Prospectus Supplement dated January 15, 2003 (To Prospectus dated November 11,
2002)
$394,005,000 (APPROXIMATE)
ASSET-BACKED PASS-THROUGH CERTIFICATES,
SERIES 2003-AR1
AMERIQUEST MORTGAGE SECURITIES INC.
DEPOSITOR
AMERIQUEST MORTGAGE COMPANY
ORIGINATOR AND MASTER SERVICER
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-10 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 1 IN THE PROSPECTUS.
The certificates will represent interests only in a trust consisting primarily
of mortgage loans and will not represent ownership interests in or obligations
of any other entity.
This prospectus supplement may be used to offer and sell the certificates
offered hereby only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
THE TRUST --
o will consist primarily of a pool of one-to four-family adjustable-rate and
fixed-rate, first lien residential mortgage loans; and
o will be represented by nine classes of certificates, six of which are
offered by this prospectus supplement.
THE OFFERED CERTIFICATES --
o will represent senior or mezzanine interests in the trust and will receive
distributions from the assets of the trust;
o will have credit enhancement in the form of excess interest, subordination,
overcollateralization and a primary mortgage insurance policy; and
o will receive monthly distributions commencing in February 2003.
The underwriters will offer the Class A-1 Certificates and the Class A-2
Certificates (together, the "Class A Certificates") and the Class M-1
Certificates, the Class M-2 Certificates, the Class M-3 Certificates and the
Class M-4 Certificates (collectively, the "Mezzanine Certificates" and together
with the Class A Certificates, the "Offered Certificates") from time to time to
the public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Depositor from the sale of
the Offered Certificates, before deducting expenses, will be approximately
99.57% of the initial certificate principal balances of the Offered
Certificates, plus accrued interest in the case of the Class M-4 Certificates.
Each underwriter's commission will be any positive difference between the price
it pays to the Depositor for the Offered Certificates and the amount it receives
from the sale of such certificates to the public. See "Method of Distribution"
in this prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
UBS WARBURG
DEUTSCHE BANK SECURITIES MORGAN STANLEY
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Ameriquest Mortgage Securities Inc. is located at 1100 Town & Country Road,
Suite 1100, Orange, California 92868, and its phone number is (714) 541-9960
Attention: Capital Markets.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF PROSPECTUS SUPPLEMENT................................................................................S-3
RISK FACTORS...................................................................................................S-10
THE MORTGAGE POOL..............................................................................................S-19
YIELD ON THE CERTIFICATES......................................................................................S-37
DESCRIPTION OF THE CERTIFICATES................................................................................S-49
POOLING AND SERVICING AGREEMENT................................................................................S-70
FEDERAL INCOME TAX CONSEQUENCES................................................................................S-79
METHOD OF DISTRIBUTION.........................................................................................S-82
SECONDARY MARKET...............................................................................................S-83
LEGAL OPINIONS.................................................................................................S-83
RATINGS ......................................................................................................S-83
LEGAL INVESTMENT...............................................................................................S-83
ERISA CONSIDERATIONS...........................................................................................S-84
S-2
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED BY THIS PROSPECTUS SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO
UNDERSTAND ALL OF THE TERMS OF THE OFFERED CERTIFICATES, READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND THE ENTIRE ACCOMPANYING PROSPECTUS. Capitalized
terms used but not defined in this prospectus supplement have the meanings
assigned to them in the prospectus. An Index of Principal Definitions is
included at the end of the prospectus.
Title of Series....................... Ameriquest Mortgage Securities Inc., Asset-Backed Pass-Through
Certificates, Series 2003-AR1.
Cut-off Date.......................... The close of business on the later of January 1, 2003 and the origination date
of such mortgage loan.
Closing Date.......................... On or about January 17, 2003.
Depositor............................. Ameriquest Mortgage Securities Inc. (the "Depositor"), an indirect wholly-
owned subsidiary of Ameriquest Mortgage Company. The Depositor will
deposit the mortgage loans into the trust. See "The Depositor" in the
prospectus.
Originator and Master Servicer........ Ameriquest Mortgage Company (the "Master Servicer" or the "Originator"),
a Delaware corporation. See "The Mortgage Pool--Underwriting Standards"
and "Pooling and Servicing Agreement--The Originator and Master
Servicer" in this prospectus supplement.
Trustee............................... Deutsche Bank National Trust Company (the "Trustee"), a national banking
association, will be the Trustee of the trust, will perform administrative
functions with respect to the certificates and will act as the custodian, initial
paying agent and certificate registrar. See "Pooling and Servicing
Agreement--The Trustee" in this prospectus supplement.
PMI Insurer........................... Mortgage Guaranty Insurance Corporation, a Wisconsin stock insurance
corporation. Certain of the mortgage loans are covered by primary mortgage
insurance provided by the PMI Insurer, which may provide limited protection
to the trust in the event such mortgage loans default. See "Description of the
Certificates--The PMI Policy" in this prospectus supplement.
NIMS Insurer.......................... One or more insurance companies (together, the "NIMS Insurer") may issue
a financial guaranty insurance policy covering certain payments to be made
on net interest margin securities to be issued by a separate trust and secured
by, among other things, all or a portion of the Class CE Certificates, the Class
P Certificates and/or the Class R Certificates.
Distribution Dates.................... Distributions on the Offered Certificates will be made on the 25th day of each
month, or, if such day is not a business day, on the next succeeding business
day, beginning in February 2003 (each, a "Distribution Date").
Offered Certificates.................. The classes of Offered Certificates, their pass-through rates and initial
certificate principal balances are shown in the table below.
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INITIAL CERTIFICATE PASS-THROUGH INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE(1) RATE CLASS PRINCIPAL BALANCE(1) RATE
----- -------------------- ---- ----- -------------------- ----
A-1....... $ 238,211,000 Variable(2) M-2.......... $ 14,000,000 Variable(2)
A-2....... $ 109,794,000 Variable(2) M-3.......... $ 12,000,000 Variable(2)
M-1....... $ 17,000,000 Variable(2) M-4.......... $ 3,000,000 6.00%(3)
______________________
(1) Approximate.
(2) Calculated as described in this prospectus supplement. The pass-through
rates on the Class A-1 Certificates, the Class A-2 Certificates, the Class M-1
Certificates, the Class M-2 Certificates and the Class M-3 Certificates are
generally based on one-month LIBOR plus an applicable margin, subject to a rate
cap calculated based on the weighted average expense adjusted net mortgage rate
of the Group I Mortgage Loans (in the case of the Class A-1 Certificates), the
weighted average expense adjusted net mortgage rate of the Group II Mortgage
Loans (in the case of the Class A-2 Certificates) or the weighted average
expense adjusted net mortgage rate of all the mortgage loans (in the case of the
Class M-1 Certificates, the Class M-2 Certificates and the Class M-3
Certificates), in each case, as further described in this prospectus supplement
under "Description of the Certificates--Pass-Through Rates.
(3) Subject to increase and subject to a rate cap, as described in this
prospectus supplement
THE TRUST
The Depositor will establish a trust relating to the Series 2003-AR1
certificates pursuant to a pooling and servicing agreement dated as of the
Cut-off Date (the "Pooling and Servicing Agreement") among the Depositor, the
Master Servicer and the Trustee. There are nine classes of certificates
representing beneficial interests in the trust. See "Description of the
Certificates" in this prospectus supplement.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and/or principal on the Offered
Certificates will be made only from payments received in connection with the
mortgage loans held in the trust and amounts on deposit in the Net WAC Rate
Carryover Reserve Account.
THE MORTGAGE LOANS
References to percentages of the mortgage loans under this section are
calculated based on the aggregate scheduled principal balance of the mortgage
loans as of the Cut-off Date. Prior to the issuance of the certificates,
mortgage loans may be removed from the mortgage pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable. A limited number of other mortgage loans may be included in the
mortgage pool prior to the issuance of the certificates unless including such
mortgage loans would materially alter the characteristics of the mortgage loans
in the mortgage pool as described in this prospectus supplement.
On the Closing Date, the trust will acquire a pool of mortgage loans consisting
of fixed-rate and adjustable- rate mortgage loans as described in this
prospectus supplement (the "Mortgage Loans"). Substantially all of the Mortgage
Loans were originated by the Originator's wholesale lending subsidiary, Argent
Mortgage Company, LLC.
For purposes of calculating interest and principal distributions on the Class
A-1 Certificates and the Class A-2 Certificates (together, the "Class A
Certificates") and for purposes of calculating the rate caps for all of the
classes of the Offered Certificates, the Mortgage Loans have been divided into
two loan groups, designated as the "Group I Mortgage Loans" and the "Group II
Mortgage Loans." The Group I Mortgage Loans consist of mortgage loans with
principal balances that conform to Freddie Mac and Fannie Mae principal balance
limit guidelines, and the Group II Mortgage Loans consist predominantly of
mortgage loans with principal balances that may or may not conform to Freddie
Mac or Fannie Mae principal balance limit guidelines. The Class A-1 Certificates
represent interests in the Group I Mortgage Loans and the Class A-2 Certificates
represent interests in the Group II Mortgage Loans. The Class M-1 Certificates,
the Class M-2 Certificates, the Class M-3 Certificates and the Class M-4
Certificates (collectively, the "Mezzanine Certificates") represent interests in
all of the mortgage loans.
S-4
The Group I Mortgage Loans have an aggregate principal balance of approximately
$273,805,907 as of the Cut-off Date and have the following approximate
characteristics as of the Cut-off Date:
Adjustable-Rate Mortgage Loans: 85.14%
Fixed-Rate Mortgage Loans: 14.86%
Mortgage Loans with prepayment
charges: 83.49%
Range of current mortgage rates: 5.55% to 12.60%
Weighted average current mortgage
rate: 8.07%
Weighted average gross margin for
the adjustable-rate Group I Mortgage
Loans: 6.48%
Weighted average minimum
mortgage rate for the adjustable-rate
Group I Mortgage Loans: 8.16%
Weighted average maximum
mortgage rate for the adjustable-rate
Group I Mortgage Loans: 14.16%
Weighted average next adjustment
date for the adjustable-rate Group I
Mortgage Loans: December 2004
Weighted average remaining term to
stated maturity: 357 months
Range of principal balances as of the
Cut-off Date: $49,966 to $449,643
Average principal balance as of the
Cut-off Date: $153,307
Range of original loan-to-value ratios: 25.00% to 95.00%
Weighted average original loan-to-
value ratio: 83.80%
Geographic concentrations in excess
of 5%:
California 24.24%
New York 11.86%
Illinois 6.90%
Florida 6.29%
Massachusetts 5.45%
Arizona 5.07%
The Group II Mortgage Loans have an aggregate principal balance of approximately
$126,199,291 as of the Cut-off Date and have the following approximate
characteristics as of the Cut-off Date:
Adjustable-Rate Mortgage Loans: 35.21%
Fixed-Rate Mortgage Loans: 64.79%
Mortgage Loans with prepayment
charges: 76.09%
Range of current mortgage rates: 5.45% to 13.90%
Weighted average current mortgage
rate: 7.46%
Weighted average gross margin for
the adjustable-rate Group II Mortgage
Loans: 6.44%
Weighted average minimum
mortgage rate for the adjustable-rate
Group II Mortgage Loans: 7.60%
Weighted average maximum
mortgage rate for the adjustable-rate
Group II Mortgage Loans: 13.60%
Weighted average next adjustment
date for the adjustable-rate Group II
Mortgage Loans: December 2004
Weighted average remaining term to
stated maturity: 353 months
Range of principal balances as of the
Cut-off Date: $49,978 to $500,000
Average principal balance as of the
Cut-off Date: $235,446
Range of original loan-to-value ratios: 25.86% to 95.00%
Weighted average original loan-to-
value ratio: 82.93%
Geographic concentrations in excess
of 5%:
California 34.81%
New York 22.23%
New Jersey 6.56%
Florida 6.38%
The interest rate on each adjustable-rate mortgage loan will adjust
semi-annually on each adjustment date to equal the sum of six-month LIBOR and
the related gross margin, subject to periodic and lifetime limitations, as
described herein. See also "The Mortgage Pool--The Index" in this prospectus
supplement.
S-5
With respect to all the adjustable-rate mortgage loans, the first adjustment
date will occur only after an initial period of approximately two years after
origination, as more fully described under "The Mortgage Pool--Description of
the Mortgage Loans" in this prospectus supplement.
For additional information regarding the Mortgage Loans, see "The Mortgage Pool"
in this prospectus supplement.
THE CERTIFICATES
OFFERED CERTIFICATES. The Class A Certificates and the Mezzanine Certificates
(together, the "Offered Certificates") are the only classes of certificates
offered by this prospectus supplement. The Offered Certificates will have the
characteristics shown in the table in this summary and as described in this
prospectus supplement.
The pass-through rates for the Class A Certificates and the Mezzanine
Certificates (other than the Class M-4 Certificates) are rates per annum
generally based on one-month LIBOR plus an applicable margin, subject to a rate
cap calculated based on the weighted average mortgage rate of the Group I
Mortgage Loans (in the case of the Class A-1 Certificates), the weighted average
mortgage rate of the Group II Mortgage Loans (in the case of the Class A-2
Certificates) or the weighted average mortgage rate of all the mortgage loans
(in the case of the Class M-1 Certificates, the Class M-2 Certificates, Class
M-3 Certificates), less the servicing fee, the trustee fee and the PMI Insurer
Fee, if applicable. The initial margin relating to the Class A- 1 Certificates
is 0.49% per annum. The initial margin relating to the Class A-2 Certificates is
0.49% per annum. The initial margin relating to the Class M-1 Certificates is
1.15% per annum. The initial margin relating to the Class M-2 Certificates is
2.10% per annum. The initial margin relating to the Class M-3 Certificates is
3.00% per annum. Each margin is subject to increase as more fully described
under "Description of the Certificates--Pass-Through Rates" in this prospectus
supplement.
The pass-through rate for the Class M-4 Certificates will be 6.00% per annum,
subject to a rate cap calculated based on the weighted average mortgage rate of
all the mortgage loans, less the servicing fee, the trustee fee and the PMI
Insurer Fee, if applicable. The pass-through rate for the Class M-4 Certificates
is subject to increase as more fully described under "Description of the
Certificates--Pass-Through Rates" in this prospectus supplement.
The Offered Certificates will be sold by the Depositor to the Underwriters on
the Closing Date.
The Offered Certificates will initially be represented by one or more global
certificates registered in the name of a nominee of The Depository Trust Company
in minimum denominations of $25,000 and integral multiples of $1.00 in excess
thereof. See "Description of the Certificates--Book-Entry Certificates" in this
prospectus supplement.
CLASS CE CERTIFICATES. The Class CE Certificates are not offered by this
prospectus supplement. The Class CE Certificates will have an initial
certificate principal balance of approximately $6,000,098 which is approximately
equal to the initial overcollateralization required by the Pooling and Servicing
Agreement. The Class CE Certificates initially evidence an interest of
approximately 1.50% in the trust. The Class CE Certificates will be delivered to
the Originator as partial consideration for the Mortgage Loans.
CLASS P CERTIFICATES. The Class P Certificates are not offered by this
prospectus supplement. The Class P Certificates will have an initial certificate
principal balance of $100 and will not be entitled to distributions in respect
of interest. The Class P Certificates will be entitled to all prepayment charges
received in respect of the Mortgage Loans, subject to certain limitations set
forth in the Pooling and Servicing Agreement. The Class P Certificates will be
delivered to the Originator as partial consideration for the Mortgage Loans.
CLASS R CERTIFICATES. The Class R Certificates are the class of certificates
representing the residual interests in the trust, but are not offered by this
prospectus supplement. The Class R Certificates will be delivered to the
Originator as partial consideration for the Mortgage Loans.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of excess interest, subordination, overcollateralization
and a primary mortgage insurance policy, each as described below and under
"Description of the Certificates--Credit Enhancement" and
"--Overcollateralization Provisions" in this prospectus supplement.
EXCESS INTEREST. The Mortgage Loans bear interest each month in an amount that
in the aggregate is expected to exceed the amount needed to distribute monthly
interest on the Offered Certificates and to pay certain fees and expenses of the
trust. Any excess
S-6
interest from the Mortgage Loans each month will be available to absorb realized
losses on the Mortgage Loans and to maintain or restore overcollateralization at
required levels.
SUBORDINATION. The rights of the holders of the Mezzanine Certificates and the
Class CE Certificates to receive distributions will be subordinated, to the
extent described in this prospectus supplement, to the rights of the holders of
the Class A Certificates.
In addition, the rights of the holders of Mezzanine Certificates with higher
numerical class designations to receive distributions in respect of the Mortgage
Loans will be subordinated to the rights of holders of Mezzanine Certificates
with lower numerical class designations, and the rights of the holders of the
Class CE Certificates to receive distributions in respect of the Mortgage Loans
will be subordinated to the rights of the holders of the Mezzanine Certificates,
in each case to the extent described under "Description of the
Certificates--Allocation of Losses; Subordination" in this prospectus
supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
such certificates protection against realized losses on the Mortgage Loans, as
described under "Description of the Certificates--Allocation of Losses;
Subordination" in this prospectus supplement.
OVERCOLLATERALIZATION. The aggregate principal balance of the Mortgage Loans as
of the Cut-off Date will exceed the aggregate certificate principal balance of
the Class A Certificates, the Mezzanine Certificates and the Class P
Certificates on the Closing Date by approximately $6,000,098, which is equal to
the initial certificate principal balance of the Class CE Certificates. Such
amount represents approximately 1.50% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. This is approximately equal to the
initial amount of overcollateralization required to be provided by the mortgage
pool under the Pooling and Servicing Agreement. See "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
PRIMARY MORTGAGE INSURANCE. Approximately 69.58% of the Group I Mortgage Loans
and approximately 60.15% of the Group II Mortgage Loans (in each case, by
aggregate principal balance of the related loan group as of the Cut-off Date),
will be insured by an insurance policy issued by the PMI Insurer. However, such
policy will provide only limited protection against losses on defaulted mortgage
loans which are covered by the policy. See "Description of the Certificates--The
PMI Policy" in this prospectus supplement.
ALLOCATION OF LOSSES. On any Distribution Date, realized losses on the Mortgage
Loans will be allocated first, to Net Monthly Excess Cashflow, second, to the
Class CE Certificates, third, to the Class M-4 Certificates, fourth, to the
Class M-3 Certificates, fifth, to the Class M-2 Certificates and sixth, to the
Class M-1 Certificates. The Pooling and Servicing Agreement does not permit the
allocation of realized losses on the Mortgage Loans to the Class A Certificates
or the Class P Certificates; however, investors in the Class A Certificates
should realize that under certain loss scenarios there will not be enough
principal and interest on the Mortgage Loans to distribute to the Class A
Certificates all principal and interest amounts to which such certificates are
then entitled. See "Description of the Certificates --Allocation of Losses;
Subordination" in this prospectus supplement.
ONCE REALIZED LOSSES ARE ALLOCATED TO THE MEZZANINE CERTIFICATES, THEIR
CERTIFICATE PRINCIPAL BALANCES WILL BE PERMANENTLY REDUCED BY THE AMOUNT SO
ALLOCATED AND NO AMOUNTS WILL BE DISTRIBUTABLE WITH RESPECT TO SUCH WRITTEN DOWN
AMOUNTS ON THAT DISTRIBUTION DATE OR ANY FUTURE DISTRIBUTION DATE.
