity
that is not treated for U.S. withholding tax purposes as the beneficial owner of
the income with respect to the certificate, the holder generally must receive
the Form W-8BEN as described in the previous sentence from the holder's partners
or other beneficial owners of the income with respect to the certificate and may
be required to provide the forms, and certain additional information, to the
person through whom the holder holds the certificates. The forms provided by the
holder or its interestholders regarding status as a non-U.S. Person must
generally be passed through the ownership chain to the person otherwise required
to withhold tax in
97
order for the exemption to apply. If a note is held through a securities
clearing organization or certain other financial institutions, the foreign
person that owns the note should furnish such organization or institution with a
Form W-8BEN or a similar form. The organization or institution may then be
required to forward the Form W-8BEN to the withholding agent. If interest is not
portfolio interest and is not effectively connected with the conduct of a U.S.
trade or business, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt noteholder fail
to provide the required certification, the trust fund will be required to
withhold 31% of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of tax counsel, the IRS successfully asserted that one or more of the notes did
not represent debt for federal income tax purposes, the notes might be treated
as equity interests in the trust fund. If so treated, the trust fund might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by deductions
for interest expense on notes recharacterized as equity). Alternatively, and
most likely in the view of tax counsel, the trust fund might be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities (including pension funds) may be "unrelated business taxable
income," income to foreign holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding requirements, and individual holders
might be subject to certain limitations on their ability to deduct their share
of the trust fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The trust fund and the
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization of
the arrangement involving the trust fund, the certificates, the notes, the trust
fund and the servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
98
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the certificates are denominated in U.S. dollars, none of the
certificates is an indexed security or a strip certificates, and that a series
of securities includes a single class of certificates. If these conditions are
not satisfied with respect to any given series of certificates, additional tax
considerations with respect to such certificates will be disclosed in the
applicable prospectus supplement.
Partnership Taxation. If the trust fund is a partnership, in the opinion
of tax counsel, the trust fund will not be subject to federal income tax.
Rather, in the opinion of tax counsel, each certificateholder will be required
to separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the trust fund. The trust fund's income will
consist primarily of interest and finance charges earned on the loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of loans. The trust fund's deductions will
consist primarily of interest accruing with respect to the notes, servicing and
other fees, and losses or deductions upon collection or disposition of loans.
In the opinion of tax counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the trust agreement and related documents). The
trust agreement will provide, in general, that the certificateholders will be
allocated taxable income of the trust fund for each month equal to the sum of:
o the interest that accrues on the certificates in accordance with
their terms for such month, including interest accruing at the
pass-through rate for that month and interest on amounts previously
due on the certificates but not yet distributed;
o any trust fund income attributable to discount on the loans that
corresponds to any excess of the principal amount of the
certificates over their initial issue price;
o prepayment premium payable to the certificateholders for that month;
and
o any other amounts of income payable to the certificateholders for
that month.
This allocation will be reduced by any amortization by the trust fund of
premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the depositor. Based on the economic arrangement
of the parties, in the opinion of tax counsel, this approach for allocating
trust fund income should be permissible under applicable Treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to certificateholders. Moreover, in the opinion
of tax counsel, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and
99
certificateholders may become liable for taxes on trust fund income even if they
have not received cash from the trust fund to pay taxes. In addition, because
tax allocations and tax reporting will be done on a uniform basis for all
certificateholders but certificateholders may be purchasing certificates at
different times and at different prices, certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the trust fund.
In the opinion of tax counsel, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) may
constitute "unrelated business taxable income" generally taxable to the holder
under the Code.
In the opinion of tax counsel, an individual taxpayer's share of expenses
of the trust fund (including fees to the servicer but not interest expense)
would be miscellaneous itemized deductions. Such deductions might be disallowed
to the individual in whole or in part and might result in such holder being
taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the loans were not issued with
OID, and, therefore, the trust fund should not have OID income. However, the
purchase price paid by the trust fund for the loans may be greater or less than
the remaining principal balance of the loans at the time of purchase. If so, in
the opinion of tax counsel, the loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the trust fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
loan-by-loan basis.)
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include any discount in income currently as it accrues
over the life of the loans or to offset any premium against interest income on
the loans. As indicated above, a portion of market discount income or premium
deduction may be allocated to certificateholders.