ADVANCES
The Master Servicer is required to advance delinquent payments of principal and
interest on the Mortgage Loans ("Advances"), subject to the limitations
described in this prospectus supplement. The Master Servicer is entitled to be
reimbursed for such Advances, and therefore such Advances are not a form of
credit enhancement. See "Description of the Certificates --Advances" in this
prospectus supplement and "Distributions on the Securities--Advances by Master
Servicer in Respect of Delinquencies on the Trust Fund Assets" in the
prospectus.
OPTIONAL TERMINATION
At its option, the Master Servicer, may purchase all of the Mortgage Loans in
both loan groups, together with any properties in respect thereof acquired on
behalf of the trust, and thereby effect termination and early retirement of the
certificates, after the aggregate principal balance of the Mortgage Loans in
both loan groups (and properties acquired in respect thereof) remaining in the
trust has been reduced to an amount less than 10% of the aggregate principal
balance of the Mortgage Loans in both loan groups as of the Cut-off
S-7
Date. If the Master Servicer fails to exercise its option, the NIMS Insurer, if
any, may exercise that option. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement and "Distributions on the
Securities--Termination of the Trust Fund and Disposition of Trust Fund Assets"
in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
One or more elections will be made to treat designated portions of the trust
(exclusive of the Net WAC Rate Carryover Reserve Account and the Excess Net WAC
Rate Reserve Account, as described more fully herein) as real estate mortgage
investment conduits for federal income tax purposes. See "Federal Income Tax
Consequences--REMICs" in the prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax Consequences" in
this prospectus supplement and in the prospectus.
CAP CONTRACTS
For the first 35 Distribution Dates, the Class A-2 Certificates will have the
benefit of a cap contract to pay amounts in respect of basis risk shortfalls on
the Class A-2 Certificates. For the Distribution Date in February 2003 through
and including the Distribution Date in December 2004, such cap contract requires
the counterparty to make a payment to the Trustee to the extent LIBOR for any
related interest accrual period exceeds 5.80%, multiplied by the notional amount
for such interest accrual period set forth in such cap contract. For the
Distribution Date in January 2005 through and including the Distribution Date in
December 2005, such cap contract requires the counterparty to make a payment to
the Trustee to the extent LIBOR for any related interest accrual period exceeds
6.40%, multiplied by the related scheduled notional amount. Cap payments, if
any, made by the counterparty will be deposited in the Net WAC Rate Carryover
Reserve Account and will be available for distribution on the Class A-2
Certificates in respect of basis risk shortfall amounts, to the limited extent
described in this prospectus supplement.
For the first 23 Distribution Dates, each of the Class M- 1 Certificates and the
Class M-2 Certificates will have the benefit of a cap contract to pay amounts in
respect of basis risk shortfalls on such certificates. For the Distribution Date
in February 2003 through and including the Distribution Date in December 2004,
each cap contract requires the counterparty to make a payment to the Trustee to
the extent LIBOR for any related interest accrual period exceeds 4.85% (with
respect to the cap contract relating to the Class M-1 Certificates) or 3.85%
(with respect to the cap contract relating to the Class M-2 Certificates), up to
a maximum LIBOR of 7.40%, in each case, multiplied by a notional amount for such
interest accrual period set forth in the related cap contract. Cap payments, if
any, made by the counterparty under each of the related cap contracts, will be
deposited in the Net WAC Rate Carryover Reserve Account and will be available
for distribution on the certificates to which they relate, in respect of basis
risk shortfall amounts, to the limited extent described in this prospectus
supplement.
For additional information regarding the cap contracts, see "Description of the
Certificates--The Cap Contracts" in this prospectus supplement.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive the following ratings from Moody's Investors Service
("Moody's"), Fitch Ratings ("Fitch") and Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P"):
OFFERED
CERTIFICATES MOODY'S S&P FITCH
------------ ------- --- -----
Class A-1 Aaa AAA AAA
Class A-2 Aaa AAA AAA
Class M-1 Aa2 AA AA
Class M-2 A2 A A
Class M-3 Baa2 BBB BBB
Class M-4 Baa3 BBB- BBB-
A security rating does not address the frequency of prepayments on the Mortgage
Loans, the receipt of any amounts from the Net WAC Rate Carryover Reserve
Account or the corresponding effect on yield to investors. See "Yield on the
Certificates" and "Ratings" in this prospectus supplement and "Yield and
Maturity Considerations" in the prospectus.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA for so long as they are
rated not lower than the second highest rating category by one or more
nationally recognized statistical rating organizations and, as such, will be
legal investments for certain entities to the extent provided in SMMEA and
applicable state laws.
S-8
The Class M-2 Certificates, the Class M-3 Certificates and the Class M-4
Certificates will not constitute "mortgage related securities" for purposes of
SMMEA. See "Legal Investment" in this prospectus supplement and in the
prospectus.
ERISA CONSIDERATIONS
It is expected that the Offered Certificates may be eligible for purchase by a
pension or other employee benefit plan subject to the Employee Retirement Income
Security Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code") so long as certain conditions are met. A fiduciary of an
employee benefit plan must determine that the purchase of a certificate is
consistent with its fiduciary duties under applicable law and does not result in
a nonexempt prohibited transaction under applicable law.
See "ERISA Considerations" in this prospectus supplement and "Considerations for
Benefit Plan Investors" in the prospectus.
S-9
RISK FACTORS
In addition to the matters described elsewhere in this prospectus
supplement and the prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Offered Certificates.
THE ORIGINATOR'S UNDERWRITING STANDARDS ARE NOT AS STRINGENT AS THOSE OF MORE
TRADITIONAL LENDERS OR OF FANNIE MAE AND FREDDIE MAC, WHICH MAY RESULT IN LOSSES
ALLOCATED TO THE OFFERED CERTIFICATES
The Originator's underwriting standards are primarily intended to
assess the value and the adequacy of the mortgaged property as collateral for
the mortgage loan and the applicant's credit standing and ability to repay. The
Originator provides loans primarily to borrowers who do not qualify for loans
conforming to Fannie Mae and Freddie Mac guidelines but who generally have
equity in their property and the apparent ability to repay. While the
Originator's primary considerations in underwriting a mortgage loan are the
value and adequacy of the mortgaged property as collateral and the applicant's
credit standing and repayment ability, the Originator also considers, among
other things, the applicant's credit history and debt service-to-income ratio,
and the type and occupancy status of the mortgaged property. The Originator's
underwriting standards do not prohibit a mortgagor from obtaining secondary
financing at the time of origination of the Originator's first lien mortgage
loan (or at any time thereafter), which secondary financing would reduce the
equity the mortgagor would otherwise have in the related mortgaged property as
indicated in the Originator's loan-to-value ratio determination.
As a result of such underwriting standards, the Mortgage Loans are
likely to experience rates of delinquency, foreclosure and bankruptcy that are
higher, and that may be substantially higher, than those experienced by mortgage
loans underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the related mortgaged
properties have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans. See "The Mortgage Pool-Underwriting
Standards" in this prospectus supplement.
CERTAIN MORTGAGE LOANS HAVE HIGH LOAN-TO-VALUE RATIOS WHICH MAY PRESENT A
GREATER RISK OF LOSS RELATING TO SUCH MORTGAGE LOANS
Mortgage loans with a loan-to-value ratio of greater than 80% may
present a greater risk of loss than mortgage loans with loan-to-value ratios of
80% or below. Approximately 66.97% of the Group I Mortgage Loans and
approximately 63.98% of the Group II Mortgage Loans, in each case by aggregate
principal balance of the related loan group as of the Cut-off Date, had a
loan-to-value ratio at origination in excess of 80% and are not covered by any
borrower-paid primary mortgage insurance. No mortgage loan had a loan-to-value
ratio exceeding 95.00% at origination. An overall decline in the residential
real estate market, a rise in interest rates over a period of time and the
general condition of a mortgaged property, as well as other factors, may have
the effect of reducing the value of such mortgaged property from the appraised
value at the time the Mortgage Loan was originated. If there is a reduction in
value of the mortgaged property, the loan-to-value ratio may increase over what
it was at the time of origination. Such an increase may reduce the likelihood of
liquidation or other proceeds being sufficient to satisfy the Mortgage Loan.
There can be no assurance that the loan-to-value ratio of any mortgage loan
determined at any time after origination is less than or equal to its original
loan-to-value ratio. Additionally, the Originator's determination of the value
of a mortgaged property used in the calculation of the loan-to-value ratios of
the Mortgage Loans may differ from the appraised value of such mortgaged
property or the actual value of such mortgaged property. See "The Mortgage
Pool--General" in this prospectus supplement.
SUBSTANTIALLY ALL OF THE MORTGAGE LOANS HAVE A FIRST PAYMENT DATE ON OR AFTER
DECEMBER 1, 2002
None of the Group I Mortgage Loans or Group II Mortgage Loans are
delinquent in their monthly payments due on or before December 31, 2002.
Investors should note, however, that approximately 95.80% of the Group I
Mortgage Loans and approximately 99.01% of the Group II Mortgage Loans, in each
case by aggregate principal balance of the related loan group as of the Cut-off
Date, have a first payment date occurring on or after December 1, 2002 and,
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therefore, such mortgage loans could not have been delinquent in any monthly
payment due on or before December 31, 2002.
GEOGRAPHIC CONCENTRATION RISK
The charts entitled "Geographic Distribution of the Mortgaged
Properties Relating to the Group I Mortgage Loans" and "Geographic Distribution
of the Mortgaged Properties Relating to the Group II Mortgage Loans" presented
under "The Mortgage Pool" list the geographic concentrations of the Group I
Mortgage Loans and the Group II Mortgage Loans by state. Mortgaged properties in
certain states (e.g. California) may be particularly susceptible to certain
types of hazards, such as earthquakes, floods, mudslides and other natural
disasters for which there may or may not be insurance.
In addition, the conditions below will have a disproportionate impact
on the mortgage loans in general:
o Economic conditions in states with high concentrations of Mortgage
Loans may affect the ability of mortgagors to repay their loans on time
even if such conditions do not affect real property values.
o Declines in the residential real estate markets in states with high
concentrations of Mortgage Loans may reduce the value of properties
located in those states, which would result in an increase in
loan-to-value ratios.
o Any increase in the market value of properties located in states with
high concentrations of Mortgage Loans would reduce loan-to-value ratios
and could, therefore, make alternative sources of financing available
to mortgagors at lower interest rates, which could result in an
increased rate of prepayment of the Mortgage Loans.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and
other charges, require certain disclosure, and require licensing of the
Originator. In addition, other state laws, public policy and general principles
of equity relating to the protection of consumers, unfair and deceptive
practices and debt collection practices may apply to the origination, servicing
and collection of the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the Mortgage Loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit;
o the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience;
o the Depository Institutions Deregulation and Monetary Control Act of
1980, which preempts certain state usury laws; and
o the Alternative Mortgage Transaction Parity Act of 1982, which preempts
certain state lending laws which regulate alternative mortgage
transactions.
Violations of certain provisions of these federal and state laws may
limit the ability of the Master Servicer to collect all or part of the principal
of or interest on the Mortgage Loans and in addition could subject the trust to
damages and administrative enforcement.
The Originator will represent that as of the Closing Date, each
Mortgage Loan is in compliance with applicable federal and state laws and
regulations. In the event of a breach of such representation, the Originator
will be obligated to cure such breach or repurchase or replace the affected
Mortgage Loan in the manner described in the prospectus. If
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the Originator is unable or otherwise fails to satisfy such obligations, the
yield on the Offered Certificates may be materially and adversely affected.
HIGH COST LOANS
None of the Mortgage Loans are "High Cost Loans" within the meaning of
the Home Ownership and Equity Protection Act of 1994 (the "Homeownership Act").
See "Legal Aspects of Mortgage Assets--Anti-Deficiency Legislation and Other
Limitations on Lenders" in the prospectus.
In addition to the Homeownership Act, however, a number of legislative
proposals have been introduced at both the federal, state and municipal level
that are designed to discourage predatory lending practices. Some states have
enacted, or may enact, laws or regulations that prohibit inclusion of some
provisions in mortgage loans that have mortgage rates or origination costs in
excess of prescribed levels, and require that borrowers be given certain
disclosures prior to the consummation of such mortgage loans. In some cases,
state law may impose requirements and restrictions greater than those in the
Homeownership Act. The Originator's failure to comply with these laws could
subject the trust, and other assignees of the Mortgage Loans, to monetary
penalties and could result in the borrowers rescinding such Mortgage Loans
against either the trust or subsequent holders of the Mortgage Loans. Lawsuits
have been brought in various states making claims against assignees of High Cost
Loans for violations of state law. Named defendants in these cases include
numerous participants within the secondary mortgage market, including some
securitization trusts.
None of the Mortgage Loans are "High Cost Home Loans" or "Covered
Loans" within the meaning of the Georgia Fair Lending Act (the "Georgia Act").
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the
liquidation of delinquent Mortgage Loans. Further, reimbursement of advances
made on a Mortgage Loan and liquidation expenses such as legal fees, real estate
taxes and maintenance and preservation expenses may reduce the portion of
liquidation proceeds distributable to you. If a mortgaged property fails to
provide adequate security for the Mortgage Loan, you will incur a loss on your
investment if the credit enhancements are insufficient to cover the loss.
CONFLICTS OF INTEREST BETWEEN THE MASTER SERVICER AND THE TRUST
The Master Servicer will initially, directly or indirectly, own all or
a portion of the Class CE Certificates, the Class P Certificates and the Class R
Certificates. The timing of Mortgage Loan foreclosures and sales of the related
mortgaged properties, which will be under the control of the Master Servicer,
may affect the weighted average lives and yields of the certificates. You should
consider that the timing of such foreclosures or sales may not be in the best
interests of all certificateholders and that no formal policies or guidelines
have been established to resolve or minimize such a conflict of interest.
THE DIFFERENCE BETWEEN THE PASS-THROUGH RATES ON THE OFFERED CERTIFICATES AND
THE MORTGAGE RATES ON THE MORTGAGE LOANS MAY AFFECT THE YIELD ON SUCH
CERTIFICATES
The yield to maturity on the Offered Certificates may be affected by
the inclusion of fixed-rate mortgage loans and the resetting of the mortgage
rates on the adjustable-rate mortgage loans on their related adjustment dates.
The mortgage rates on the fixed-rate mortgage loans are fixed and will not vary
with any index and the mortgage rates on the adjustable-rate mortgage loans are
based on six-month LIBOR (and such mortgage loans will not have their mortgage
rates adjusted for an initial period, generally of approximately two years from
the dates of their origination), while the pass-through rates on the Offered
Certificates (other than the Class M-4 Certificates) are based on one-month
LIBOR. This may cause the application of the rate cap, which is calculated based
on the weighted average mortgage rate of the of the Group I Mortgage Loans (in
the case of the Class A-1 Certificates), the weighted average mortgage rate of
the Group II Mortgage Loans (in the case of the Class A-2 Certificates) or the
weighted average mortgage rate of all the Mortgage Loans (in the case of the
Mezzanine Certificates), after payment of certain fees, and could therefore
adversely affect the yield to maturity on one or more classes of the Offered
Certificates. In addition, the rate caps will decrease if the applicable
mortgage loans with relatively high mortgage rates prepay at a faster rate than
applicable mortgage loans with relatively low mortgage rates.
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Because the mortgage rate for each adjustable-rate mortgage loan is
based on six-month LIBOR plus a fixed percentage amount, such rate could be
higher than prevailing market interest rates at the time of adjustment, and this
may result in an increase in the rate of prepayments on such mortgage loans
after such adjustment.
If the pass-through rate on any class of the Offered Certificates is
limited for any Distribution Date, the resulting basis risk shortfalls may be
recovered by the holders of such class of Offered Certificates on such
Distribution Date or on future Distribution Dates, to the extent that on such
Distribution Date or future Distribution Dates there are any available funds
remaining after certain other distributions on the Offered Certificates and the
payment of certain fees and expenses of the trust. The ratings on the Offered
Certificates will not address the likelihood of any such recovery of basis risk
shortfalls by holders of the Offered Certificates.
Investors should note that, with respect to the Class A-2 Certificates,
the Class M-1 Certificates and the Class M-2 Certificates, amounts used to pay
such shortfalls will be supplemented by any amount received by the Trustee under
three cap contracts, pursuant to which the counterparty thereunder will be
obligated to make payments when LIBOR exceeds the percentage set forth in the
related cap contract, subject to a maximum rate (in the case of the cap
contracts related to the Class M-1 Certificates and the Class M-2 Certificates).
However, the amount received under each cap contract may be insufficient to pay
the holders of such certificates the full amount of interest which they would
have received absent the limitations of the rate cap.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS
The rate and timing of distributions allocable to principal on the
Offered Certificates will depend, in general, on the rate and timing of
principal payments (including prepayments and collections upon defaults,
liquidations and repurchases) on the Mortgage Loans and the allocation thereof
to distribute principal on such certificates as described under "Description of
the Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement. As is the case with asset-backed pass-through
certificates generally, the Offered Certificates are subject to substantial
inherent cash-flow uncertainties because the Mortgage Loans may be prepaid at
any time.
With respect to approximately 83.49% of the Group I Mortgage Loans and
approximately 76.09% of the Group II Mortgage Loans, in each case by aggregate
principal balance of the related loan group as of the Cut-off Date, a mortgagor
principal prepayment may subject the related mortgagor to a prepayment charge,
subject to certain limitations in the related mortgage note and limitations upon
collection in the Pooling and Servicing Agreement. Generally, each such Mortgage
Loan provides for payment of a prepayment charge on certain prepayments made
within a defined period set forth in the related mortgage note (generally within
the first three years but possibly as short as one year from the date of
origination of such mortgage loan). A prepayment charge may or may not act as a
deterrent to prepayment of the related mortgage loan.
The rate of prepayments on the Mortgage Loans will be sensitive to
prevailing interest rates. Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage loans tend to decrease; a decrease in
the prepayment rates on the Mortgage Loans will result in a reduced rate of
principal distributions to investors in the Offered Certificates at a time when
reinvestment at such higher prevailing rates would be desirable. Conversely,
when prevailing interest rates are declining, prepayment rates on mortgage loans
tend to increase; an increase in the prepayment rates on the Mortgage Loans will
result in a greater rate of principal payments to investors in the Offered
Certificates at a time when reinvestment at comparable yields may not be
possible. Furthermore, because the mortgage rate for each adjustable-rate
Mortgage Loan is generally based on six-month LIBOR plus a fixed percentage
amount, such rate could be higher than prevailing market interest rates at the
time of adjustment, and this may result in an increase in the rate of
prepayments on such Mortgage Loans after such adjustment.
The Originator may be required to repurchase Mortgage Loans from the
trust in the event certain breaches of representations and warranties have not
been cured. In addition, the NIMS Insurer, if any, or the Master Servicer may
purchase or repurchase Mortgage Loans 90 days or more delinquent, subject to the
conditions set forth in the Pooling and Servicing Agreement. These purchases
will have the same effect on the holders of the Offered Certificates as a
prepayment of those Mortgage Loans.
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The Master Servicer or the NIMS Insurer, if any, may purchase all of
the Mortgage Loans when the aggregate principal balance of the Mortgage Loans is
less than 10% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date.
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on each class of Offered Certificates will
depend, in general, on (i) the applicable pass- through rate thereon from time
to time; (ii) the applicable purchase price; (iii) the rate and timing of
principal payments (including prepayments and collections upon defaults,
liquidations and repurchases) and the allocation thereof to reduce the
certificate principal balance of such certificates; (iv) the rate, timing and
severity of realized losses on the Mortgage Loans; (v) adjustments to the
mortgage rates on the adjustable-rate Mortgage Loans; (vi) the amount of excess
interest generated by the Mortgage Loans; and (vii) the allocation to the
Offered Certificates of some types of interest shortfalls.
In general, if the Offered Certificates are purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if the Offered Certificates
are purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
As a result of the absorption of realized losses on the Mortgage Loans
by excess interest, overcollateralization and the availability of the PMI
Policy, each as described in this prospectus supplement, liquidations of
defaulted Mortgage Loans, whether or not realized losses are allocated to the
Offered Certificates upon such liquidations, will result in an earlier return of
principal to the Offered Certificates and will influence the yields on such
certificates in a manner similar to the manner in which principal prepayments on
the Mortgage Loans will influence the yields on the Offered Certificates. The
overcollateralization provisions are intended to result in an accelerated rate
of principal distributions to holders of the Offered Certificates at any time
that the overcollateralization provided by the mortgage pool falls below the
required level.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE OFFERED CERTIFICATES
The credit enhancement features described in the summary are intended
to increase the likelihood that holders of the Offered Certificates will receive
regular distributions of interest and principal. If delinquencies or defaults
occur on the Mortgage Loans, neither the Master Servicer nor any other entity
will advance scheduled monthly payments of interest and principal on delinquent
or defaulted Mortgage Loans if such advances are deemed unrecoverable. If
substantial losses occur as a result of defaults and delinquent payments on the
Mortgage Loans, you may suffer losses.
Furthermore, although loan-level primary mortgage insurance coverage
has been acquired on behalf of the trust from the PMI Insurer with respect to
approximately 69.58% of the Group I Mortgage Loans and approximately 60.15% of
the Group II Mortgage Loans, in each case, by aggregate principal balance of the
related loan group as of the Cut-off Date, such coverage will provide only
limited protection against losses on defaulted covered Mortgage Loans. Unlike a
financial guaranty policy, coverage under the mortgage insurance policy is
subject to certain limitations and exclusions including, for example, losses
resulting from fraud. As a result, coverage may be denied or limited on covered
Mortgage Loans. In addition, since the amount of coverage depends on the
loan-to-value ratio at the inception of the policy, a decline in the value of a
mortgaged property will not result in increased coverage, and the trust may
still suffer a loss on a covered Mortgage Loan. The PMI Insurer also may affect
the timing and conduct of foreclosure proceedings and other servicing decisions
regarding defaulted Mortgage Loans covered by the policy.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN OR
RESTORE OVERCOLLATERALIZATION
The Mortgage Loans are expected to generate more interest than is
needed to distribute interest owed on the Offered Certificates and to pay
certain fees and expenses of the trust. Any remaining interest generated by the
Mortgage Loans will first be used to absorb losses that occur on the Mortgage
Loans and will then be used to maintain or restore overcollateralization. We
cannot assure you, however, that enough excess interest will be generated to
maintain or restore the required level of overcollateralization. The factors
described below will affect the amount of excess interest that the Mortgage
Loans will generate.
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o Each time a Mortgage Loan is prepaid in full, excess interest may be
reduced because the Mortgage Loan will no longer be outstanding and
generating interest or, in the case of a partial prepayment, will be
generating less interest.
o Each time a Mortgage Loan is liquidated, written off or repurchased,
excess interest may be reduced because such Mortgage Loan will no
longer be outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the Mortgage Loans
are higher than expected, excess interest will be reduced by the amount
necessary to compensate for any shortfalls in cash available to make
required distributions on the Offered Certificates.
o The adjustable-rate Mortgage Loans have mortgage rates that adjust less
frequently than, and on the basis of an index that is different from,
the index used to determine the pass-through rates on the Offered
Certificates (other than the Class M-4 Certificates) and the fixed-rate
Mortgage Loans have mortgage rates that do not adjust. As a result, the
pass-through rates on the Offered Certificates (other than the Class
M-4 Certificates) may increase relative to mortgage rates on the
Mortgage Loans, requiring that a greater portion of the interest
generated by the Mortgage Loans be applied to cover interest on the
Offered Certificates (other than the Class M-4 Certificates).
THERE ARE VARIOUS RISKS ASSOCIATED WITH THE MEZZANINE CERTIFICATES
The weighted average lives of, and the yields to maturity on, the
Mezzanine Certificates will be progressively more sensitive, in increasing order
of their numerical class designations, to the rate and timing of mortgagor
defaults and the severity of ensuing losses on the Mortgage Loans. If the actual
rate and severity of losses on the Mortgage Loans is higher than those assumed
by an investor in such certificates, the actual yield to maturity of such
certificate may be lower than the yield anticipated by such holder. The timing
of losses on the Mortgage Loans will also affect an investor's yield to
maturity, even if the rate of defaults and severity of losses over the life of
the mortgage pool are consistent with an investor's expectations. In general,
the earlier a loss occurs, the greater the effect on an investor's yield to
maturity. Realized losses on the Mortgage Loans, to the extent they exceed the
amount of excess interest and overcollateralization following distributions of
principal on the related Distribution Date, will reduce the certificate
principal balance of the class of Mezzanine Certificate then outstanding with
the highest numerical class designation. As a result of these reductions, less
interest will accrue on these classes of certificates than would be the case if
those losses were not so allocated. ONCE A REALIZED LOSS IS ALLOCATED TO A
MEZZANINE CERTIFICATE, NO AMOUNTS WILL BE DISTRIBUTABLE WITH RESPECT TO SUCH
WRITTEN DOWN AMOUNT.
Unless the aggregate certificate principal balance of the Class A
Certificates has been reduced to zero, the Mezzanine Certificates will not be
entitled to any principal distributions until at least February 2006 or a later
date as provided in this prospectus supplement or during any period in which
delinquencies or realized losses on the Mortgage Loans exceed certain levels
described under "Description of the Certificates--Principal Distributions on the
Offered Certificates" in this prospectus supplement. As a result, the weighted
average lives of such certificates will be longer than would be the case if
distributions of principal were allocated among all of the certificates at the
same time. As a result of the longer weighted average lives of such
certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. Further, because such certificates might not
receive any principal if certain delinquency levels described under "Description
of the Certificates--Principal Distributions on the Offered Certificates" in
this prospectus supplement are exceeded, it is possible for such certificates to
receive no principal distributions on a particular distribution date even if no
losses have occurred on the mortgage pool.
In addition, the multiple class structure of the Mezzanine Certificates
causes the yield of such classes to be particularly sensitive to changes in the
rates of prepayment on the Mortgage Loans. Because distributions of principal
will be made to the holders of the Mezzanine Certificates according to the
priorities described in this prospectus supplement, the yield to maturity on
such classes of certificates will be sensitive to the rates of prepayment on the
Mortgage Loans experienced both before and after the commencement of principal
distributions on such classes. The yield to maturity on such classes of
certificates will also be extremely sensitive to losses due to defaults on the
Mortgage Loans (and the timing thereof), to the extent such losses are not
covered by excess interest otherwise distributable to the Class CE Certificates
or a class of Mezzanine Certificates with a higher numerical class designation.
Furthermore, as
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described in this prospectus supplement, the timing of receipt of principal and
interest by the Mezzanine Certificates may be adversely affected by losses even
if such classes of certificates do not ultimately bear such loss.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS
When a Mortgage Loan is prepaid, the mortgagor is charged interest on
the amount prepaid only up to (but not including) the date on which the
prepayment is made, rather than for an entire month. This may result in a
shortfall in interest collections available for distribution on the next
Distribution Date. The Master Servicer is required to cover a portion of the
shortfall in interest collections that are attributable to prepayments, but only
up to the amount of the Master Servicer's servicing fee for the related period.
In addition, certain shortfalls in interest collections arising from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940 and similar
state laws (the "Relief Act") will not be covered by the Master Servicer.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any prepayment interest shortfalls to the extent not
covered by compensating interest paid by the Master Servicer, in each case
regardless of which loan group experienced the shortfall, will be allocated,
first, to the interest distribution amount with respect to the Class CE
Certificates, and thereafter, to the monthly interest distributable amounts with
respect to the Offered Certificates on a PRO RATA basis based on the respective
amounts of interest accrued on such certificates for such Distribution Date. The
holders of the Offered Certificates will not be entitled to reimbursement for
any such interest shortfalls. If these shortfalls are allocated to the Offered
Certificates the amount of interest distributed to those certificates will be
reduced, adversely affecting the yield on your investment.
REIMBURSEMENT OF ADVANCES BY THE MASTER SERVICER COULD DELAY DISTRIBUTIONS ON
THE CERTIFICATES
Under the Pooling and Servicing Agreement, the Master Servicer will
make cash advances to cover delinquent payments of principal and interest to the
extent it reasonably believes that the cash advances are recoverable from future
payments on the Mortgage Loans. The Master Servicer may make such advances from
amounts held for future distribution. In addition, the Master Servicer may
withdraw from the collection account funds that were not included in available
funds for the preceding Distribution Date to reimburse itself for advances
previously made. Any such amounts withdrawn by the Master Servicer in
reimbursement of advances previously made are generally required to be replaced
by the Master Servicer on or before the next Distribution Date, subject to
subsequent withdrawal. To the extent that the Master Servicer is unable to
replace any amounts withdrawn in reimbursement of advances previously made,
there could be a delay in distributions on the Offered Certificates.
Furthermore, the Master Servicer's right to reimburse itself for advances
previously made from funds held for future distribution could lead to amounts
required to be restored to the collection account by the Master Servicer that
are higher, and potentially substantially higher, than one month's advance
obligation.
THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an ownership interest in or
obligation of the Depositor, the Master Servicer, the Originator, the Trustee or
any of their respective affiliates. Neither the certificates nor the underlying
Mortgage Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Master Servicer, the Originator, the
Trustee or any of their respective affiliates. Proceeds of the assets included
in the trust will be the sole source of distributions on the Offered
Certificates, and there will be no recourse to the Depositor, the Master
Servicer, the Originator, the Trustee or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all distributions
provided for under the Offered Certificates.
THE CAP CONTRACTS ARE SUBJECT TO COUNTERPARTY RISK
The assets of the Trust include the cap contracts which will require
the counterparty thereunder to make certain payments for the benefit of the
holders of the Class A-2 Certificates, the Class M-1 Certificates and the Class
M-2 Certificates. To the extent that payments on the Class A-2 Certificates, the
Class M-1 Certificates and the Class M-2 Certificates depend in part on payments
to be received by the Trustee under the cap contracts, the ability of the
Trustee to make such payments on such Certificates will be subject to the credit
risk of the counterparty to the cap contracts. Although there is a mechanism in
place to facilitate replacement of the cap contracts upon the default or credit
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impairment of the cap contract counterparty, there can be no assurance that any
such mechanism will result in the ability of the Trustee to obtain suitable
replacement cap contracts.
THE LIQUIDITY OF YOUR CERTIFICATES MAY BE LIMITED
None of UBS Warburg LLC, Deutsche Bank Securities Inc. or Morgan
Stanley & Co. Incorporated (collectively, the "Underwriters") has any obligation
to make a secondary market in the classes of Offered Certificates. There is
therefore no assurance that a secondary market will develop or, if it develops,
that it will continue. Consequently, you may not be able to sell your
certificates readily or at prices that will enable you to realize your desired
yield. The market values of the certificates are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary markets for asset-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
THE RATINGS ON THE CERTIFICATES COULD BE REDUCED OR WITHDRAWN
Each rating agency rating the Offered Certificates may change or
withdraw its initial ratings at any time in the future if, in its sole judgment,
circumstances warrant a change. A reduction in the claims paying ability of the
PMI Insurer may result in a reduction in the ratings of the Offered
Certificates. No person is obligated to maintain the ratings at their initial
levels. If a rating agency reduces or withdraws its rating on one or more
classes of the Offered Certificates, the liquidity and market value of the
affected Certificates is likely to be reduced.
RIGHTS OF THE NIMS INSURER MAY NEGATIVELY IMPACT THE OFFERED CERTIFICATES
Pursuant to the terms of the Pooling and Servicing Agreement, unless
there exists a continuance of any failure by the NIMS Insurer, if any, to make a
required payment under the policy insuring the net interest margin securities
(such event, a "NIMS Insurer Default"), the NIMS Insurer, if any, will be
entitled to exercise, among others, the following rights of the holders of the
Offered Certificates, without the consent of such holders, and the holders of
the Offered Certificates may exercise such rights only with the prior written
consent of the NIMS Insurer, if any: (i) the right to provide notices of Master
Servicer defaults and the right to direct the Trustee to terminate the rights
and obligations of the Master Servicer under the Pooling and Servicing Agreement
in the event of a default by the Master Servicer; (ii) the right to remove the
Trustee or any co-trustee or custodian pursuant to the Pooling and Servicing
Agreement; and (iii) the right to direct the Trustee to make investigations and
take actions pursuant to the Pooling and Servicing Agreement. In addition,
unless a NIMS Insurer Default exists, such NIMS Insurer's consent will be
required prior to, among other things, (i) the removal and replacement of the
Master Servicer, any successor master servicer or the Trustee, (ii) the
appointment or termination of any subservicer or co-trustee or (iii) any
amendment to the Pooling and Servicing Agreement.
INVESTORS IN THE OFFERED CERTIFICATES SHOULD NOTE THAT:
O ANY INSURANCE POLICY ISSUED BY THE NIMS INSURER, IF ANY, WILL NOT
COVER, AND WILL NOT BENEFIT IN ANY MANNER WHATSOEVER THE OFFERED
CERTIFICATES;
O THE RIGHTS TO BE GRANTED TO THE NIMS INSURER, IF ANY, ARE EXTENSIVE;
O THE INTERESTS OF THE NIMS INSURER, IF ANY, MAY BE INCONSISTENT WITH,
AND ADVERSE TO THE INTERESTS OF THE HOLDERS OF THE OFFERED CERTIFICATES
AND THE NIMS INSURER, IF ANY, HAS NO OBLIGATION OR DUTY TO CONSIDER THE
INTERESTS OF THE OFFERED CERTIFICATES IN CONNECTION WITH THE EXERCISE
OR NON-EXERCISE OF SUCH NIMS INSURER'S RIGHTS;
S-17
O SUCH NIMS INSURER'S, IF ANY, EXERCISE OF THE RIGHTS AND CONSENTS SET
FORTH ABOVE MAY NEGATIVELY AFFECT THE OFFERED CERTIFICATES AND THE
EXISTENCE OF SUCH NIMS INSURER'S, IF ANY, RIGHTS, WHETHER OR NOT
EXERCISED, MAY ADVERSELY AFFECT THE LIQUIDITY OF THE OFFERED
CERTIFICATES RELATIVE TO OTHER ASSET-BACKED CERTIFICATES BACKED BY
COMPARABLE MORTGAGE LOANS AND WITH COMPARABLE PAYMENT PRIORITIES AND
RATINGS; AND
O THERE MAY BE MORE THAN ONE SERIES OF NOTES INSURED BY THE NIMS INSURER
AND THE NIMS INSURER WILL HAVE THE RIGHTS SET FORTH HEREIN SO LONG AS
ANY SUCH SERIES OF NOTES REMAIN OUTSTANDING.
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.
In certain circumstances, these laws and regulations impose obligations on
owners or operators of residential properties such as those that secure the
mortgage loans. Failure to comply with these laws and regulations can result in
fines and penalties that could be assessed against the trust as owner of the
related property.
In some states, a lien on the property due to contamination has
priority over the lien of an existing mortgage. Further, a mortgage lender may
be held liable as an "owner" or "operator" for costs associated with the release
of petroleum from an underground storage tank under certain circumstances. If
the trust is considered the owner or operator of a property, it may suffer
losses as a result of any liability imposed for environmental hazards on the
property.
TERRORIST ATTACKS AND MILITARY ACTION COULD ADVERSELY AFFECT THE YIELD ON YOUR
CERTIFICATES
The effects that the terrorist attacks in the United States on
September 11, 2001 and related military action may have on the performance of
the mortgage loans and the Offered Certificates cannot be determined at this
time. Investors should consider the possible effects on the delinquency, default
and prepayment experience of the mortgage loans. In accordance with the
servicing standard set forth in the Pooling and Servicing Agreement, the Master
Servicer may defer, reduce or forgive payments and delay foreclosure proceedings
in respect of mortgage loans to borrowers affected in some way by recent and
possible future events. In addition, activation of a substantial number of
United States military reservists or members of the National Guard may
significantly increase the proportion of mortgage loans whose mortgage rates are
reduced by the application of the Relief Act. Advances made by the Master
Servicer will not cover shortfalls in interest collections arising from the
application of the Relief Act or any state law providing for similar relief. See
"Legal Aspects of the Mortgage Assets--Soldiers' and Sailors' Civil Relief Act
of 1940" in the prospectus.
LEGAL ACTIONS ARE PENDING AGAINST THE ORIGINATOR
Because the nature of the sub-prime mortgage lending and servicing
business involves the collection of numerous accounts, the validity of liens and
compliance with state and federal lending laws, sub-prime lenders and servicers,
including the Originator, are subject to numerous claims and legal actions
(collectively, "Legal Actions") in the ordinary course of their businesses.
These Legal Actions include lawsuits styled as class actions and alleging
violations of various federal and state consumer protection laws. While it is
impossible to estimate with certainty the ultimate legal and financial liability
with respect to such Legal Actions, and an adverse judgment in one or more Legal
Actions may have a significant adverse financial effect on the Originator, the
Originator believes that the aggregate amount of liabilities arising from such
Legal Actions will not result in monetary damages which will have a material
adverse effect on the financial condition or results of the Originator. The
Mortgage Loans are not subject to any pending Legal Actions as of the Cut-off
Date, although there can be no assurance that Legal Actions involving the
mortgage loans will not be initiated.
SUITABILITY OF THE OFFERED CERTIFICATES AS INVESTMENTS
The Offered Certificates are not suitable investments for any investor
that requires a regular or predictable schedule of monthly payments or payment
on any specific date. The Offered Certificates are complex investments that
should be considered only by investors who, either alone or with their
financial, tax and legal advisors, have the expertise to analyze the prepayment,
reinvestment, default and market risk, the tax consequences of an investment and
the interaction of these factors.
S-18
THE MORTGAGE POOL
The statistical information presented in this prospectus supplement
relates to the Mortgage Loans and related mortgaged properties as of the Cut-off
Date, as adjusted for scheduled principal payments due on or before the Cut-off
Date whether or not received. Prior to the issuance of the certificates,
Mortgage Loans may be removed from the mortgage pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable. In addition, Mortgage Loans may be prepaid at any time. A limited
number of other Mortgage Loans may be included in the mortgage pool prior to the
issuance of the certificates unless including such mortgage loans would
materially alter the characteristics of the Mortgage Loans in the mortgage pool
as described in this prospectus supplement. The Depositor believes that the
information set forth in this prospectus supplement with respect to the Mortgage
Loans in the mortgage pool will be representative of the characteristics of the
mortgage pool as it will be constituted at the time the certificates are issued,
although the range of mortgage rates and maturities and certain other
characteristics of the Mortgage Loans may vary.
Unless otherwise noted, all statistical percentages or weighted
averages set forth in this prospectus supplement are measured as a percentage of
the aggregate scheduled principal balance of the Mortgage Loans in the related
loan group as of the Cut-off Date.