Section 708 Termination. In the opinion of tax counsel, under section 708
of the Code, the trust fund will be deemed to terminate for federal income tax
purposes if 50% or more of the capital and profits interests in the trust fund
are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under section 708 of the Code, if such a
termination occurs, the trust fund would be deemed to contribute its assets to a
new partnership in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the original trust fund
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of tax counsel,
capital gain or loss will be recognized on a sale of certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the certificates sold. A certificateholder's tax basis in a certificate will
generally equal the holder's cost increased by the holder's share of trust fund
income (includible in income) and decreased by any distributions received with
respect to the certificate. In addition, both the tax basis in
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the certificates and the amount realized on a sale of a certificate would
include the holder's share of the notes and other liabilities of the trust fund.
A holder acquiring certificates at different prices may be required to maintain
a single aggregate adjusted tax basis in the certificates, and, upon sale or
other disposition of some of the certificates, allocate a portion of the
aggregate tax basis to the certificates sold (rather than maintaining a separate
tax basis in each certificate for purposes of computing gain or loss on a sale
of that certificate).
Any gain on the sale of a certificate attributable to the holder's share
of unrecognized accrued market discount on the loans would generally be treated
as ordinary income to the holder and would give rise to special tax reporting
requirements. The trust fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the trust fund will elect to include market discount in
income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, this excess will generally give rise to
a capital loss upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund will not make such
election. As a result, certificateholders might be allocated a greater or lesser
amount of trust fund income than would be appropriate based on their own
purchase price for certificates.
Administrative Matters. The trustee is required to keep or have kept
complete and accurate books of the trust fund. Books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-l information to nominees that fail to provide
the trust fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
certificates. Generally, holders must
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file tax returns that are consistent with the information return filed by the
trust fund or be subject to penalties unless the holder notifies the IRS of all
such inconsistencies.
Under section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. Such information includes:
o the name, address and taxpayer identification number of the nominee;
and
o as to each beneficial owner (a) the name, address and identification
number of such person, (b) whether such person is a U.S. Person, a
tax-exempt entity or a foreign government, an international
organization or any wholly owned agency or instrumentality of either
of the foregoing, and (c) certain information on certificates that
were held, bought or sold on behalf of such person throughout the
year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under section 17A of the Securities Exchange Act of 1934 is not
required to furnish any such information statement to the trust fund. The
information referred to above for any calendar year must be furnished to the
trust fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the related
trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the trust fund would be engaged in a trade or business in the United States
for such purposes, the trust fund will withhold as if it were so engaged in
order to protect the trust fund from possible adverse consequences of a failure
to withhold. The trust fund expects to withhold on the portion of its taxable
income that is allocable to foreign certificateholders pursuant to section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the trust fund to change its withholding procedures. In determining a holder's
withholding status, the trust fund may rely on IRS Form W-8BEN or a similar
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form, IRS Form W-9 or the holder's certification of nonforeign status signed
under penalties of perjury. Each foreign holder might be required to file a U.S.
individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the trust fund's income.
Each foreign holder must obtain a taxpayer identification number from the IRS
and submit that number to the trust fund on Form W-8BEN in order to assure
appropriate crediting of the taxes withheld. A foreign holder generally would be
entitled to file with the IRS a claim for refund with respect to taxes withheld
by the trust fund taking the position that no taxes were due because the trust
fund was not engaged in a U.S. trade or business. However, interest payments
made (or accrued) to a certificateholder who is a foreign person generally will
be considered guaranteed payments to the extent such payments are determined
without regard to the income of the trust fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, certificateholders will be subject
to United States federal income tax and withholding tax at a rate of 30%, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
State Tax Considerations
In addition to the federal income tax considerations described in this
prospectus under "Material Federal Income Tax Considerations," potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the securities. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences of
an investment in the securities.
FASIT Securities
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed FASIT securities effective
on September 1, 1997. On February 4, 2000, the IRS and Treasury issued proposed
Treasury regulations for FASITs. The regulations generally would not be
effective until final regulations are filed with the federal register. However,
it appears that certain anti-abuse rules would apply as of February 4, 2000.