GENERAL
The pool of mortgage loans will consist of conventional, one-to four-
family, adjustable-rate and fixed-rate mortgage loans (the "Mortgage Loans")
secured by first liens on residential real properties (the "Mortgaged
Properties"). The Mortgage Loans are secured by first mortgages or deeds of
trust or other similar security instruments creating first liens on one- to
four-family residential properties consisting of attached, detached or
semi-detached one- to four-family dwelling units, townhouses, individual
condominium units or individual units in planned unit developments and
manufactured housing. Substantially all of the Mortgage Loans were originated by
the Originator's wholesale lending subsidiary, Argent Mortgage Company, LLC. For
purposes of calculating interest and principal distributions on the Class A
Certificates, the Mortgage Loans have been divided into two loan groups,
designated as the "Group I Mortgage Loans" and the "Group II Mortgage Loans."
The Group I Mortgage Loans consist of Mortgage Loans with principal balances
that conform to Freddie Mac and Fannie Mae principal balance limit guidelines,
and the Group II Mortgage Loans consist predominantly of Mortgage Loans with
principal balances that may or may not conform to Freddie Mac or Fannie Mae
principal balance limit guidelines.
The Group I Mortgage Loans consist of approximately 1,786 Mortgage
Loans having an aggregate principal balance as of the Cut-off Date of
approximately $273,805,907, after application of scheduled payments due on or
before the Cut-off Date whether or not received, and subject to a permitted
variance of plus or minus 5%. The Group II Mortgage Loans consist of
approximately 536 Mortgage Loans having an aggregate principal balance as of the
Cut-off Date of approximately $126,199,291, after application of scheduled
payments due on or before the Cut-off Date whether or not received, and subject
to a permitted variance of plus or minus 5%. The Mortgage Loans have original
terms to maturity of not greater than 30 years from the date on which the first
payment was due on each Mortgage Loan.
The Depositor will purchase the Mortgage Loans from the Originator
pursuant to the Mortgage Loan Purchase Agreement, dated as of January 15, 2003
(the "Mortgage Loan Purchase Agreement"), between the Originator and the
Depositor. Pursuant to the Pooling and Servicing Agreement, dated as of January
1, 2003 (the "Pooling and Servicing Agreement"), among the Depositor, the Master
Servicer and the Trustee, the Depositor will cause the Mortgage Loans to be
assigned to the Trustee for the benefit of the certificateholders.
Approximately 14.86% of the Group I Mortgage Loans and approximately
64.79% of the Group II Mortgage Loans are fixed-rate Mortgage Loans and
approximately 85.14% of the Group I Mortgage Loans and approximately 35.21% of
the Group II Mortgage Loans are adjustable-rate Mortgage Loans. The "Mortgage
Rate" on each Mortgage Loan is the per annum rate of interest specified in the
related mortgage note. Each adjustable-rate Mortgage Loan provides for
semi-annual adjustment to its Mortgage Rate; provided, however, that the rate
first adjusts after an initial period of approximately two years from
origination. In connection with each Mortgage Rate adjustment, the adjustable-
rate Mortgage Loans provide for corresponding adjustments to their monthly
payment amounts, in each case on each applicable adjustment date (each such
date, an "Adjustment Date"). On each Adjustment Date, the Mortgage Rate on each
adjustable-rate Mortgage Loan will be adjusted to equal the sum, rounded to the
nearest multiple of 0.125%, of the
S-19
Index (as described below) and a fixed percentage amount (the "Gross Margin")
for that Mortgage Loan specified in the related Mortgage Note; provided,
however, that with respect to all of the adjustable-rate Mortgage Loans, the
Mortgage Rate will generally increase or decrease by no more than 1.00% per
annum on any related Adjustment Date (the "Periodic Rate Cap"), as provided in
the related Mortgage Note, and will not exceed a specified maximum Mortgage Rate
over the life of such Mortgage Loan (the "Maximum Mortgage Rate") or be less
than a specified minimum Mortgage Rate over the life of such Mortgage Loan (the
"Minimum Mortgage Rate"). Notwithstanding the foregoing, the adjustable-rate
Mortgage Loans generally have a Periodic Rate Cap of 2.00%, as specified in the
related Mortgage Note, for their first Adjustment Date. Effective with the first
monthly payment due on each adjustable-rate Mortgage Loan after each related
Adjustment Date, the monthly payment amount will be adjusted to an amount that
will amortize fully the outstanding principal balance of that Mortgage Loan over
its remaining term, and pay interest at the Mortgage Rate as so adjusted. Due to
the application of the Periodic Rate Caps and the Maximum Mortgage Rates, the
Mortgage Rate on each adjustable-rate Mortgage Loan, as adjusted on any related
Adjustment Date, may be less than the sum of the Index, calculated as described
herein, and the related Gross Margin. See "--The Index" herein. None of the
adjustable-rate Mortgage Loans permits the related mortgagor to convert the
adjustable Mortgage Rate thereon to a fixed Mortgage Rate.
The Mortgage Loans have scheduled monthly payments due on the first day
of the month (with respect to each Mortgage Loan, a "Due Date"). Each Mortgage
Loan will contain a customary "due-on-sale" clause which provides that (subject
to state and federal restrictions) the Mortgage Loan must be repaid at the time
of sale of the related Mortgaged Property or with the consent of the holder of
the mortgage note assumed by a creditworthy purchaser of the related Mortgaged
Property.
Approximately 83.49% of the Group I Mortgage Loans and approximately
76.09% of the Group II Mortgage Loans provide for payment by the mortgagor of a
prepayment charge on certain principal prepayments, subject to certain
limitations in the related mortgage note and limitations upon collection in the
Pooling and Servicing Agreement. Generally, each such Mortgage Loan provides for
payment of a prepayment charge on certain prepayments made within a defined
period set forth in the related Mortgage Note (generally within the first three
years but possibly as short as one year from the date of origination of such
Mortgage Loan). The amount of the prepayment charge is as provided in the
related Mortgage Note. The holders of the Class P Certificates will be entitled
to all prepayment charges received on the Mortgage Loans in both loan groups,
and such amounts will not be available for distribution on the other classes of
Certificates. Under certain instances, as described under the terms of the
Pooling and Servicing Agreement, the Master Servicer may waive the payment of
any otherwise applicable prepayment charge. Investors should conduct their own
analysis of the effect, if any, that the prepayment charges, and decisions by
the Master Servicer with respect to the waiver thereof, may have on the
prepayment performance of the Mortgage Loans. The Depositor makes no
representation as to the effect that the prepayment charges, and decisions by
the Master Servicer with respect to the waiver thereof, may have on the
prepayment performance of the Mortgage Loans.
None of the Mortgage Loans are Buydown Mortgage Loans.
GROUP I MORTGAGE LOAN STATISTICS
The average principal balance of the Group I Mortgage Loans at
origination was approximately $153,408. No Group I Mortgage Loan had a principal
balance at origination greater than approximately $450,500 or less than
approximately $50,000. The average principal balance of the Group I Mortgage
Loans as of the Cut-off Date was approximately $153,307. No Group I Mortgage
Loan had a principal balance as of the Cut-off Date greater than approximately
$449,643 or less than approximately $49,965.
The Group I Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 5.55% per annum to approximately 12.60% per annum,
and the weighted average Mortgage Rate on the Group I Mortgage Loans was
approximately 8.07% per annum. As of the Cut-off Date, the adjustable-rate Group
I Mortgage Loans had Gross Margins ranging from approximately 5.00% to
approximately 7.13%, Minimum Mortgage Rates ranging from approximately 5.55% per
annum to approximately 12.60% per annum and Maximum Mortgage Rates ranging from
approximately 11.55% per annum to approximately 18.60% per annum. As of the
Cut-off Date, the weighted average Gross Margin on the adjustable-rate Group I
Mortgage Loans was approximately 6.48%, the weighted average Minimum Mortgage
Rate on the adjustable-rate Group I Mortgage Loans was approximately 8.16% per
annum and the weighted average Maximum Mortgage Rate on the adjustable-rate
Group I Mortgage Loans was approximately 14.16% per annum. The latest first
Adjustment Date following the Cut-off Date on any adjustable-rate Group I
Mortgage Loan occurs in
S-20
January 2005 and the weighted average next Adjustment Date for all of the
adjustable-rate Group I Mortgage Loans following the Cut-off Date is December
2004.
The weighted average loan-to-value ratio at origination of the Group I
Mortgage Loans was approximately 83.80%. At origination, no Group I Mortgage
Loan had a loan-to-value ratio greater than approximately 95.00% or less than
approximately 25.00%.
The weighted average remaining term to stated maturity of the Group I
Mortgage Loans was approximately 357 months as of the Cut-off Date. None of the
Group I Mortgage Loans will have a first Due Date prior to August 2002 or after
February 2003, or will have an original term to stated maturity of less than 180
months or greater than 360 months as of the Cut-off Date. The latest maturity
date of any Group I Mortgage Loan is January 2033.
The Group I Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
RANGE OF PRINCIPAL BALANCES AS NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
OF THE CUT OFF DATE ($) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
----------------------- -------------- ------------ ------------
0.01- 50,000.00..................... 9 $ 449,789.87 0.16%
50,000.01-100,000.00..................... 535 40,837,049.32 14.91
100,000.01-150,000.00..................... 465 58,485,142.98 21.36
150,000.01-200,000.00..................... 314 54,529,856.48 19.92
200,000.01-250,000.00..................... 227 50,966,778.78 18.61
250,000.01-300,000.00..................... 161 43,928,557.66 16.04
300,000.01-350,000.00..................... 60 18,903,219.42 6.90
350,000.01-400,000.00..................... 13 4,825,870.10 1.76
400,000.01-450,000.00..................... 2 879,642.86 0.32
----- ------------------ ------
Total........................... 1,786 $ 273,805,907.47 100.00%
===== ================== ======
___________________
(1) The average principal balance of the Group I Mortgage Loans as of the
Cut-off Date was approximately $153,307.
S-21
MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
CURRENT MORTGAGE RATE (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------------------- -------------- ------------ ------------
5.500 - 5.999........................... 13 $ 2,794,059.25 1.02%
6.000 - 6.499........................... 55 11,802,874.67 4.31
6.500 - 6.999........................... 168 32,458,220.05 11.85
7.000 - 7.499........................... 199 35,420,934.24 12.94
7.500 - 7.999........................... 314 55,111,599.83 20.13
8.000 - 8.499........................... 298 44,279,194.50 16.17
8.500 - 8.999........................... 297 42,789,489.43 15.63
9.000 - 9.499........................... 168 20,416,372.93 7.46
9.500 - 9.999........................... 168 18,568,827.52 6.78
10.000 -10.499........................... 52 4,280,035.05 1.56
10.500 -10.999........................... 32 3,235,995.13 1.18
11.000 -11.499........................... 9 907,358.88 0.33
11.500 -11.999........................... 8 1,178,950.74 0.43
12.000 -12.499........................... 4 450,195.25 0.16
12.500 -12.999........................... 1 111,800.00 0.04
----- ------------------ ------
Total.............................. 1,786 $ 273,805,907.47 100.00%
===== ================== ======
__________________
(1) The weighted average current Mortgage Rate of the Group I Mortgage Loans
as of the Cut-off Date was approximately 8.07% per annum.
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
MAXIMUM MORTGAGE RATE (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------------------- -------------- ------------ ------------
11.500 - 11.999........................... 11 $ 2,321,793.22 1.00%
12.000 - 12.499........................... 35 7,449,282.42 3.20
12.500 - 12.999........................... 113 21,165,743.65 9.08
13.000 - 13.499........................... 167 29,871,198.34 12.81
13.500 - 13.999........................... 277 48,528,897.50 20.82
14.000 - 14.499........................... 268 39,451,282.59 16.92
14.500 - 14.999........................... 270 39,282,873.72 16.85
15.000 - 15.499........................... 159 18,899,106.80 8.11
15.500 - 15.999........................... 157 17,410,190.46 7.47
16.000 - 16.499........................... 46 3,757,481.37 1.61
16.500 - 16.999........................... 25 2,508,778.30 1.08
17.000 - 17.499........................... 7 734,908.19 0.32
17.500 - 17.999........................... 8 1,178,950.74 0.51
18.000 - 18.499........................... 4 450,195.25 0.19
18.500 - 18.999........................... 1 111,800.00 0.05
----- ------------------ ------
Total........................... 1,548 $ 233,122,482.55 100.00%
===== ================== ======
____________________
(1) The weighted average Maximum Mortgage Rate of the adjustable-rate Group I
Mortgage Loans as of the Cut-off Date was approximately 14.16% per annum.
S-22
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
MINIMUM MORTGAGE RATE (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------------------- -------------- ------------ ------------
5.500 - 5.999........................... 11 $ 2,321,793.22 1.00%
6.000 - 6.499........................... 35 7,449,282.42 3.20
6.500 - 6.999........................... 113 21,165,743.65 9.08
7.000 - 7.499........................... 167 29,871,198.34 12.81
7.500 - 7.999........................... 277 48,528,897.50 20.82
8.000 - 8.499........................... 268 39,451,282.59 16.92
8.500 - 8.999........................... 270 39,282,873.72 16.85
9.000 - 9.499........................... 159 18,899,106.80 8.11
9.500 - 9.999........................... 157 17,410,190.46 7.47
10.000 -10.499........................... 46 3,757,481.37 1.61
10.500 -10.999........................... 25 2,508,778.30 1.08
11.000 -11.499........................... 7 734,908.19 0.32
11.500 -11.999........................... 8 1,178,950.74 0.51
12.000 -12.499........................... 4 450,195.25 0.19
12.500 -12.999........................... 1 111,800.00 0.05
----- ------------------ ------
Total........................... 1,548 $ 233,122,482.55 100.00%
===== ================== ======
__________________
(1) The weighted average Minimum Mortgage Rate of the adjustable-rate Group I
Mortgage Loans as of the Cut-off Date was approximately 8.16% per annum.
GROSS MARGINS OF THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
GROSS MARGINS (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
----------------- -------------- ------------ ------------
5.000 - 5.249............................. 3 $ 417,512.14 0.18%
5.500 - 5.749............................. 22 5,245,297.58 2.25
6.000 - 6.249............................. 1 258,833.14 0.11
6.250 - 6.499............................. 1 292,271.82 0.13
6.500 - 6.749............................. 1,513 225,634,926.56 96.79
6.750 - 6.999............................. 3 334,224.67 0.14
7.000 - 7.249............................. 5 939,416.64 0.40
----- ------------------ ------
Total........................... 1,548 $ 233,122,482.55 100.00%
===== ================== ======
__________________
(1) The weighted average Gross Margin of the adjustable-rate Group I Mortgage
Loans as of the Cut-off Date was approximately 6.48%.
S-23
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
NEXT ADJUSTMENT DATE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
-------------------- -------------- ------------ ------------
July 2004................................. 2 $ 455,067.37 0.20%
August 2004............................... 3 397,806.75 0.17
September 2004............................ 15 2,587,968.89 1.11
October 2004.............................. 43 6,906,791.87 2.96
November 2004............................. 211 31,530,323.12 13.53
December 2004............................. 797 119,029,882.55 51.06
January 2005.............................. 477 72,214,642.00 30.98
----- ------------------ ------
Total........................... 1,548 $ 233,122,482.55 100.00%
===== ================== ======
__________________
(1) The weighted average next Adjustment Date for the adjustable-rate Group I
Mortgage Loans as of the Cut-off Date is December 2004.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
ORIGINAL LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
-------------------------------- -------------- ------------ ------------
Less than or equal to 25.00............... 1 $ 74,942.21 0.03%
25.01- 30.00.............................. 1 139,946.71 0.05
30.01- 35.00.............................. 4 378,595.30 0.14
35.01- 40.00.............................. 5 501,645.04 0.18
40.01- 45.00.............................. 11 1,234,078.80 0.45
45.01- 50.00.............................. 14 1,883,194.16 0.69
50.01- 55.00.............................. 19 2,606,707.00 0.95
55.01- 60.00.............................. 33 4,998,326.80 1.83
60.01- 65.00.............................. 61 9,908,874.81 3.62
65.01- 70.00.............................. 68 9,528,168.02 3.48
70.01- 75.00.............................. 120 19,460,310.33 7.11
75.01- 80.00.............................. 268 39,709,981.15 14.50
80.01- 85.00.............................. 309 44,466,784.23 16.24
85.01- 90.00.............................. 627 95,045,961.54 34.71
90.01- 95.00.............................. 245 43,868,391.37 16.02
----- ------------------ ------
Total........................... 1,786 $ 273,805,907.47 100.00%
===== ================== ======
__________________
(1) The weighted average original loan-to-value ratio of the Group I Mortgage
Loans as of the Cut-off Date was approximately 83.80%.
S-24
MORTGAGED PROPERTY TYPES OF THE GROUP I MORTGAGE LOANS
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
PROPERTY TYPE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------- -------------- ------------ ------------
Single Family Detached.................... 1,410 $ 210,740,100.47 76.97%
Single Family Attached.................... 4 602,218.27 0.22
Two-to-Four-Family........................ 156 30,502,107.42 11.14
Condominium............................... 121 15,963,777.89 5.83
Planned Unit Development Detached......... 69 12,437,355.34 4.54
Planned Unit Development Attached......... 15 2,484,400.54 0.91
Manufactured Housing...................... 11 1,075,947.54 0.39
----- ------------------ ------
Total........................... 1,786 $ 273,805,907.47 100.00%
===== ================== ======
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE GROUP I MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
OCCUPANCY STATUS MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
---------------- -------------- ------------ ------------
Owner Occupied............................ 1,610 $ 253,496,790.40 92.58%
Non Owner Occupied........................ 170 19,264,800.32 7.04
Second Home............................... 6 1,044,316.75 0.38
----- ------------------ ------
Total........................... 1,786 $ 273,805,907.47 100.00%
===== ================== ======
____________________
(1) Occupancy status as represented by the mortgagor at the time of
origination.
PURPOSE OF THE GROUP I MORTGAGE LOANS
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
PURPOSE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------- -------------- ------------ ------------
Refinance-Debt Consolidation, Cashout(1).. 882 $ 135,645,393.09 49.54%
Refinance-Debt Consolidation, No Cashout(2) 449 71,160,192.49 25.99
Purchase.................................. 455 67,000,321.89 24.47
----- ------------------ ------
Total........................... 1,786 $ 273,805,907.47 100.00%
===== ================== ======
____________________
(1) Cash proceeds to the borrower exclusive of Debt Consolidation payments
exceed 3% of the original Principal Balance of the related mortgage loan.
Also includes all home equity loans originated in Texas with any cash
proceeds.
(2) Cash proceeds to the borrower exclusive of Debt Consolidation payments
are 3% or less of the original Principal Balance of the related mortgage
loan. Excludes all home equity loans originated in Texas with any cash
proceeds.