Investors also should note that the FASIT discussions contained herein
constitutes only a summary of the federal income tax consequences to holders of
FASIT securities. With respect to each series of FASIT securities, the related
prospectus supplement will provide a detailed discussion regarding the federal
income tax consequences associated with the particular transaction.
FASIT securities will be classified as either FASIT "regular securities,"
which generally will be treated as debt for federal income tax purposes, or
FASIT "ownership securities," which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the
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taxable income or loss of the related series. The prospectus supplement for each
series of securities will indicate whether one or more FASIT elections will be
made for the series, and which securities of the series will be designated as
regular securities, and which, if any, will be designated as ownership
securities.
Qualification as a FASIT. The trust fund underlying a series (or one or
more designated pools of assets held in the trust fund) will qualify under the
Code as a FASIT in which the FASIT regular securities and the FASIT ownership
securities will constitute the "regular interests" and the "ownership
interests," respectively, if
o a FASIT election is in effect,
o certain tests concerning the composition of the FASIT's assets and
the nature of the holders' interest in the FASIT are met on a
continuing basis, and
o the trust fund is not a regulated investment company or RIC as
defined in section 851(a) of the Code.
However, the qualification as a FASIT of any trust fund for which a FASIT
election is made depends on the trust's ability to satisfy the requirements of
the FASIT provisions on an ongoing basis, including, without limitation, the
requirements of any final Treasury regulations that may be promulgated in the
future under the FASIT provisions or as a result of any change in applicable
law. Thus, no assurances can be made regarding the qualification as a FASIT of
any trust for which a FASIT election is made at any particular time after the
issuance of securities by the trust.
Asset Composition. In order for a trust fund (on one or more designated
pools of assets held by a trust fund) to be eligible for FASIT status,
substantially all of the assets of the trust fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter. Permitted assets include
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC
regular interests if issued by a REMIC (generally, instruments that
provide for interest at a fixed rate, a qualifying variable rate, or
a qualifying interest-only type rate,
o foreclosure property,
o certain hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required
to guarantee or hedge against the FASIT's risks associated with
being the obligor on FASIT interests,
o contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
o FASIT regular interests, and
o REMIC regular interests.
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o Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to
the holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT must meet certain requirements. All of
the interests in a FASIT must belong to either
o one or more classes of regular interests or
o a single class of ownership interest that is held by a fully taxable
domestic corporation. In the case of series that include FASIT
ownership securities, the ownership interest will be represented by
the FASIT ownership securities.
A FASIT interest generally qualifies as a regular interest if
o it is designated as a regular interest,
o it has a stated maturity no greater than thirty years, o it entitles
its holder to a specified principal amount,
o the issue price of the interest does not exceed 125% of its stated
principal amount,
o the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
o if it pays interest, such interest is payable either at a fixed rate
with respect to the principal amount of the regular interest or at a
permissible variable rate with respect to the principal amount.
Permissible variable rates for FASIT regular interests are the same as
those for REMIC regular interest (i.e., certain qualified floating rates and
weighted average rates). See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Variable Rate Debt Securities" in
this prospectus.
If a FASIT security fails to meet one or more of the requirements set out
in the third, fourth or fifth bullet in the preceding paragraph, but otherwise
meets the above requirements, it may still qualify as a type of regular interest
known as a "high-yield interest." In addition, if a FASIT security fails to meet
the requirements of the final bullet in the preceding paragraph, but the
interest payable on the security consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the security also will qualify as a high-yield interest. A high-yield
interest may be held only by domestic corporations that are fully subject to
corporate income tax, other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
high-yield interests are subject to limitations on offset of income derived from
such interest. See "--Tax Treatment of FASIT Regular Securities" and
"--Treatment of High-Yield Interests" below.
Anti-Abuse Rule. Under proposed Treasury regulations, the IRS Commissioner
may make appropriate adjustments with regard to the FASIT and any arrangement or
transaction involving the FASIT if a principal purpose of forming or using the
FASIT is to achieve results inconsistent with the
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intent of the FASIT provisions and the FASIT regulations. This determination
would be based on all of the facts and circumstances, including a comparison of
the purported business purpose for a transaction and the claimed tax benefits
resulting from the transaction.
Consequences of the Failure of the FASIT Trust to Qualify as a FASIT. If a
FASIT trust fails to comply with one or more of the Code's ongoing requirements
for FASIT status during any taxable year, proposed Treasury regulations provide
that its FASIT status would be lost for that year and the FASIT trust would be
unable to elect FASIT status without the Commissioner's approval. If FASIT
status is lost, under proposed Treasury regulations the entity classification of
the former FASIT would be determined under general federal income tax
principles. The holder of the FASIT ownership security would be treated as
exchanging the assets of the former FASIT for an amount equal to their value and
gain recognized would be treated as gain from a prohibited transaction that is
subject to the 100% tax, without exception. Loss, if any, would be disallowed.
In addition, the holder of the FASIT ownership security must recognize
cancellation of indebtedness income, on a regular interest by regular interest
basis, in an amount equal to the adjusted issue price of each FASIT regular
security outstanding immediately before the loss of FASIT status over its fair
market value. If the holder of the FASIT ownership security has a continuing
economic interest in the former FASIT, the characterization of this interest is
determined under general federal income tax principles. Holders of FASIT regular
securities are treated as exchanging their securities for interests in the new
entity classification of the former FASIT, which the classification is
determined under general federal income tax principles. Gain is recognized to
the extent the new interest either does not qualify as debt or differs either in
kind or extent. The basis of the interest in the new entity classification of
the former FASIT equals the basis in the FASIT regular security increased by any
gain recognized on the exchange.
Tax Treatment of FASIT Regular Securities. Payments received by holders of
FASIT regular securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC regular securities. As in the case of holders of REMIC regular
securities, holders of FASIT regular securities must report income from such
securities under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. Except in the case of
FASIT regular securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT regular security
generally will be treated as ordinary income to the holder and a principal
payment on the security will be treated as a return of capital to the extent
that the holder's basis is allocable to that payment. FASIT regular securities
issued with original issue discount or acquired with market discount or premium
generally will treat interest and principal payments on the securities in the
same manner described for REMIC regular securities. See "Material Federal Income
Tax Considerations--Taxation of Debt Securities," "--Market Discount," and
"--Premium" in this prospectus. High-yield interests may be held only by fully
taxable domestic corporations, other FASITs, and certain securities dealers.
Holders of high-yield interests are subject to limitations on their ability to
use current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those securities.
If a FASIT regular security is sold or exchanged, the holder generally
will recognize gain or loss upon the sale in the manner described above for
securities other than REMIC regular interest securities. See "Material Federal
Income Tax Considerations--Sale or Exchange" in this prospectus. In addition, if
a FASIT regular security becomes wholly or partially worthless as a result of
default and delinquencies of the underlying assets, the holder of the security
should be allowed to deduct the loss sustained (or
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alternatively be able to report a lesser amount of income). See "Material
Federal Income Tax Considerations--Taxation of Debt Securities--Effects of
Default and Delinquencies" in this prospectus.
FASIT regular securities held by a real estate investment trust or REIT
will qualify as "real estate assets" within the meaning of section 856(c) (4)(A)
of the Code, and interest on such securities will be considered "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 to the same
extent that REMIC securities would be so considered. FASIT regular securities
held by a thrift institution taxed as a "domestic building and loan association"
will represent qualifying assets for purposes of the qualification requirements
set forth in section 7701(a)(19) of the Code to the same extent that REMIC
securities would be so considered. See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property loans" in
this prospectus. In addition, FASIT regular securities held by a financial
institution to which section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of section 582(c)(1) of the Code. FASIT
securities will not qualify as "government securities" for either REIT - or RIC
- - qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income derived
from the High-Yield Interest, for either regular federal income tax purposes or
for alternative minimum tax purposes. In addition, the FASIT provisions contain
an anti-abuse rule that imposes corporate income tax on income derived from a
FASIT Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See "FASIT Securities--Treatment of High-Yield Interests."
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Rules similar to the wash sale rules applicable to REMIC Residual
securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
securities will be subject to backup withholding to the same extent holders of
REMIC securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT securities
generally will be treated in the same manner as holders of REMIC Securities.
Under proposed Treasury regulations, if a non-U.S. Person holds (either
directly or through a vehicle which itself is not subject to U.S. federal income
tax, such as a partnership or a trust) a FASIT Regular Security and a "conduit
debtor" pays or accrues interest on a debt instrument held by such FASIT, any
interest received or accrued by the non-U.S. Person FASIT Regular Security
holder is treated as received or accrued from the conduit debtor. The proposed
Treasury regulations state that a debtor is a conduit debtor if the debtor is a
U.S. Person or the United States branch of a non-U.S. Person and the non-U.S.