S-25
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES RELATING TO THE GROUP I MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
LOCATION MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
-------- -------------- ------------ ------------
Alabama................................... 16 $ 1,467,447.69 0.54%
Alaska.................................... 6 1,099,449.36 0.40
Arizona................................... 118 13,880,498.12 5.07
Arkansas.................................. 5 487,994.43 0.18
California................................ 324 66,369,286.90 24.24
Colorado.................................. 28 4,969,915.04 1.82
Connecticut............................... 35 5,728,540.79 2.09
Delaware.................................. 1 175,778.62 0.06
Florida................................... 129 17,227,850.44 6.29
Hawaii.................................... 7 1,908,249.79 0.70
Idaho..................................... 5 489,072.62 0.18
Illinois.................................. 126 18,888,366.32 6.90
Indiana................................... 50 5,388,788.05 1.97
Iowa...................................... 4 350,806.15 0.13
Kansas.................................... 7 771,153.00 0.28
Kentucky.................................. 2 128,356.64 0.05
Louisiana................................. 7 512,949.26 0.19
Maine..................................... 5 874,429.78 0.32
Maryland.................................. 20 3,112,499.23 1.14
Massachusetts............................. 74 14,924,938.52 5.45
Michigan.................................. 93 9,997,171.98 3.65
Minnesota................................. 48 6,857,104.44 2.50
Mississippi............................... 7 635,040.93 0.23
Missouri.................................. 47 4,582,404.11 1.67
Nebraska.................................. 3 236,236.94 0.09
Nevada.................................... 26 3,575,458.11 1.31
New Hampshire............................. 13 1,943,696.18 0.71
New Jersey................................ 67 12,809,693.07 4.68
New Mexico................................ 12 1,140,581.98 0.42
New York.................................. 152 32,463,062.43 11.86
Ohio...................................... 71 6,234,370.88 2.28
Oklahoma.................................. 9 668,215.00 0.24
Oregon.................................... 22 3,089,239.22 1.13
Pennsylvania.............................. 33 3,678,454.01 1.34
Rhode Island.............................. 12 1,914,553.31 0.70
South Carolina............................ 11 1,444,951.03 0.53
Tennessee................................. 20 1,647,195.89 0.60
Texas..................................... 61 6,850,929.93 2.50
Utah...................................... 34 4,806,684.30 1.76
Vermont................................... 1 133,000.00 0.05
Washington................................ 54 8,038,351.93 2.94
Wisconsin................................. 19 2,164,856.94 0.79
Wyoming................................... 2 138,284.11 0.05
----- ------------------ ------
Total........................... 1,786 $ 273,805,907.47 100.00%
===== ================== ======
__________________
(1) The greatest ZIP Code geographic concentration of the Group I Mortgage
Loans was approximately 0.56% in the 11234 ZIP Code.
S-26
QUALIFYING FICO SCORES FOR THE GROUP I MORTGAGE LOANS AT ORIGINATION(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
QUALIFYING FICO SCORE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
--------------------- -------------- ------------ ------------
No Score.................................. 4 $ 726,282.50 0.27%
480-499................................... 1 154,263.91 0.06
500-519................................... 49 6,626,129.71 2.42
520-539................................... 111 16,581,180.01 6.06
540-559................................... 267 37,746,936.48 13.79
560-579................................... 263 37,476,535.91 13.69
580-599................................... 254 36,086,730.84 13.18
600-619................................... 245 39,333,475.54 14.37
620-639................................... 244 41,964,943.97 15.33
640-659................................... 149 23,870,347.71 8.72
660-679................................... 95 15,253,130.95 5.57
680-699................................... 54 9,376,671.65 3.42
700-719................................... 23 3,890,990.84 1.42
720-739................................... 15 2,616,297.47 0.96
740-759................................... 8 1,582,103.05 0.58
760-779................................... 1 97,919.67 0.04
780-799................................... 2 262,510.15 0.10
800-819................................... 1 159,457.11 0.06
----- ------------------ ------
Total........................... 1,786 $ 273,805,907.47 100.00%
===== ================== ======
______________________
(1) The weighted average qualifying FICO score at origination of the Group I
Mortgage Loans that had FICO scores was approximately 602. See "--FICO
Scores" herein.
INCOME DOCUMENTATION OF THE GROUP I MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
INCOME DOCUMENTATION MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
-------------------- -------------- ------------ ------------
Full Documentation Program................ 1,357 $ 204,783,860.13 74.79%
Limited Documentation Program............. 30 5,357,654.69 1.96
Stated Income Documentation Program....... 399 63,664,392.65 23.25
----- ------------------ ------
Total........................... 1,786 $ 273,805,907.47 100.00%
===== ================== ======
____________________
(1) For a description of each documentation level, see "The Mortgage
Loans--Underwriting Standards" herein.
RISK CATEGORIES FOR THE GROUP I MORTGAGE LOANS
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
RISK CATEGORY MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------- -------------- ------------ ------------
I......................................... 1,235 $ 193,408,488.69 70.64%
II........................................ 194 27,829,337.44 10.16
III....................................... 170 25,554,026.23 9.33
IV........................................ 121 17,694,834.08 6.46
V......................................... 53 7,714,700.34 2.82
VI........................................ 13 1,604,520.69 0.59
----- ------------------ ------
Total........................... 1,786 $ 273,805,907.47 100.00%
===== ================== ======
S-27
GROUP II MORTGAGE LOAN STATISTICS
The average principal balance of the Group II Mortgage Loans at
origination was approximately $235,581. No Group II Mortgage Loan had a
principal balance at origination greater than approximately $500,000 or less
than approximately $50,000. The average principal balance of the Group II
Mortgage Loans as of the Cut-off Date was approximately $235,446 No Group II
Mortgage Loan had a principal balance as of the Cut-off Date greater than
approximately $500,000 or less than approximately $49,978.
The Group II Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 5.45% per annum to approximately 13.90% per annum,
and the weighted average Mortgage Rate on the Group II Mortgage Loans was
approximately 7.46% per annum. As of the Cut-off Date, the adjustable-rate Group
II Mortgage Loans had Gross Margins ranging from approximately 5.00% to
approximately 6.50%, Minimum Mortgage Rates ranging from approximately 5.45% per
annum to approximately 12.20% per annum and Maximum Mortgage Rates ranging from
approximately 11.45% per annum to approximately 18.20% per annum. As of the
Cut-off Date, the weighted average Gross Margin on the adjustable-rate Group II
Mortgage Loans was approximately 6.44%, the weighted average Minimum Mortgage
Rate on the adjustable-rate Group II Mortgage Loans was approximately 7.60% per
annum and the weighted average Maximum Mortgage Rate on the adjustable-rate
Group II Mortgage Loans was approximately13.60% per annum. The latest first
Adjustment Date following the Cut-off Date on any adjustable-rate Group II
Mortgage Loan occurs in January 2005 and the weighted average next Adjustment
Date for all of the adjustable-rate Group II Mortgage Loans following the
Cut-off Date is December 2004.
The weighted average loan-to-value ratio at origination of the Group II
Mortgage Loans was approximately 82.93%. At origination, no Group II Mortgage
Loan had a loan-to-value ratio greater than approximately 95.00% or less than
approximately 25.86%.
The weighted average remaining term to stated maturity of the Group II
Mortgage Loans was approximately 353 months as of the Cut-off Date. None of the
Group II Mortgage Loans will have a first Due Date prior to October 2002 or
after February 2003, or will have an original term to stated maturity of less
than 180 months or greater than 360 months as of the Cut-off Date. The latest
maturity date of any Group II Mortgage Loan is January 2033.
The Group II Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
RANGE OF PRINCIPAL BALANCES AS NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
OF THE CUT-OFF DATE ($) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
----------------------- -------------- ------------ ------------
0.01- 50,000.00..................... 2 $ 99,978.34 0.08%
50,000.01-100,000.00..................... 97 7,263,975.50 5.76
100,000.01-150,000.00..................... 70 8,607,712.81 6.82
150,000.01-200,000.00..................... 72 12,830,281.50 10.17
200,000.01-250,000.00..................... 69 15,193,515.41 12.04
250,000.01-300,000.00..................... 38 10,353,683.89 8.20
300,000.01-350,000.00..................... 63 20,848,558.85 16.52
350,000.01-400,000.00..................... 69 25,774,683.32 20.42
400,000.01-450,000.00..................... 32 13,768,231.93 10.91
450,000.01-500,000.00..................... 24 11,458,669.86 9.08
--- ------------------ ------
Total........................... 536 $ 126,199,291.41 100.00%
=== ================== ======
___________________
(1) The average principal balance of the Group II Mortgage Loans as of the
Cut-off Date was approximately $235,446.
S-28
MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
CURRENT MORTGAGE RATE (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------------------- -------------- ------------ ------------
5.000- 5.499........................... 2 $ 702,091.19 0.56%
5.500- 5.999........................... 6 1,922,668.84 1.52
6.000- 6.499........................... 53 15,889,139.10 12.59
6.500- 6.999........................... 112 29,556,226.88 23.42
7.000- 7.499........................... 97 21,538,340.96 17.07
7.500- 7.999........................... 106 25,614,919.07 20.30
8.000- 8.499........................... 60 14,633,652.08 11.60
8.500- 8.999........................... 45 8,506,463.44 6.74
9.000- 9.499........................... 14 2,329,112.51 1.85
9.500- 9.999........................... 13 1,878,741.87 1.49
10.000- 10.499........................... 16 2,028,835.08 1.61
10.500- 10.999........................... 7 857,119.84 0.68
11.000- 11.499........................... 2 143,180.55 0.11
12.000- 12.499........................... 2 548,400.00 0.43
13.500- 13.999........................... 1 50,400.00 0.04
--- ------------------ ------
Total.............................. 536 $ 126,199,291.41 100.00%
=== ================== ======
__________________
(1) The weighted average current Mortgage Rate of the Group II Mortgage Loans
as of the Cut-off Date was approximately 7.46% per annum.
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
MAXIMUM MORTGAGE RATE (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------------------- -------------- ------------ ------------
11.000 - 11.499........................... 2 $ 702,091.19 1.58%
11.500 - 11.999........................... 4 1,767,500.00 3.98
12.000 - 12.499........................... 6 2,516,901.85 5.66
12.500 - 12.999........................... 20 7,764,554.79 17.48
13.000 - 13.499........................... 18 6,957,781.95 15.66
13.500 - 13.999........................... 30 11,282,551.27 25.39
14.000 - 14.499........................... 18 7,361,932.30 16.57
14.500 - 14.999........................... 9 3,344,227.81 7.53
15.000 - 15.499........................... 2 817,240.53 1.84
15.500 - 15.999........................... 2 707,627.55 1.59
16.000 - 16.499........................... 1 349,851.64 0.79
16.500 - 16.999........................... 1 422,344.34 0.95
18.000 - 18.499........................... 1 435,000.00 0.98
--- ----------------- ------
Total.............................. 114 $ 44,429,605.22 100.00%
=== ================= ======
____________________
(1) The weighted average Maximum Mortgage Rate of the adjustable-rate Group
II Mortgage Loans as of the Cut-off Date was approximately 13.60% per
annum.
S-29
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
MINIMUM MORTGAGE RATE (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------------------- -------------- ------------ ------------
5.000 - 5.499............................ 2 $ 702,091.19 1.58%
5.500 - 5.999............................ 4 1,767,500.00 3.98
6.000 - 6.499............................ 6 2,516,901.85 5.66
6.500 - 6.999............................ 20 7,764,554.79 17.48
7.000 - 7.499............................ 18 6,957,781.95 15.66
7.500 - 7.999............................ 30 11,282,551.27 25.39
8.000 - 8.499............................ 18 7,361,932.30 16.57
8.500 - 8.999............................ 9 3,344,227.81 7.53
9.000 - 9.499............................ 2 817,240.53 1.84
9.500 - 9.999............................ 2 707,627.55 1.59
10.000 - 10.499........................... 1 349,851.64 0.79
10.500 - 10.999........................... 1 422,344.34 0.95
12.000 - 12.499........................... 1 435,000.00 0.98
--- ----------------- ------
Total........................... 114 $ 44,429,605.22 100.00%
=== ================= ======
__________________
(1) The weighted average Minimum Mortgage Rate of the adjustable-rate Group
II Mortgage Loans as of the Cut-off Date was approximately 7.60% per
annum.
GROSS MARGINS OF THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
GROSS MARGINS (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
----------------- -------------- ------------ ------------
5.000 - 5.249.......................... 1 $ 340,000.00 0.77%
5.550 - 5.749.......................... 5 2,036,773.13 4.58
6.500 - 6.749.......................... 108 42,052,832.09 94.65
--- ----------------- ------
Total........................... 114 $ 44,429,605.22 100.00%
=== ================= ======
__________________
(1) The weighted average Gross Margin of the adjustable-rate Group II
Mortgage Loans as of the Cut-off Date was approximately 6.44%.
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
NEXT ADJUSTMENT DATE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
-------------------- -------------- ------------ ------------
September 2004............................ 1 $ 443,346.13 1.00%
October 2004.............................. 1 381,524.49 0.86
November 2004............................. 1 337,081.12 0.76
December 2004............................. 55 21,261,379.48 47.85
January 2005.............................. 56 22,006,274.00 49.53
--- ----------------- ------
Total........................... 114 $ 44,429,605.22 100.00%
=== ================= ======
__________________
(1) The weighted average next Adjustment Date for the adjustable-rate Group
II Mortgage Loans as of the Cut-off Date is December 2004.
S-30
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
ORIGINAL LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
-------------------------------- -------------- ------------ ------------
25.01- 30.00.............................. 3 $ 335,912.21 0.27%
35.01- 40.00.............................. 3 501,417.95 0.40
40.01- 45.00.............................. 3 668,548.60 0.53
45.01- 50.00.............................. 3 655,383.27 0.52
50.01- 55.00.............................. 7 1,509,533.01 1.20
55.01- 60.00.............................. 21 4,731,653.25 3.75
60.01- 65.00.............................. 28 5,711,930.23 4.53
65.01- 70.00.............................. 32 6,288,801.01 4.98
70.01- 75.00.............................. 40 8,645,101.45 6.85
75.01- 80.00.............................. 71 16,406,169.92 13.00
80.01- 85.00.............................. 68 15,200,054.26 12.04
85.01- 90.00.............................. 159 38,371,989.07 30.41
90.01- 95.00.............................. 98 27,172,797.18 21.53
--- ------------------ ------
Total........................... 536 $ 126,199,291.41 100.00%
=== ================== ======
__________________
(1) The weighted average original loan-to-value ratio of the Group II
Mortgage Loans as of the Cut-off Date was approximately 82.93%.
MORTGAGED PROPERTY TYPES OF THE GROUP II MORTGAGE LOANS
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
PROPERTY TYPE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------- -------------- ------------ ------------
Single Family Detached.................... 441 $ 104,329,644.90 82.67%
Single Family Attached.................... 1 382,000.00 0.30
Two-to-Four-Family........................ 54 10,590,672.07 8.39
Condominium............................... 19 4,068,160.41 3.22
Planned Unit Development Detached......... 17 5,890,725.05 4.67
Planned Unit Development Attached......... 2 723,524.49 0.57
Manufactured Housing...................... 2 214,564.49 0.17
--- ------------------ ------
Total........................... 536 $ 126,199,291.41 100.00%
=== ================== ======
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
OCCUPANCY STATUS MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
---------------- -------------- ------------ ------------
Owner Occupied............................ 490 $ 117,811,391.92 93.35%
Non Owner Occupied........................ 44 7,832,600.33 6.21
Second Home............................... 2 555,299.16 0.44
--- ------------------ ------
Total........................... 536 $ 126,199,291.41 100.00%
=== ================== ======
____________________
(1) Occupancy status as represented by the mortgagor at the time of
origination.
S-31
PURPOSE OF THE GROUP II MORTGAGE LOANS
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
PURPOSE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------- -------------- ------------ ------------
Refinance-Debt Consolidation, Cashout(1).. 297 $ 67,369,130.43 53.38%
Refinance-Debt Consolidation, No Cashout(2) 144 34,691,559.26 27.49
Purchase.................................. 95 24,138,601.72 19.13
--- ------------------ ------
Total........................... 536 $ 126,199,291.41 100.00%
=== ================== ======
____________________
(1) Cash proceeds to the borrower exclusive of Debt Consolidation payments
exceed 3% of the original Principal Balance of the related mortgage loan.
Also includes all home equity loans originated in Texas with any cash
proceeds.
(2) Cash proceeds to the borrower exclusive of Debt Consolidation payments
are 3% or less of the original Principal Balance of the related mortgage
loan. Excludes all home equity loans originated in Texas with any cash
proceeds.
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES RELATING TO THE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
LOCATION MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
-------- -------------- ------------ ------------
Alabama................................... 4 $ 443,978.21 0.35%
Arizona................................... 13 2,676,780.53 2.12
Arkansas.................................. 1 77,355.92 0.06
California................................ 153 43,927,483.11 34.81
Colorado.................................. 6 2,067,801.17 1.64
Connecticut............................... 10 2,267,722.27 1.80
Florida................................... 37 8,045,567.02 6.38
Hawaii.................................... 7 1,372,855.75 1.09
Illinois.................................. 25 4,533,224.45 3.59
Indiana................................... 7 1,435,865.35 1.14
Louisiana................................. 2 230,620.73 0.18
Maryland.................................. 6 1,794,813.97 1.42
Massachusetts............................. 19 5,327,989.27 4.22
Michigan.................................. 10 886,895.34 0.70
Minnesota................................. 6 1,378,158.71 1.09
Missouri.................................. 8 1,287,745.21 1.02
Nevada.................................... 1 433,275.00 0.34
New Hampshire............................. 1 171,423.36 0.14
New Jersey................................ 36 8,283,073.30 6.56
New Mexico................................ 1 382,279.93 0.30
New York.................................. 99 28,057,858.98 22.23
Ohio...................................... 35 3,143,310.70 2.49
Oklahoma.................................. 1 57,760.41 0.05
Oregon.................................... 2 424,915.88 0.34
Pennsylvania.............................. 9 1,427,633.03 1.13
Rhode Island.............................. 3 472,300.55 0.37
South Carolina............................ 4 254,076.60 0.20
Tennessee................................. 5 338,091.79 0.27
Texas..................................... 15 2,605,282.50 2.06
Utah...................................... 3 1,171,208.67 0.93
Washington................................ 6 1,047,943.70 0.83
Wisconsin................................. 1 174,000.00 0.14
--- ------------------ ------
Total.............................. 536 $ 126,199,291.41 100.00%
=== ================== ======
___________________
(1) The greatest ZIP Code geographic concentration of the Group II Mortgage
Loans was approximately 0.95% in the 92656 ZIP Code.
S-32
QUALIFYING FICO SCORES FOR THE GROUP II MORTGAGE LOANS AT ORIGINATION(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
QUALIFYING FICO SCORE MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
--------------------- -------------- ------------ ------------
500 - 519................................. 7 $ 1,292,156.06 1.02%
520 - 539................................. 20 3,638,569.76 2.88
540 - 559................................. 43 8,635,714.75 6.84
560 - 579................................. 42 8,649,768.52 6.85
580 - 599................................. 60 14,677,140.39 11.63
600 - 619................................. 84 20,171,916.68 15.98
620 - 639................................. 89 22,457,484.24 17.80
640 - 659................................. 78 16,987,653.81 13.46
660 - 679................................. 42 10,216,005.71 8.10
680 - 699................................. 37 10,120,741.77 8.02
700 - 719................................. 13 2,755,507.12 2.18
720 - 739................................. 10 3,404,196.40 2.70
740 - 759................................. 8 2,332,018.85 1.85
760 - 779................................. 3 860,417.35 0.68
--- ------------------ ------
Total........................... 536 $ 126,199,291.41 100.00%
=== ================== ======
______________________
(1) The weighted average qualifying FICO score at origination of the Group II
Mortgage Loans that had FICO scores was approximately 626. See "--FICO
Scores" herein.