Person FASIT Regular Security holder is (1) a "10 percent shareholder" of the
debtor, (2) a "controlled foreign corporation" and the debtor is a related
person with respect to the controlled foreign corporation or (3) related to the
debtor. As set forth above, the proposed Treasury regulations would not be
effective until final regulations are filed with the federal register.
Due to the complexity of the federal income tax rules applicable to
holders and the considerable uncertainty that exists with respect to many
aspects of those rules, potential investors should consult their own tax
advisors regarding the tax treatment of the acquisition, ownership, and
disposition of the securities.
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ERISA Considerations
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended and the Internal Revenue
Code, which apply only to securities of a series that are not divided into
subclasses. If securities are divided into subclasses, the related prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to the related subclasses.
ERISA and Section 4975 of the Code impose requirements on employee benefit
plans - and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which 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 Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans, 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 such 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 that is qualified and exempt
from taxation under Sections 401(a) and 501(a) of the Code, however, is subject
to the prohibited transaction rules set forth in Section 503 of the Code.
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 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
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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 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
plan assets. 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
such parties may receive certain benefits in connection with the sale of the
notes, the purchase of notes using plan assets 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 such
Plan assets;
o has authority or responsibility to give, or regularly gives,
investment advice with respect to such plan assets for a fee and
pursuant to an agreement of understanding that the advice will serve
as a primary basis for investment decisions with respect to the Plan
assets and will be based on the particular investment needs for the
Plan; or
o is an employer maintaining or contributing to such 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 Plan assets 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 Prohibited Transaction Class Exemption (PTCE) 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager;"
o PTCE 90-1, which exempts certain transactions involving insurance
company pooled separate accounts;
110
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 Plan assets, 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 plan 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 or administrative
exemption applies.
The DOL issued to Bear, Stearns & Co. Inc., an individual underwriter
exemption (Prohibited Transaction Exemption 90-30, 55 Fed. Reg. 21461 (1990)),
which exempts from the application of certain of the prohibited transaction
rules transactions relating to the acquisition, sale and holding by Plans of
certain securities, including certificates, representing an interest in
asset-backed pass-through entities, including trusts, that hold certain types of
receivables or obligations and with respect to which Bear, Stearns & Co. Inc. is
the underwriter, or the manager or co-manager of an underwriting syndicate.
The underwriter exemption sets forth the following general conditions
which must be satisfied before a transaction involving the acquisition, sale and
holding of the certificates or a transaction in
111
connection with the servicing, operation and management of the trust fund may be
eligible for exemptive relief thereunder:
o The acquisition of the certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to
the investing Plan as they would be in an arm's-length transaction
with an unrelated party.
o The rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced
by other certificates of the same trust fund, other than in the case
of a "designated transaction" (as defined below).
o The certificates acquired by the Plan have received a rating at the
time of such acquisition that is in one of the three (or in the case
of a designated transaction, four) highest generic rating categories
from any of Fitch, Inc., Moody's Investors Service, Inc. and
Standard & Poor's.
o The trustee is not an affiliate of the underwriters, the depositor,
the servicer, any borrower whose obligations under one or more
mortgage loans constitute more than 5% of the aggregate unamortized
principal balance of the assets in the trust, the counterparty in a
permitted notional principal transaction, or any of their respective
affiliates (together with the trustee, the "restricted group").
o The sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting or placing such
certificates; the sum of all payments made to and retained by the
depositor pursuant to the sale of the mortgage loans to the trust
represents not more than the fair market value of such mortgage
loans; and the sum of all payments made to and retained by the
servicers represent not more than reasonable compensation for the
servicers' services under the pooling and servicing agreements and
reimbursement of the servicers' reasonable expenses in connection
therewith.
o The Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933.
For purposes of the underwriter exemption, a "designated transaction"
means, for certificates issued on or after August 23, 2000, a transaction in
which the assets underlying the certificates consist of single-family
residential, multi-family residential, home equity, manufactured housing and/or
commercial mortgage obligations that are fully secured by single-family
residential, multi-family residential or commercial real property or leasehold
interests in the foregoing.
Moreover, the underwriter exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which such person (or its affiliate) is an obligor; provided,
that among other requirements:
112
o the person (or its affiliate) is not an obligor with respect to more
than 5% of the fair market value of the obligations or receivables
contained in the trust;
o the Plan is not a plan with respect to which any member of the
restricted group is the "plan sponsor" (as defined in Section
3(16)(B) of ERISA);
o in the case of an acquisition in connection with the initial
issuance of certificates, at least 50% of each class of certificates
in which Plans have invested is acquired by persons independent of
the restricted group and at least 50% of the aggregate interest in
the trust fund is acquired by persons independent of the restricted
group;
o a Plan's investment in certificates of any class does not exceed 25%
of all of the certificates 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 such person has discretionary
authority or renders investment advice are invested in certificates
representing an interest in one or more trusts containing assets
sold or serviced by the same entity.
The underwriter exemptions as amended by Prohibited Transaction Exemption
97-34, 62 Fed. Reg. 39021 (1997), provides exemptive relief to certain
mortgage-backed and asset-backed securities transactions that utilize
pre-funding accounts and that otherwise satisfy the requirements of the
underwriter exemption. Mortgage loans or other secured receivables supporting
payments to certificateholders, and having a value equal to no more than 25% of
the total principal amount of the certificates being offered by the trust, may
be transferred to the trust within a 90-day or three-month funding period
following the closing date of being required to be either identified or
transferred on or before the closing date. The relief is available when the
following conditions are met:
o The funding limit (i.e., ratio of the amount allocated to the
pre-funding account to the total principal amount of the
certificates being offered) must not exceed 25%.
o All the additional obligations transferred after the closing date
must meet the same terms and conditions for eligibility as the
original obligations used to create the trust, which terms and
conditions have been approved by a rating agency; provided, that the
terms and conditions for determining the eligibility of an
obligation may be changed if such changes receive prior approval
either by a majority vote of the outstanding certificateholders or
by a rating agency.
o The transfer of additional obligations to the trust during the
funding period must not result in the certificates to be covered by
the underwriter exemption receiving a lower credit rating from a
rating agency upon termination of the funding period than the rating
that was obtained at the time of the initial issuance of the
certificates by the trust.
o Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the obligations in the
trust at the end of the funding period must not be more than 100
basis points lower than the average interest rate for the
obligations transferred to the trust on the closing date.
113
o In order to insure that the characteristics of the additional
obligations are substantially similar to the original obligations
which were transferred to the trust fund:
(i) the characteristics of the additional obligations must be monitored
by an insurer or other credit support provider that is independent
of the depositor; or
(ii) an independent accountant retained by the depositor must provide the
depositor with a letter (with copies provided to each rating agency
rating the certificates, the related underwriter and the related
trustee) stating whether or not the characteristics of the
additional obligations conform to the characteristics described in
the related prospectus or prospectus supplement and/or pooling and
servicing agreement. In preparing the letter, the independent
accountant must use the same type of procedures as were applicable
to the obligations transferred to the trust as of the closing date.
o The period of pre-funding must end no later than three months or 90
days after the closing date or earlier in certain circumstances if
the pre-funding account falls below the minimum level specified in
the pooling and servicing agreement or an event of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments.
o The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account used in
connection with a pre-funding account,
(ii) the duration of the period of pre-funding,
(iii) the percentage and/or dollar amount of the funding limit for the
trust, and
(iv) that the amounts remaining in the pre-funding account at the end of
the funding period will be remitted to certificateholders as
repayments of principal.
o The related pooling and servicing agreement must describe the
permitted investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
additional obligations.
On November 13, 2000, the DOL published in the Federal Register an
amendment (Prohibited Transaction Exemption 2000-58) to the underwriter
exemption (65 Fed. Reg. 67765 (2000)) that, effective as of August 23, 2000,
generally permits Plans to purchase securities, including subordinated
securities, rated in any of the four highest ratings categories (provided that
all other requirements of the underwriter exemption are met). The description
above reflects this amendment.