INCOME DOCUMENTATION OF THE GROUP II MORTGAGE LOANS(1)
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
INCOME DOCUMENTATION MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
-------------------- -------------- ------------ ------------
Full Documentation Program................ 435 $ 102,010,843.46 80.83%
Limited Documentation Program............. 13 3,646,309.43 2.89
Stated Income Documentation Program....... 88 20,542,138.52 16.28
--- ------------------ ------
Total........................... 536 $ 126,199,291.41 100.00%
=== ================== ======
____________________
(1) For a description of each documentation level, see "The Mortgage
Loans--Underwriting Standards" herein.
RISK CATEGORIES FOR THE GROUP II MORTGAGE LOANS
AGGREGATE PRINCIPAL
BALANCE OUTSTANDING % OF AGGREGATE PRINCIPAL
NUMBER OF AS OF THE CUT-OFF DATE BALANCE OUTSTANDING AS OF THE
RISK CATEGORY MORTGAGE LOANS CUT-OFF DATE CUT-OFF DATE
------------- -------------- ------------ ------------
I......................................... 404 $ 93,841,586.01 74.36%
II........................................ 61 13,472,577.76 10.68
III....................................... 35 8,793,240.25 6.97
IV........................................ 27 7,524,055.76 5.96
V......................................... 6 1,660,087.29 1.32
VI........................................ 3 907,744.34 0.72
--- ------------------ ------
Total........................... 536 $ 126,199,291.41 100.00%
=== ================== ======
S-33
FICO SCORES
"FICO Scores" are statistical credit scores obtained by many mortgage
lenders in connection with the loan application to help assess a borrower's
creditworthiness. FICO Scores are generated by models developed by a third party
and are made available to lenders through three national credit bureaus. The
models were derived by analyzing data on consumers in order to establish
patterns which are believed to be indicative of the borrower's probability of
default. The FICO Score is based on a borrower's historical credit data,
including, among other things, payment history, delinquencies on accounts,
levels of outstanding indebtedness, length of credit history, types of credit,
and bankruptcy experience. FICO Scores range from approximately 250 to
approximately 900, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score. However,
a FICO Score purports only to be a measurement of the relative degree of risk a
borrower represents to a lender, i.e., that 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 FICO 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, FICO
Scores were not developed specifically for use in connection with mortgage
loans, but for consumer loans in general. Therefore, a FICO Score does not take
into consideration the effect of mortgage loan characteristics on the
probability of repayment by the borrower. The FICO Scores set forth in the
tables above were obtained at either the time of origination of the Mortgage
Loan or more recently. None of the Originator, the Master Servicer, the Trustee,
the Underwriters or the Depositor make any representations or warranties as to
the actual performance of any Mortgage Loan or that a particular FICO Score
should be relied upon as a basis for an expectation that the borrower will repay
the Mortgage Loan according to its terms.
THE INDEX
The Index for each adjustable-rate Mortgage Loan will be set forth in
the related Mortgage Note. The "Index" is the average of interbank offered rates
for six-month U.S. dollar deposits in the London market based on quotations of
major banks, and most recently available as of a day specified in the related
mortgage note as published in the Western Edition of THE WALL STREET JOURNAL
("Six-Month LIBOR"). If the Index becomes unpublished or is otherwise
unavailable, the Master Servicer will select an alternative index which is based
upon comparable information.
UNDERWRITING STANDARDS
The Originator provided the information in the following paragraphs.
None of the Depositor, the Trustee, the Underwriters, or any of their respective
affiliates has made or will make any representations as to the accuracy or
completeness of such information. The following is a description of the
underwriting standards used by the Originator in connection with its acquisition
of the Mortgage Loans.
Substantially all of the Mortgage Loans were originated or acquired by
the Originator through its wholesale subsidiary, generally in accordance with
the underwriting criteria described below.
The Mortgage Loans were originated generally in accordance with
guidelines (the "Underwriting Guidelines") established by the Originator with
one of the following income documentation types: "Full Documentation," "Limited
Documentation" or "Stated Income." The Underwriting Guidelines are primarily
intended to evaluate the value and adequacy of the mortgaged property as
collateral and are also intended to consider the applicant's credit standing and
repayment ability. On a case-by-case basis, the Originator may determine that,
based upon compensating factors, a loan applicant, not strictly qualifying under
one of the Risk Categories described below, warrants an exception to the
requirements set forth in the Underwriting Guidelines. Compensating factors may
include, but are not limited to, loan-to- value ratio, debt-to-income ratio,
good credit history, stable employment history, length at current employment and
time in residence at the applicant's current address. It is expected that a
substantial number of the Mortgage Loans to be included in the Mortgage Pool
will represent such underwriting exceptions.
The Underwriting Guidelines are less stringent than the standards
generally acceptable to Fannie Mae and Freddie Mac with regard to the property
offered as collateral and the applicant's credit standing and repayment ability.
Applicants who qualify under the Underwriting Guidelines generally have payment
histories and debt ratios which would not satisfy Fannie Mae and Freddie Mac
underwriting guidelines and may have a record of major derogatory credit items
such as outstanding judgments or prior bankruptcies. The Underwriting Guidelines
establish the maximum permitted loan-to-value ratio for each loan type based
upon these and other risk factors.
S-34
All of the Mortgage Loans originated or acquired by the Originator are
based on loan application packages submitted directly or indirectly by a loan
applicant to the Originator. Each loan application package has an application
completed by the applicant that includes information with respect to the
applicant's liabilities, income, credit history and employment history, as well
as certain other personal information. The Originator also obtains (or the
broker submits) a credit report on each applicant from a credit reporting
company. The credit report typically contains the reported information relating
to such matters as credit history with local and national merchants and lenders,
installment debt payments and reported records of default, bankruptcy,
repossession and judgments. If applicable, the loan application package must
also generally include a letter from the applicant explaining all late payments
on mortgage debt and, generally, consumer (i.e. non-mortgage) debt.
During the underwriting process, the Originator reviews and verifies
the loan applicant's sources of income (except under the Stated Income and
Limited Income Documentation types, under which programs, such information may
not be independently verified), calculates the amount of income from all such
sources indicated on the loan application, reviews the credit history of the
applicant, calculates the debt-to-income ratio to determine the applicant's
ability to repay the loan, and reviews the mortgaged property for compliance
with the Underwriting Guidelines. The Underwriting Guidelines are applied in
accordance with a procedure which complies with applicable federal and state
laws and regulations and requires (i) an appraisal of the mortgaged property
which conforms to the Uniform Standards of Professional Appraisal Practice and
are generally on forms similar to those acceptable to Fannie Mae and Freddie Mac
and (ii) a review of such appraisal, which review may be conducted by a
representative of the Originator or a fee appraiser and, may include a desk
review of the original appraisal or a drive-by review appraisal of the mortgaged
property. The Underwriting Guidelines permit loans with loan-to-value ratios at
origination of up to 95%, subject to certain Risk Category limitations (as
further described in that section). The maximum allowable loan-to-value ratio
varies based upon the income documentation, property type, creditworthiness,
debt service-to-income ratio of the applicant and the overall risks associated
with the loan decision. Under the Underwriting Guidelines, the maximum loan-
to-value ratio, including any second deeds of trust subordinate to the
Originator's first deed of trust, is 100%.
A. INCOME DOCUMENTATION TYPES
FULL DOCUMENTATION. The Full Documentation residential loan program is
generally based upon current year to date income documentation as well as the
previous year's income documentation (i.e., tax returns and/or W-2 forms). The
documentation required is specific to the applicant's sources of income. The
applicant's employment and/or business licenses are generally verified.
LIMITED DOCUMENTATION. The Limited Documentation residential loan
program is generally based on bank statements from the past twelve months
supported by additional documentation provided by the applicant or current year
to date documentation. The applicant's employment and/or business licenses are
generally verified.
STATED INCOME. The Stated Income residential loan program requires the
applicant's employment and income sources to be stated on the application. The
applicant's income as stated must be reasonable for the related occupation in
the loan underwriter's discretion. However, the applicant's income as stated on
the application is not independently verified.
B. PROPERTY REQUIREMENTS
Properties that are to secure mortgage loans are appraised by qualified
independent appraisers who are in good standing with the Originator's in-house
appraisal department. Generally, properties below average standards in condition
and repair are not acceptable as security for mortgage loans under the
Underwriting Guidelines. Each appraisal includes a market data analysis based on
recent sales of comparable homes in the area and, where deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. Every independent appraisal is reviewed by a representative of the
Originator or a fee appraiser before the mortgage loan is funded. The Originator
requires that all mortgage loans have title insurance. The Originator also
requires that fire and extended coverage casualty insurance be maintained on the
property in an amount equal to the lesser of the principal balance of the
mortgage loan or the replacement cost of the property.
S-35
C. RISK CATEGORIES
Under the Underwriting Guidelines, various Risk Categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage loan. These Risk Categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in Risk Categories which permit higher
debt ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, the Underwriting
Guidelines establish lower maximum loan-to-value ratios and lower maximum loan
amounts for loans graded in such Risk Categories.
The Underwriting Guidelines have the following Risk Categories and
criteria for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
RISK CATEGORIES - WHOLESALE ORIGINATION
- ------------------------------------------------------------------------------------------------------------------------------------
I II III IV V VI
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage History no lates 1 x 30 3 x 30 1 x 60 1 x 90 > 1 x 90
(Last 12 Months)
Bankruptcy or none in last none in last none in last none in last not currently in current(1)
Foreclosure 36 months 36 months 24 months 12 months
FICO Score Maximum LTV(2)
680 95% 95% 95% 90% 80% 75%
650 95% 95% 90% 90% 80% 75%
620 95% 95% 90% 90% 80% 70%
600 95% 95% 90% 85% 80% 70%
580 90% 90% 90% 85% 75% 70%
550 90% 90% 90% 85% 75% 65%
525 85% 85% 85% 80% 75% 65%
500 80% 80% 80% 80% 65% 65%
Maximum Debt Ratio(3) 45% 45% 45% 50% 55% 55%
Other Credit(4) max $2,500 max $2,500 max $5,000
open major open major open major
derogatory derogatory derogatory
credit credit credit
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Maximum LTV for applicants currently in Bankruptcy or Foreclosure is
60%.
(2) The maximum LTV referenced is for borrowers providing full income
documentation. The LTV may be reduced up to 5% for each of the
following characteristics: limited income documentation, non-owner
occupancy and 2 unit properties. LTV may be reduced up to 10% for each
of the following characteristics: stated income documentation,
three-to-four unit properties, manufactured homes and rural locations.
(3) Debt ratios may be increased if the LTV ratio is decreased. LTV equal
to or less than 75% may have 55% debt ratio. LTV equal to or less than
90% may have up 50% debt ratio.
(4) Open major derogatory credit may be increased if the LTV ratio is
decreased. LTV equal to or less than 90% may have up to $5,000 open
major derogatory credit. LTV equal to or less than 90% may have greater
than $5,000 open derogatory credit.
S-36
YIELD ON THE CERTIFICATES
DELAY IN DISTRIBUTIONS ON THE CLASS M-4 CERTIFICATES
The effective yield to holders of the Class M-4 Certificates will be
less than the yields otherwise produced by their respective pass-through rates
and purchase prices because:
o on the first Distribution Date one month's interest is distributable
thereon even though more than 30 days will have elapsed from the date
on which interest begins to accrue thereon;
o on each succeeding Distribution Date, the interest distributable
thereon is the interest accrued during the month preceding the month of
such Distribution Date, which ends 24 days prior to such Distribution
Date; and
o during each Interest Accrual Period, other than the first Interest
Accrual Period, interest accrues on a Certificate Principal Balance
that may be less than the Certificate Principal Balance of such class
actually outstanding for the first 24 days of such Interest Accrual
Period.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to (but not including) the date of such prepayment,
instead of for a full month. When a partial principal prepayment is made on a
Mortgage Loan, the mortgagor is not charged interest on the amount of such
prepayment for the month in which such prepayment is made. With respect to any
Determination Date and each Mortgage Loan as to which a principal prepayment was
applied during the portion of the related Prepayment Period occurring in the
month preceding the month of such Determination Date, the "Prepayment Interest
Shortfall" is an amount equal to the interest at the applicable Mortgage Rate
(net of the Servicing Fee) on the amount of such principal prepayment for the
number of days from the day after the last date on which interest was collected
from the related mortgagor through the last day of such preceding calendar
month. In addition, the application of the Relief Act to any Mortgage Loan will
adversely affect, for an indeterminate period of time, the ability of the Master
Servicer to collect full amounts of interest on such Mortgage Loan. See "Legal
Aspects of Mortgage Assets Soldiers' and Sailors' Civil Relief Act of 1940" in
the Prospectus.
The Master Servicer is obligated to pay from its own funds only those
Prepayment Interest Shortfalls attributable to full and partial prepayments by
the mortgagors on the Mortgage Loans, but only to the extent of its aggregate
Servicing Fee for the related Due Period. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" herein.
Accordingly, the effect of (i) any Prepayment Interest Shortfall that exceeds
any payments made by the Master Servicer from its own funds ("Compensating
Interest") or (ii) any shortfalls resulting from the application of the Relief
Act, will be to reduce the aggregate amount of interest collected that is
available for distribution to certificateholders. Any such shortfalls will be
allocated among the Certificates as provided under "Description of the
Certificates--Interest Distributions on the Offered Certificates" and
"--Overcollateralization Provisions" herein. If these shortfalls are allocated
to the Offered Certificates the amount of interest paid to those certificates
will be reduced, adversely affecting the yield on your investment. The holders
of the Offered Certificates will not be entitled to reimbursement for any such
interest shortfalls.
GENERAL PREPAYMENT AND DEFAULT CONSIDERATIONS
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans. If a purchaser of an Offered Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity may be lower than that so calculated. In
general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity. There can be no assurance as to the delinquency, foreclosure
or loss experience with respect to the Mortgage Loans. Because the Mortgage
Loans were underwritten in accordance with standards less stringent than those
generally acceptable to Fannie Mae and Freddie Mac with regard to a borrower's
credit standing and repayment ability, the risk of delinquencies with respect
to, and losses on, the Mortgage Loans will be greater than that of mortgage
loans underwritten in accordance with Fannie Mae and Freddie Mac standards.
S-37
The rate of principal distributions on the Offered Certificates, the
aggregate amount of distributions on the Offered Certificates and the yield to
maturity of such Certificates will be related to the rate and timing of payments
of principal on the applicable Mortgage Loans. The rate of principal payments on
the Mortgage Loans will in turn be affected by the amortization schedules of the
adjustable-rate Mortgage Loans as they change from time to time to accommodate
changes in the Mortgage Rates and by the rate of principal prepayments thereon
(including for this purpose, payments resulting from refinancings, liquidations
of the Mortgage Loans due to defaults, casualties, condemnations and
repurchases, whether optional or required, by the Depositor, the Originator or
the Master Servicer, as the case may be). The Mortgage Loans generally may be
prepaid by the mortgagors at any time; however, as described under "The Mortgage
Pool" herein, with respect to approximately 83.49% of the Group I Mortgage Loans
and approximately 76.09% of the Group II Mortgage Loans, in each case by
aggregate principal balance of the related loan group as of the Cut-off Date, a
mortgagor principal prepayment may subject the related mortgagor to a prepayment
charge.
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions in respect of principal to the holders of the class or
classes of Offered Certificates then entitled to receive such distributions that
otherwise would be distributed over the remaining terms of the Mortgage Loans.
See "Yield and Maturity Considerations" in the Prospectus. Since the rates of
payment of principal on the Mortgage Loans will depend on future events and a
variety of factors (as described more fully herein and in the Prospectus under
"Yield and Maturity Considerations" ), no assurance can be given as to the rate
of principal prepayments on the Mortgage Loans. The extent to which the yield to
maturity of any class of Offered Certificates may vary from the anticipated
yield will depend, in the case of the Offered Certificates, upon the degree to
which such Certificates are purchased at a discount or premium and the degree to
which the timing of distributions thereon is sensitive to prepayments on the
Mortgage Loans. Further, an investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments could result in an actual yield to such
investor that is lower than the anticipated yield.
The rate of payments (including prepayments) on pools of mortgage loans
is influenced by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing decisions. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. The adjustable-rate Mortgage Loans may be
subject to greater rates of prepayment as they approach their initial Adjustment
Dates even if market interest rates are only slightly higher or lower than the
Mortgage Rates on the Mortgage Loans as borrowers seek to avoid changes in their
monthly payments. In addition, the existence of the applicable Periodic Rate
Cap, Maximum Mortgage Rate and Minimum Mortgage Rate on such Mortgage Loans may
affect the likelihood of prepayments resulting from refinancings. Moreover, the
Group I Mortgage Loans, which have principal balances that conform to Freddie
Mac and Fannie Mae principal balance limit guidelines, may experience prepayment
behavior that differs from that experienced by the Group II Mortgage Loans,
which have principal balances that may or may not conform to Freddie Mac and
Fannie Mae principal balance limit guidelines. There can be no certainty as to
the rate of prepayments on the Mortgage Loans during any period or over the life
of the Certificates. See "Yield and Maturity Considerations" in the Prospectus.
Because principal distributions are made to certain classes of Offered
Certificates before other such classes, holders of classes of Offered
Certificates having a later priority of payment bear a greater risk of losses
(because such Certificates will represent an increasing percentage interest in
the Trust during the period prior to the commencement of distributions of
principal thereon) than holders of classes having earlier priorities for
distribution of principal. As described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" herein, prior
to the Stepdown Date, all principal payments on the Mortgage Loans will be
allocated to the Class A Certificates. Thereafter, as further described herein,
during certain periods, subject to certain delinquency triggers described
herein, all principal payments on the Mortgage Loans will be allocated to the
Offered Certificates in the priorities described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement.
S-38
In general, defaults on mortgage loans may occur with greater frequency
in their early years. In addition, default rates may be higher for mortgage
loans used to refinance an existing mortgage loan. In the event of a mortgagor's
default on a Mortgage Loan, there can be no assurance that recourse will be
available beyond the specific Mortgaged Property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards" herein.
SPECIAL YIELD CONSIDERATIONS FOR THE CLASS A CERTIFICATES, THE CLASS M-1
CERTIFICATES, THE CLASS M-2 CERTIFICATES AND THE CLASS M-3 CERTIFICATES
The Mortgage Rates on the fixed-rate Mortgage Loans are fixed and will
not vary with any index and the Mortgage Rates on the adjustable-rate Mortgage
Loans adjust semi-annually based upon the Index after an initial period,
generally of approximately two years from origination, whereas the Pass-Through
Rates on the Offered Certificates (other than the Class M-4 Certificates) adjust
monthly based upon One-Month LIBOR as described under "Description of the
Certificates--Calculation of One-Month LIBOR" herein, subject to the related Net
WAC Pass-Through Rate. As a result, increases in the Pass-Through Rates on the
Offered Certificates (other than the Class M-4 Certificates) may be limited for
extended periods in a rising interest rate environment. Investors should note
that the Mortgage Rate on all of the adjustable-rate Mortgage Loans will not
adjust for an initial period of approximately two years after origination. The
interest due on the Mortgage Loans during any Due Period, net of the expenses of
the Trust, may not equal the amount of interest that would accrue at One-Month
LIBOR plus the applicable margin on the Offered Certificates (other than the
Class M-4 Certificates) during the related Interest Accrual Period. In addition,
the Index and One-Month LIBOR may respond differently to economic and market
factors. Thus, it is possible, for example, that if both One- Month LIBOR and
the Index rise during the same period, One-Month LIBOR may rise more rapidly
than the Index or may rise higher than the Index, potentially resulting in the
application of the Net WAC Pass-Through Rate on the Offered Certificates (other
than the Class M-4 Certificates), which would adversely affect the yield to
maturity on such Certificates. In addition, the Net WAC Pass-Through Rate will
be reduced by the prepayment of Mortgage Loans with high Mortgage Rates.