114
In general, neither PTCE 83-1, which exempts certain transactions
involving Plan investments in mortgage trusts, nor the underwriter exemption
applies to a trust which contains unsecured obligations. However, PTE 2000-58
provides that, for purposes of the underwriter exemption, residential and home
equity loan receivables issued in designated transactions may be less than fully
secured if
o the rights and interests evidenced by the certificates issued in the
designated transaction are not subordinated to the rights and
interests evidenced by other securities of the same trust fund,
o the certificates have received a rating at the time of acquisition
that is in one of the two highest generic rating categories from a
rating agency, and
o the receivables are secured by collateral whose fair market value on
the closing date of the designated transaction is at least 80% of
the sum of the outstanding principal balance due under the
receivable and the outstanding principal balance of any other
receivable of higher priority which is secured by the same
collateral.
Any Plan fiduciary that proposes to cause a Plan to purchase securities
should consult with counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the underwriter exemption, or any other exemption
and the potential consequences in their specific circumstances, prior to making
an investment. Moreover, each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Legal Matters
The legality of the securities of each series, including the material
federal income tax consequences with respect to the securities, will be passed
upon for the depositor by Sidley Austin Brown & Wood LLP, New York, New York,
Thacher Proffitt & Wood, New York, New York, Stroock & Stroock & Lavan LLP or
other counsel designated in the prospectus supplement.
Financial Information
A new trust fund will be formed for each series of securities. No trust
fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related series of securities. Accordingly, no
financial statements with respect to any trust fund will be included in this
prospectus or in the related prospectus supplement.
Available Information
The depositor has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus, which forms a part of the registration statement, and the prospectus
supplement relating to each series of securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the registration statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the registration statement and its exhibits. The registration statement
and exhibits
115
can be inspected and copied at prescribed rates at the public reference
facilities maintained by the SEC at its Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows: Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048. In addition, the SEC maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the depositor, that file
electronically with the SEC.
Incorporation of Certain Information by Reference
This prospectus incorporates by reference all documents and reports filed
by the depositor, Bear Stearns Asset Backed Securities, Inc., 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 the related
securities. Upon request by any 95 person to whom this prospectus is delivered
in connection with the offering of one or more classes securities, the depositor
will provide or cause to be provided without charge a copy of any of the
documents and/or reports incorporated herein by reference, in each case to the
extent the documents or reports relate to those classes of securities, other
than the exhibits to the documents (unless the exhibits are specifically
incorporated by reference in such documents). Requests to the depositor should
be directed in writing to: Bear Stearns Asset Backed Securities, Inc., 245 Park
Avenue, New York, New York 10167, telephone number (212) 272-4095. The depositor
has determined that its financial statements are not material to the offering of
any 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, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each trust fund, that file
electronically with the SEC.
Ratings
It is a condition to the issuance of the securities 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 prospectus
supplement.
Each such rating will be based on, among other things, the adequacy of the
value of the trust fund assets and any credit enhancement with respect to the
related class and will reflect the rating agency's assessment solely of the
likelihood that the related holders will receive payments to which they are
entitled. No rating will constitute an assessment of the likelihood that
principal prepayments on the related 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. A rating should not
be deemed a recommendation to purchase, hold or sell securities, inasmuch as it
does not address market price or suitability for a particular investor. A rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
116
There is also no assurance that any rating will remain in effect for any
given period of time or that it may not be lowered or withdrawn entirely by the
applicable rating agency in the future if in its judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of trust fund assets or any credit enhancement with
respect to a series, a rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of the credit enhancement
provider's long-term debt.
The amount, type and nature of any credit enhancement established with
respect to a series of securities will be determined on the basis of criteria
established by each rating agency named in the related prospectus supplement.
These criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each rating agency determines the amount of credit enhancement required with
respect to each class of securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of loans. No assurance can be given that
values of any properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If residential real estate
markets should experience an overall decline in property values such that the
principal balances of the loans in a particular trust fund and any secondary
financing on the related properties become equal to or greater than the value of
those properties, the rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
additional, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal of and interest on the loans and, accordingly, the rates
of delinquencies, foreclosures and losses with respect to any trust fund. To the
extent that losses are not covered by credit enhancement, losses will be borne,
at least in part, by the holders of one or more classes of the securities of the
related series.
Legal Investment Considerations
Unless otherwise specified in the related prospectus supplement, the
securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Credit Enhancement Act of 1984, as amended.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the securities constitute legal investments for them.