If the pass-through rate on any class of Offered Certificates is
limited by the Net WAC Pass-Through Rate for any Distribution Date, the
resulting basis risk shortfalls may be recovered by the holders of the Offered
Certificates on such Distribution Date or on future Distribution Dates, to the
extent that on such Distribution Date or future Distribution Dates there are any
available funds remaining after certain other distributions on the Offered
Certificates and the payment of certain fees and expenses of the Trust and in
the case of the Class A-2 Certificates, the Class M-1 Certificates and the Class
M-2 Certificates, to the extent of any payments under the cap contracts. The
ratings on the Offered Certificates do not address the likelihood of any such
recovery of basis risk shortfalls by holders of the Offered Certificates.
As described under "Description of the Certificates--Allocation of
Losses; Subordination", amounts otherwise distributable to holders of the
Mezzanine Certificates may be made available to protect the holders of the Class
A Certificates against interruptions in distributions due to certain mortgagor
delinquencies, to the extent not covered by Advances. Such delinquencies may
affect the yield to investors on the Mezzanine Certificates and, even if
subsequently cured, will affect the timing of the receipt of distributions by
the holders of the Mezzanine Certificates. In addition, the rate of
delinquencies or losses will affect the rate of principal payments on each class
of Mezzanine Certificates. See "Description of the Certificates--Principal
Distributions on the Offered Certificates" herein.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Offered Certificates will be influenced by the rate at which principal on the
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including repurchases by the Originator, the Depositor or the
Master Servicer and prepayments of principal by the borrower as well as amounts
received by virtue of condemnation, insurance or foreclosure with respect to the
Mortgage Loans), and the timing thereof.
S-39
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used with respect to the Mortgage Loans
(the "Prepayment Assumption") assumes:
(i) In the case of the fixed-rate Mortgage Loans, 100% of the
related Vector. In the case of the fixed-rate Mortgage Loans,
the related "Vector" means a constant prepayment rate ("CPR")
of 4% per annum of the then unpaid principal balance of such
Mortgage Loans in the first month of the life of such Mortgage
Loans and an additional approximately 1.7273% (precisely
19/11%) per annum in each month thereafter until the 12th
month, and then beginning in the 12th month and in each month
thereafter during the life of such Mortgage Loans, a CPR of
23% per annum.
(ii) In the case of the adjustable-rate Mortgage Loans, 27% CPR.
CPR is a prepayment assumption that represents a constant assumed rate
of prepayment each month relative to the then outstanding principal balance of a
pool of mortgage loans for the life of such mortgage loans. The model does not
purport to be either an historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of prepayment
of any mortgage loans, including the Mortgage Loans to be included in the Trust.
Each of the Prepayment Scenarios in the table below assumes the respective
percentages of CPR indicated for such scenario.
The tables entitled "Percent of Initial Certificate Principal Balance
Outstanding" were prepared on the basis of the following assumptions and the
table entitled "Assumed Mortgage Loan Characteristics." There are certain
differences between the loan characteristics included in such assumptions and
the characteristics of the actual Mortgage Loans. Any such discrepancy may have
an effect upon the percentages of initial Certificate Principal Balances
outstanding and weighted average lives of the Offered Certificates set forth in
the tables. In addition, since the actual Mortgage Loans in the Trust will have
characteristics that differ from those assumed in preparing the tables set forth
below, the distributions of principal of the Offered Certificates may be made
earlier or later than indicated in the table. The tables are based on the
following assumptions (the "Modeling Assumptions"):
(i) the Mortgage Loans have the characteristics set forth in the
table entitled "Assumed Mortgage Loan Characteristics";
(ii) distributions on the Offered Certificates are made on the 25th
day of each month, commencing in February 2003 and the
pass-through rates for the Offered Certificates are as set
forth herein;
(iii) the prepayment rates are the percentages of the respective
Prepayment Assumption set forth in the table entitled
"Prepayment Scenarios";
(iv) no defaults or delinquencies occur in the payment by
mortgagors of principal and interest on the Mortgage Loans and
no shortfalls in collection of interest are incurred;
(v) none of the Depositor, the Originator, the Master Servicer,
the NIMS Insurer, if any, or any other person purchases from
the Trust any Mortgage Loan pursuant to any obligation or
option under the Pooling and Servicing Agreement, except as
indicated in footnote three in the tables below;
(vi) scheduled monthly payments on the Mortgage Loans are received
on the first day of each month commencing in February 2003,
and are computed prior to giving effect to any prepayments
received in the prior month;
(vii) voluntary principal prepayments representing payment in full
of individual Mortgage Loans are received on the last day of
each month commencing in January 2003, and include 30 days'
interest thereon;
(viii) the scheduled monthly payment for each Mortgage Loan is
calculated based on its principal balance, Mortgage Rate and
remaining term to stated maturity such that the Mortgage Loan
will amortize in amounts sufficient to repay the remaining
principal balance of such Mortgage Loan by its remaining term
to maturity;
S-40
(ix) the Certificates are purchased on January 17, 2003;
(x) the Index remains constant at 1.4056% per annum and the
Mortgage Rate on each adjustable-rate Mortgage Loan is
adjusted on the next Adjustment Date (and on subsequent
Adjustment Dates if necessary) to equal the Index plus the
applicable Gross Margin, subject to the applicable Initial
Periodic Rate Cap, Periodic Rate Cap, Maximum Mortgage Rate
and Minimum Mortgage Rate;
(xi) One-Month LIBOR remains constant at 1.38% per annum;
(xii) the monthly payment on each adjustable-rate Mortgage Loan is
adjusted on the Due Date immediately following the next
Adjustment Date (and on subsequent Adjustment Dates if
necessary) to equal a fully amortizing monthly payment as
described in clause (viii) above;
(xiii) the Servicing Fee Rate is equal to 0.50% per annum and the
Trustee Fee Rate is equal to 0.0065% per annum; and the PMI
Insurer Fee Rate with respect to the Mortgage Loans covered by
the PMI Policy is the per annum rate set forth in the Pooling
and Servicing Agreement; and
(xiv) the Class P Certificates have an initial Certificate Principal
Balance of $0.
PREPAYMENT SCENARIOS(1)
I II III IV V VI
- -- --- -- - --
Fixed-rate Mortgage Loans: 0% 50% 75% 100% 150% 200%
Adjustable-rate Mortgage Loans: 0% 14% 21% 27% 42% 56%
_______________
(1) Percentages of Vector for the fixed-rate Mortgage Loans and percentages of
CPR for the adjustable-rate Mortgage Loans.
S-41
ASSUMED MORTGAGE LOAN CHARACTERISTICS
MONTHS TO MORTGAGE
ORIGINAL REMAINING MAXIMUM MINIMUM NEXT RATE INITIAL
GROSS TERM TO TERM TO GROSS MORTGAGE MORTGAGE ADJUSTMENT ADJUSTMENT PERIODIC PERIODIC
PRINCIPAL MORTGAGE MATURITY MATURITY MARGIN RATE RATE DATE FREQUENCY RATE CAP RATE CAP
DESCRIPTION BALANCE ($) RATE (%) (MONTHS) (MONTHS) (%) (%) (%) (MONTHS) (MONTHS) (%) (%)
- ----------- ----------- -------- -------- -------- --- --- --- -------- -------- --- ---
Group I Mortgage Loans:
190,5239.57 9.5768 180 178 N/A N/A N/A N/A N/A N/A N/A
343,8257.44 7.4484 240 240 N/A N/A N/A N/A N/A N/A N/A
6,346,87.90 7.9084 360 359 N/A N/A N/A N/A N/A N/A N/A
1,610,67.41 7.4163 180 179 N/A N/A N/A N/A N/A N/A N/A
628,1337.02 7.0272 240 239 N/A N/A N/A N/A N/A N/A N/A
31,563,7.51 7.5123 360 359 N/A N/A N/A N/A N/A N/A N/A
74,788.8.25 8.2500 180 179 6.5000 14.2500 8.2500 23 6 2.0000 1.0000
82,754.7.65 7.6500 240 237 6.5000 13.6500 7.6500 21 6 2.0000 1.0000
76,253,8.64 8.6489 360 359 6.4669 14.6489 8.6489 23 6 2.0000 1.0000
168,5877.99 7.9935 180 179 6.5000 13.9935 7.9935 23 6 2.0000 1.0000
553,3887.59 7.5976 240 239 6.5000 13.5976 7.5976 23 6 2.0000 1.0000
155,9897.91 7.9197 360 359 6.4822 13.9197 7.9197 23 6 2.0000 1.0000
Group II Mortgage Loans:
586,0557.29 7.2925 180 179 N/A N/A N/A N/A N/A N/A N/A
1,253,26.75 6.7543 240 240 N/A N/A N/A N/A N/A N/A N/A
21,930,7.64 7.6425 360 359 N/A N/A N/A N/A N/A N/A N/A
1,808,47.31 7.3194 180 179 N/A N/A N/A N/A N/A N/A N/A
1,462,97.76 7.7674 240 239 N/A N/A N/A N/A N/A N/A N/A
54,728,7.30 7.3033 360 359 N/A N/A N/A N/A N/A N/A N/A
26,526,7.83 7.8325 360 359 6.4503 13.8325 7.8325 23 6 2.0000 1.0000
17,902,7.24 7.2423 360 359 6.4314 13.2423 7.2423 23 6 2.0000 1.0000
_______________
* Indicates a Mortgage Loan covered by the PMI Policy.
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics included in the Modeling Assumptions. Any
such discrepancy may have an effect upon the percentages of the initial
Certificate Principal Balances outstanding (and the weighted average lives) of
the Offered Certificates set forth in the tables. In addition, since the actual
Mortgage Loans included in the Mortgage Pool will have characteristics that
differ from those assumed in preparing the tables set forth below and since it
is not likely the level of the Index or One-Month LIBOR will remain constant as
assumed, the Offered Certificates may mature earlier or later than indicated by
the table. As described under "Description of the Certificates--Principal
Distributions on the Offered Certificates" herein, the occurrence of the
Stepdown Date or a Trigger Event will have the effect of accelerating or
decelerating the amortization of the Offered Certificates and affecting the
weighted average lives of such Certificates. Neither the prepayment model used
herein nor any other prepayment model or assumption purports to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans included
in the Mortgage Pool. Variations in the prepayment experience and the balance of
the Mortgage Loans that prepay may increase or decrease the percentages of
initial Certificate Principal Balances (and weighted average lives) shown in the
following table. Such variations may occur even if the average prepayment
experience of all the Mortgage Loans equals any of the Prepayment Scenarios
shown in the immediately following tables.
S-42
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS A-1
PREPAYMENT SCENARIO
-------------------
DISTRIBUTION DATE I II III IV V VI
----------------- - -- --- -- - --
Initial Percentage.............. 100 100 100 100 100 100
January 25, 2004................ 99 84 77 70 54 39
January 25, 2005................ 98 70 57 47 26 10
January 25, 2006................ 97 58 42 30 9 0
January 25, 2007................ 96 47 33 24 9 0
January 25, 2008................ 94 39 26 18 6 0
January 25, 2009................ 93 33 21 13 4 0
January 25, 2010................ 91 28 16 9 2 0
January 25, 2011................ 89 24 13 7 1 0
January 25, 2012................ 87 20 10 5 * 0
January 25, 2013................ 85 17 8 4 * 0
January 25, 2014................ 83 15 6 3 0 0
January 25, 2015................ 81 12 5 2 0 0
January 25, 2016................ 78 10 4 1 0 0
January 25, 2017................ 75 9 3 1 0 0
January 25, 2018................ 72 7 2 * 0 0
January 25, 2019................ 69 6 2 * 0 0
January 25, 2020................ 66 5 1 0 0 0
January 25, 2021................ 62 4 1 0 0 0
January 25, 2022................ 58 3 * 0 0 0
January 25, 2023................ 54 3 * 0 0 0
January 25, 2024................ 49 2 0 0 0 0
January 25, 2025................ 44 2 0 0 0 0
January 25, 2026................ 39 1 0 0 0 0
January 25, 2027................ 35 1 0 0 0 0
January 25, 2028................ 30 1 0 0 0 0
January 25, 2029................ 25 * 0 0 0 0
January 25, 2030................ 19 0 0 0 0 0
January 25, 2031................ 13 0 0 0 0 0
January 25, 2032................ 7 0 0 0 0 0
January 25, 2033................ 0 0 0 0 0 0
Weighted Average Life (years) to
Maturity(2)..................... 19.46 5.58 3.81 2.90 1.65 0.99
Weighted Average Life (years) to
Optional Termination(2)(3)...... 19.41 5.23 3.53 2.68 1.52 0.99
_________________________
* Represents less than one-half of one percent but greater than zero percent.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-43
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS A-2
PREPAYMENT SCENARIO
-------------------
DISTRIBUTION DATE I II III IV V VI
----------------- - -- --- -- - --
Initial Percentage.............. 100 100 100 100 100 100
January 25, 2004................ 99 88 82 77 65 53
January 25, 2005................ 98 74 63 54 35 20
January 25, 2006................ 96 62 48 36 16 0
January 25, 2007................ 95 52 38 28 15 0
January 25, 2008................ 93 43 30 21 9 0
January 25, 2009................ 92 37 24 16 6 0
January 25, 2010................ 90 32 19 12 4 0
January 25, 2011................ 88 27 16 9 2 0
January 25, 2012................ 86 23 13 7 1 0
January 25, 2013................ 83 20 10 5 1 0
January 25, 2014................ 81 17 8 4 * 0
January 25, 2015................ 78 15 6 3 0 0
January 25, 2016................ 76 13 5 2 0 0
January 25, 2017................ 72 11 4 1 0 0
January 25, 2018................ 69 9 3 1 0 0
January 25, 2019................ 66 8 2 * 0 0
January 25, 2020................ 62 6 2 * 0 0
January 25, 2021................ 58 5 1 0 0 0
January 25, 2022................ 54 4 1 0 0 0
January 25, 2023................ 50 4 1 0 0 0
January 25, 2024................ 45 3 * 0 0 0
January 25, 2025................ 40 2 * 0 0 0
January 25, 2026................ 37 2 0 0 0 0
January 25, 2027................ 33 1 0 0 0 0
January 25, 2028................ 28 1 0 0 0 0
January 25, 2029................ 23 1 0 0 0 0
January 25, 2030................ 18 * 0 0 0 0
January 25, 2031................ 12 0 0 0 0 0
January 25, 2032................ 6 0 0 0 0 0
January 25, 2033................ 0 0 0 0 0 0
Weighted Average Life (years) to
Maturity(2)..................... 18.87 6.15 4.32 3.32 2.10 1.28
Weighted Average Life (years) to 18.82 5.69 3.93 3.01 1.88 1.28
Optional Termination(2)(3)......