Plan of Distribution
The depositor may offer each series of securities through Bear, Stearns &
Co. Inc. (BS&Co.) or one or more other firms that may be designated at the time
of the related offering. The participation of BS&Co. in any offering will comply
with Schedule E to the By-Laws of the National Association of securities
Dealers, Inc. The prospectus supplement relating to each series of securities
will set forth the specific terms of the offering of the series and of each
class within the series, the names of the underwriters, the purchase price of
the securities, the proceeds to the depositor from the sale, any securities
exchange on which the securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or
117
reallowed to dealers. The place and time of delivery of each series of
securities will also be set forth in the related prospectus supplement. BS&Co.
is an affiliate of the depositor.
Glossary of Terms
Agency Securities. Mortgage-backed securities issued or guaranteed by
Ginnie Mae, Fannie Mae or Freddie Mac.
Asset Value. Unless otherwise specified in the related prospectus
supplement with respect to the primary assets in the trust fund, the product of
the Asset Value percentage set forth in the related indenture multiplied by the
lesser of
o the stream of remaining regularly scheduled payments in the primary
assets net of certain amounts payable as expenses, together with
income earned on each regularly scheduled payment received through
the day preceding the next distribution date at the Assumed
Reinvestment Rate, if any, discounted to present value at the
highest interest rate on the notes of the series over periods equal
to the interval between payments on the notes and
o the then outstanding principal balance of the primary assets.
Assumed Reinvestment Rate. With respect to a series of securities, the
highest rate permitted by the rating agencies named in the related prospectus
supplement or a rate insured by means of a surety bond, guaranteed investment
contract, reinvestment agreement or other arrangement satisfactory to the rating
agencies.
Home Equity Loans. Closed-end loans and/or revolving credit line loans
secured by mortgages, deeds of trust or other similar security instruments
creating senior or junior liens on one- to four-family residential properties or
mixed-use properties.
Home Improvement Contracts. Home Improvement installment sales contracts
and installment loan agreements which are either unsecured or secured by
mortgages, deeds of trust or similar security instruments creating generally
junior liens on one- to four-family residential properties or mixed-use
properties or secured by purchase money security interests in the related home
improvements.
Insurance Proceeds. Amounts received by the related servicer under any
title insurance policy, hazard insurance policy or other insurance policy
covering any primary asset in a trust fund, other than amounts to be applied to
the restoration or repair of the related property or released to the borrower
under the related agreement.
Liquidation Proceeds. Amounts received by the related servicer in
connection with the liquidation of the primary assets or related real property
in a trust fund, whether through foreclosure sale, repossession or otherwise,
including payments in connection with the primary assets received from the
borrower, other than amounts required to be paid or refunded to the borrower
under the applicable loan documents or pursuant to law, net of the related
liquidation expenses.
118
OID Regulations. Sections 1271 through 1275 of the Internal Revenue Code
of 1986, as amended, and the Treasury regulations issued thereunder on February
2, 1994 and amended on June 11, 1996.
Manufactured Housing Contracts. Manufactured housing installment sales
contracts and installment loan agreements secured by senior or junior liens on
the related manufactured homes or secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on the real estate
on which the related manufactured homes are located.
Private Label Securities. Private mortgage-backed securities, other than
Agency Securities, backed or secured by underlying loans that may be Residential
Loans, Home Equity Loans, Home Improvement Contracts and/or Manufactured Housing
Contracts.
Residential Loans. Loans secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on one- to
four-family residential properties.
U.S. Person: Any of the following:
o a citizen or resident of the United States;
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.
119
$402,914,853
(APPROXIMATE)
BEAR STEARNS ASSET BACKED SECURITIES TRUST 2002-AC5
ISSUER
ASSET-BACKED CERTIFICATES, SERIES 2002-AC5
EMC MORTGAGE CORPORATION
SELLER
WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
BEAR, STEARNS & CO. INC.
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 Series 2002-AC5 Asset-Backed Certificates in
any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the Series 2002- AC5 Asset-Backed Certificates and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the Series 2002-AC5 Asset-Backed Certificates will be required to
deliver a prospectus supplement and prospectus until January 26, 2003.
OCTOBER 28, 2002