_________________________
* Represents less than one-half of one percent but greater than zero percent.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-44
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS M-1
PREPAYMENT SCENARIO
-------------------
DISTRIBUTION DATE I II III IV V VI
----------------- - -- --- -- - --
Initial Percentage.............. 100 100 100 100 100 100
January 25, 2004................. 100 100 100 100 100 100
January 25, 2005................. 100 100 100 100 100 100
January 25, 2006................. 100 100 100 100 100 86
January 25, 2007................. 100 100 81 60 47 86
January 25, 2008................. 100 95 64 44 17 53
January 25, 2009................. 100 81 51 33 10 20
January 25, 2010................. 100 69 40 24 6 4
January 25, 2011................. 100 59 32 18 1 0
January 25, 2012................. 100 50 25 13 0 0
January 25, 2013................. 100 43 20 9 0 0
January 25, 2014................. 100 36 16 7 0 0
January 25, 2015................. 100 31 12 4 0 0
January 25, 2016................. 100 26 10 1 0 0
January 25, 2017................. 100 22 8 0 0 0
January 25, 2018................. 100 18 6 0 0 0
January 25, 2019................. 100 15 2 0 0 0
January 25, 2020................. 100 13 1 0 0 0
January 25, 2021................. 100 11 0 0 0 0
January 25, 2022................. 100 9 0 0 0 0
January 25, 2023................. 100 7 0 0 0 0
January 25, 2024................. 100 6 0 0 0 0
January 25, 2025................. 100 2 0 0 0 0
January 25, 2026................. 91 1 0 0 0 0
January 25, 2027................. 81 0 0 0 0 0
January 25, 2028................. 69 0 0 0 0 0
January 25, 2029................. 57 0 0 0 0 0
January 25, 2030................. 44 0 0 0 0 0
January 25, 2031................. 30 0 0 0 0 0
January 25, 2032................. 15 0 0 0 0 0
January 25, 2033................. 0 0 0 0 0 0
Weighted Average Life (years) to
Maturity(2)...................... 26.44 10.51 7.23 5.63 4.43 5.13
Weighted Average Life (years) to
Optional Termination(2)(3)....... 26.33 9.70 6.59 5.12 4.11 3.23
_________________________
* Represents less than one-half of one percent but greater than zero percent.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-45
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS M-2
PREPAYMENT SCENARIO
-------------------
DISTRIBUTION DATE I II III IV V VI
----------------- - -- --- -- - --
Initial Percentage.............. 100 100 100 100 100 100
January 25, 2004................ 100 100 100 100 100 100
January 25, 2005................ 100 100 100 100 100 100
January 25, 2006................ 100 100 100 100 100 100
January 25, 2007................ 100 100 81 60 28 40
January 25, 2008................ 100 95 64 44 17 0
January 25, 2009................ 100 81 51 33 10 0
January 25, 2010................ 100 69 40 24 1 0
January 25, 2011................ 100 59 32 18 0 0
January 25, 2012................ 100 50 25 13 0 0
January 25, 2013................ 100 43 20 9 0 0
January 25, 2014................ 100 36 16 3 0 0
January 25, 2015................ 100 31 12 0 0 0
January 25, 2016................ 100 26 10 0 0 0
January 25, 2017................ 100 22 4 0 0 0
January 25, 2018................ 100 18 * 0 0 0
January 25, 2019................ 100 15 0 0 0 0
January 25, 2020................ 100 13 0 0 0 0
January 25, 2021................ 100 11 0 0 0 0
January 25, 2022................ 100 8 0 0 0 0
January 25, 2023................ 100 4 0 0 0 0
January 25, 2024................ 100 * 0 0 0 0
January 25, 2025................ 100 0 0 0 0 0
January 25, 2026................ 91 0 0 0 0 0
January 25, 2027................ 81 0 0 0 0 0
January 25, 2028................ 69 0 0 0 0 0
January 25, 2029................ 57 0 0 0 0 0
January 25, 2030................ 44 0 0 0 0 0
January 25, 2031................ 30 0 0 0 0 0
January 25, 2032................ 15 0 0 0 0 0
January 25, 2033................ 0 0 0 0 0 0
Weighted Average Life (years) to
Maturity(2)..................... 26.43 10.38 7.12 5.51 4.08 4.01
Weighted Average Life (years) to
Optional Termination(2)(3)...... 26.33 9.70 6.59 5.10 3.82 3.27
_________________________
* Represents less than one-half of one percent but greater than zero percent.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-46
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS M-3
PREPAYMENT SCENARIO
-------------------
DISTRIBUTION DATE I II III IV V VI
----------------- - -- --- -- - --
Initial Percentage.............. 100 100 100 100 100 100
January 25, 2004................ 100 100 100 100 100 100
January 25, 2005................ 100 100 100 100 100 100
January 25, 2006................ 100 100 100 100 100 100
January 25, 2007................ 100 100 81 60 28 3
January 25, 2008................ 100 95 64 44 13 0
January 25, 2009................ 100 81 51 33 1 0
January 25, 2010................ 100 69 40 24 0 0
January 25, 2011................ 100 59 32 14 0 0
January 25, 2012................ 100 50 25 6 0 0
January 25, 2013................ 100 43 18 0 0 0
January 25, 2014................ 100 36 11 0 0 0
January 25, 2015................ 100 31 5 0 0 0
January 25, 2016................ 100 26 * 0 0 0
January 25, 2017................ 100 22 0 0 0 0
January 25, 2018................ 100 16 0 0 0 0
January 25, 2019................ 100 10 0 0 0 0
January 25, 2020................ 100 6 0 0 0 0
January 25, 2021................ 100 2 0 0 0 0
January 25, 2022................ 100 0 0 0 0 0
January 25, 2023................ 100 0 0 0 0 0
January 25, 2024................ 100 0 0 0 0 0
January 25, 2025................ 100 0 0 0 0 0
January 25, 2026................ 91 0 0 0 0 0
January 25, 2027................ 81 0 0 0 0 0
January 25, 2028................ 69 0 0 0 0 0
January 25, 2029................ 57 0 0 0 0 0
January 25, 2030................ 44 0 0 0 0 0
January 25, 2031................ 30 0 0 0 0 0
January 25, 2032................ 10 0 0 0 0 0
January 25, 2033................ 0 0 0 0 0 0
Weighted Average Life (years) to
Maturity(2)..................... 26.38 10.02 6.84 5.28 3.81 3.44
Weighted Average Life (years) to
Optional Termination(2)(3)...... 26.33 9.70 6.59 5.08 3.69 3.26
_________________________
* Represents less than one-half of one percent but greater than zero percent.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-47
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS M-4
PREPAYMENT SCENARIO
-------------------
DISTRIBUTION DATE I II III IV V VI
----------------- - -- --- -- - --
Initial Percentage.............. 100 100 100 100 100 100
January 25, 2004................ 100 100 100 100 100 100
January 25, 2005................ 100 100 100 100 100 100
January 25, 2006................ 100 100 100 100 100 100
January 25, 2007................ 100 100 81 60 16 0
January 25, 2008................ 100 95 64 44 0 0
January 25, 2009................ 100 81 51 31 0 0
January 25, 2010................ 100 69 40 5 0 0
January 25, 2011................ 100 59 29 0 0 0
January 25, 2012................ 100 50 9 0 0 0
January 25, 2013................ 100 43 0 0 0 0
January 25, 2014................ 100 36 0 0 0 0
January 25, 2015................ 100 26 0 0 0 0
January 25, 2016................ 100 11 0 0 0 0
January 25, 2017................ 100 0 0 0 0 0
January 25, 2018................ 100 0 0 0 0 0
January 25, 2019................ 100 0 0 0 0 0
January 25, 2020................ 100 0 0 0 0 0
January 25, 2021................ 100 0 0 0 0 0
January 25, 2022................ 100 0 0 0 0 0
January 25, 2023................ 100 0 0 0 0 0
January 25, 2024................ 100 0 0 0 0 0
January 25, 2025................ 100 0 0 0 0 0
January 25, 2026................ 91 0 0 0 0 0
January 25, 2027................ 81 0 0 0 0 0
January 25, 2028................ 69 0 0 0 0 0
January 25, 2029................ 57 0 0 0 0 0
January 25, 2030................ 44 0 0 0 0 0
January 25, 2031................ 24 0 0 0 0 0
January 25, 2032................ 0 0 0 0 0 0
January 25, 2033................ 0 0 0 0 0 0
Weighted Average Life (years) to
Maturity(2)..................... 26.21 9.29 6.30 4.86 3.50 3.14
Weighted Average Life (years) to
Optional Termination(2)(3)...... 26.21 9.29 6.30 4.86 3.50 3.14
_________________________
* Represents less than one-half of one percent but greater than zero percent.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-48
There is no assurance that prepayments of the Mortgage Loans will
conform to any of the levels of CPR reflected in the Prepayment Scenarios
indicated in the table above, or to any other level, or that the actual weighted
average lives of the Offered Certificates will conform to any of the weighted
average lives set forth in the table above. Furthermore, the information
contained in the table with respect to the weighted average lives of the Offered
Certificates is not necessarily indicative of the weighted average lives that
might be calculated or projected under different or varying prepayment, Index or
One-Month LIBOR level assumptions.
The characteristics of the Mortgage Loans will differ from those
assumed in preparing the table above. In addition, it is unlikely that any
Mortgage Loan will prepay at any constant percentage until maturity, that all of
the Mortgage Loans will prepay at the same rate or that the level of the Index
or One-Month LIBOR will remain constant or at any level for any period of time.
The timing of changes in the rate of prepayments may significantly affect the
actual yield to maturity to investors, even if the average rate of principal
prepayments and the level of the Index or One- Month LIBOR is consistent with
the expectations of investors.
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class CE Certificates and
each class of Mezzanine Certificates with a lower payment priority have been
reduced to zero, the yield to maturity on the remaining classes of Mezzanine
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of any Realized Losses (to the extent not covered by Net Monthly Excess
Cashflow), will be allocated to those Certificates. Investors in the Mezzanine
Certificates should fully consider the risk that Realized Losses on the Mortgage
Loans could result in the failure of such investors to fully recover their
investments. IN ADDITION, ONCE REALIZED LOSSES HAVE BEEN ALLOCATED TO A
MEZZANINE CERTIFICATE, SUCH AMOUNTS WITH RESPECT TO SUCH CERTIFICATE WILL NO
LONGER ACCRUE INTEREST, WILL NOT BE REINSTATED THEREAFTER AND NO AMOUNTS IN
RESPECT THEREOF WILL BE DISTRIBUTABLE TO THE HOLDERS OF THE MEZZANINE
CERTIFICATE.
Unless the Certificate Principal Balance of the Class A Certificates
has been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until the Stepdown Date or during any period in which a
Trigger Event is in effect. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a PRO RATA basis among the Offered
Certificates. As a result of the longer weighted average lives of the Mezzanine
Certificates, the holders of such Certificates have a greater risk of suffering
a loss on their investments. Further, because a Trigger Event may be based on
delinquencies, it is possible for the Mezzanine Certificates to receive no
principal distributions (unless the Certificate Principal Balance of the Class A
Certificates has been reduced to zero) on and after the Stepdown Date even if no
losses have occurred on the Mortgage Pool. For additional considerations
relating to the yield on the Mezzanine Certificates, see "Yield and Maturity
Considerations" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Ameriquest Mortgage Securities Inc., Asset-Backed Pass-Through
Certificates, Series 2003-AR1 (the "Certificates") will consist of nine classes
of certificates, designated as: (i) the Class A-1 Certificates and the Class A-2
Certificates (together, the "Class A Certificates), (ii) the Class M-1
Certificates, the Class M-2 Certificates, the Class M-3 Certificates and the
Class M-4 Certificates (the "Mezzanine Certificates"); (iii) the Class CE
Certificates (together with the Mezzanine Certificates, the "Subordinate
Certificates"), (iv) the Class P Certificates and (v) the Class R Certificates.
Only the Class A Certificates and the Mezzanine Certificates (together, the
"Offered Certificates") are offered hereby. The Class CE Certificates, the Class
P Certificates and the Class R Certificates, which are not being offered hereby,
will be delivered to the Originator as partial consideration for the Mortgage
Loans.
Distributions on the Offered Certificates will be made on the 25th day
of each month, or, if such day is not a business day, on the next succeeding
business day, beginning in February 2003 (each, a "Distribution Date").
The Certificates represent in the aggregate the entire beneficial
ownership interest in a trust (the "Trust") consisting primarily of the Mortgage
Pool as of the Closing Date. The Offered Certificates have an aggregate
principal balance as of the Cut-off Date of approximately $394,005,000.
S-49
Each class of Offered Certificates will have the approximate initial
Certificate Principal Balances set forth in the table under "Summary of
Prospectus Supplement--Offered Certificates" in this prospectus supplement. The
Pass- Through Rates on the Offered Certificates will be calculated for each
Distribution Date as described under "--Pass- Through Rates" below.
The Class A Certificates evidence an initial undivided interest of
approximately 87.00% in the Trust. The Class M-1 Certificates, the Class M-2
Certificates, the Class M-3 Certificates and the Class M-4 Certificates evidence
initial undivided interests of approximately 4.25%, approximately 3.50%,
approximately 3.00% and approximately 0.75%, respectively, in the Trust, and the
Class CE Certificates evidence an initial undivided interest of approximately
1.50% in the Trust.
The Offered Certificates will be issued, maintained and transferred on
the book-entry records of the Depository Trust Company ("DTC") and its
participants in minimum denominations of $25,000 and integral multiples of $1.00
in excess thereof. If the use of book-entry facilities for the Offered
Certificates is terminated, which may occur under the limited circumstances
described under "--Book- Entry Certificates" in this prospectus supplement, then
any definitive certificates issued in respect of the Offered Certificates will
be transferable and exchangeable at the offices of the Trustee designated for
such purposes. No service charge will be imposed for any registration of
transfer or exchange, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
All distributions to holders of the Certificates will be made by the
Trustee to the persons in whose names such Certificates are registered at the
close of business on each Record Date, which will be DTC or its nominee unless
definitive certificates are issued. The "Record Date" for each Distribution Date
(i) with respect to any book-entry certificate (other than the Class M-4
Certificates) will be the close of business on the business day immediately
preceding such Distribution Date or (ii) with respect to the Class M-4
Certificates and with respect to any definitive certificates, will be the close
of business on the last business day of the month preceding the month in which
such Distribution Date occurs or in the case of the first Distribution Date, the
Closing Date. Such distributions will be made by wire transfer in immediately
available funds to the account of each certificateholder specified in writing to
the Trustee at least five business days prior to the relevant Record Date by
such holder of Certificates or, if such instructions are not received, then by
check mailed to the address of each such certificateholder as it appears in the
Certificate Register. The final distribution on any class of Certificates will
be made in like manner, but only upon presentment and surrender of such
Certificates at the offices of the Trustee designated for such purposes or such
other location specified in the notice to certificateholders of such final
distribution. As of the Closing Date, the Trustee designates the office of its
agent located at c/o DTC Transfer Agent Services, 55 Water Street, Jeanette Park
Entrance, New York, New York 10041 for such purposes.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry certificates. Persons
acquiring beneficial ownership interests in the Offered Certificates, or
certificate owners, will hold the certificates through The Depository Trust
Company or DTC in the United States, or Clearstream Banking Luxembourg, or
Clearstream, formerly known as Cedelbank SA, or Euroclear in Europe, if they are
participants of these systems, or indirectly through organizations which are
participants in these systems. The book-entry certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
the certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. Clearstream and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in Clearstream's
and Euroclear's names on the books of their respective depositories which in
turn will hold positions in customers' securities accounts in the depositories'
names on the books of DTC. Citibank will act as depositary for Clearstream and
JPMorgan Chase Bank will act as depositary for Euroclear. Citibank and JPMorgan
Chase Bank will be referred to individually in this prospectus supplement as the
"Relevant Depositary" and will be referred to collectively in this prospectus
supplement as the "European Depositories". Except as described in this section,
no person acquiring a book-entry certificate will be entitled to receive a
physical or definitive certificate representing that certificate. Unless and
until definitive certificates are issued, it is anticipated that the only
"certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate owners will not be certificateholders as that term is used
in the Pooling and Servicing Agreement. Certificate owners are only permitted to
exercise their rights indirectly through participants and DTC.
S-50
The certificate owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the certificate owner's account for that
purpose. In turn, the financial intermediary's ownership of the book-entry
certificate will be recorded on the records of DTC or of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the certificate owner's financial
intermediary is not a DTC participant and on the records of Clearstream or
Euroclear, as appropriate.
Certificate owners will receive all distributions of principal of and
interest on the book-entry certificates from the Trustee through DTC and DTC
participants. While the book-entry certificates are outstanding, under the
rules, regulations and procedures creating and affecting DTC and its operations,
DTC is required to make book-entry transfers among participants on whose behalf
it acts with respect to the book-entry certificates and is required to receive
and transmit distributions of principal of, and interest on, the book-entry
certificates. Participants and indirect participants with whom certificate
owners have accounts with respect to book-entry certificates are similarly
required to make book- entry transfers and receive and transmit distributions on
behalf of their respective certificate owners. Accordingly, although certificate
owners will not possess certificates representing their respective interests in
the book-entry certificates, the DTC rules provide a mechanism by which
certificate owners will receive distributions and will be able to transfer their
interest.
Certificate owners will not receive or be entitled to receive
certificates representing their respective interests in the book-entry
certificates, except under the limited circumstances described under this
section. Unless and until definitive certificates are issued, certificateholders
who are not participants may transfer ownership of book-entry certificates only
through participants and indirect participants by instructing these participants
and indirect participants to transfer book-entry certificates, by book-entry
transfer, through DTC for the account of the purchasers of the book- entry
certificates, which account is maintained with their respective participants.
Under the DTC rules and in accordance with DTC's normal procedures, transfers of
ownership of book-entry certificates will be executed through DTC and the
accounts of the respective participants at DTC will be debited and credited.
Similarly, the participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing certificateholders.
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. These credits or any transactions in
these securities settled during this processing will be reported to the relevant
Euroclear or Clearstream participants on the business day following the DTC
settlement date. Cash received in Clearstream or Euroclear as a result of sales
of securities by or through a Clearstream participant or Euroclear participant
to a DTC participant will be received with value on the DTC settlement date but
will be available in the relevant Clearstream or Euroclear cash account only as
of the business day following settlement in DTC. For information with respect to
tax documentation procedures relating to the certificates, see "Federal Income
Tax Considerations--REMICs--Backup Withholding With Respect to REMIC
Certificates" and "--Foreign Investors in REMIC Certificates" in the prospectus
and "Global Clearance and Settlement and Tax Documentation Procedures--Certain
U.S. Federal Income Tax Documentation Requirements" in Annex I of this
prospectus supplement. Transfers between 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, these types of cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines, based on
European time. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream participants and Euroclear participants may not deliver
instructions directly to the European Depositories.
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DTC which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which directly or indirectly own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book- entry certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry certificates will be subject to the DTC
rules, as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and therefore is
subject to regulation by the Institute Monetaire Luxembourgeois or "IML", the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers, which are referred to
in this prospectus supplements as Clearstream participants, and facilitates the
clearance and settlement of securities transactions by electronic book-entry
transfers between their accounts. Clearstream provides various services,
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in several countries
through established depository and custodial relationships. Clearstream has
established an electronic bridge with Euroclear Bank SA/NV as the Euroclear
operator in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
The Euroclear system was created in 1968 to hold securities for its
participants which are referred to in this prospectus supplement as Euroclear
participants and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 29 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by Euroclear Bank SA/NV, which is referred to in this prospectus
supplement as the Euroclear operator, under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation, or simply, the Cooperative. All
operations are conducted by the Euroclear operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
operator, not the Cooperative. The Cooperative establishes policy for Euroclear
on behalf of Euroclear participants. Euroclear participants include banks,
central banks, securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related operating procedures of the Euroclear system and applicable Belgian
law, which are referred to in this prospectus supplement as the "terms and
conditions". The terms and conditions govern transfers of securities and cash
within Euroclear, withdrawals of securities and cash from Euroclear, and
receipts of payments with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear operator
acts under the terms and conditions only on behalf of Euroclear participants,
and has no record of or relationship with persons holding through Euroclear
participants.
Distributions on the book-entry certificates will be made on each
distribution date by the Trustee to DTC. DTC will be responsible for crediting
the amount of these payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing these payments to the certificate owners that it
represents and to each financial intermediary for which it acts as agent. Each
financial
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intermediary will be responsible for disbursing funds to the certificate owners
of the book-entry certificates that it represents.
Under a book-entry format, certificate owners of the book-entry
certificates may experience some delay in their receipt of payments, since these
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. These distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Considerations--REMICs Backup Withholding With Respect
to REMIC Certificates" and "--Foreign Investors in REMIC Certificates" in the
prospectus. Because DTC can only act on behalf of financial intermediaries, the
ability of a certificate owner to pledge book-entry certificates to persons or
entities that do not participate in the depository system, or otherwise take
actions in respect of the book-entry certificates, may be limited due to the
lack of physical certificates for the book-entry certificates. In addition,
issuance of the book-entry certificates in book-entry form may reduce the
liquidity of the certificates in the secondary market since potential investors
may be unwilling to purchase certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to certificate owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the depository, and to the financial intermediaries to whose DTC
accounts the book-entry certificates of the certificate owners are credited.
DTC has advised the Depositor that, unless and until definitive
certificates are issued, DTC will take any action permitted to be taken by the
holders of the book-entry certificates under the Pooling and Servicing Agreement
only at the direction of one or more financial intermediaries to whose DTC
accounts the book-entry certificates are credited, to the extent that actions
are taken on behalf of financial intermediaries whose holdings include the
book-entry certificates. Clearstream or the Euroclear operator, as the case may
be, will take any other action permitted to be taken by a certificateholder
under the Pooling 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
actions on its behalf through DTC. DTC may take actions, at the direction of the
related participants, with respect to some book-entry certificates which
conflict with actions taken with respect to other book-entry certificates.
Definitive certificates will be issued to certificate owners, or their
nominees, rather than to DTC, only if:
o DTC or the Depositor advises the Trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the book-
entry certificates and the Depositor or the Trustee is unable to locate
a qualified successor;
o the Depositor, at its sole option, with the consent of the Trustee,
elects to terminate a book-entry system through DTC or
o after the occurrence of an event of default, certificate owners having
percentage interests aggregating not less than 51% of the book-entry
certificates advise the Trustee and DTC through the financial
intermediaries and the DTC participants in writing that the
continuation of a book-entry system through DTC, or a successor to DTC,
is no longer in the best interests of certificate owners.
Upon the occurrence of any of the events described above, the Trustee
will be required to notify all certificate owners of the occurrence of the event
and the availability through DTC of definitive certificates. Upon surrender by
DTC of the global certificate or certificates representing the book-entry
certificates and instructions for re-registration, the Trustee will issue
definitive certificates, and thereafter the Trustee will recognize the holders
of the definitive certificates as certificateholders under the Pooling and
Servicing Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of book-entry certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform these procedures and these procedures may be
discontinued at any time.
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None of the Depositor, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
PASS-THROUGH RATES
The Pass-Through Rate on any Distribution Date with respect to the
Offered Certificates (other than the Class M-4 Certificates) will equal the
lesser of (a) the related Formula Rate and (b) the related Net WAC Pass-Through
Rate for such class for such Distribution Date. Interest in respect of any
Distribution Date will accrue during the related Interest Accrual Period on the
basis of a 360-day year and the actual number of days elapsed.
The Pass-Through Rate on any Distribution Date with respect to the
Class M-4 Certificates will equal the lesser of (a) 6.00% per annum in the case
of each Distribution Date through and including the first Distribution Date on
which the aggregate principal balance of the Mortgage Loans (and the properties
acquired in respect thereof) remaining in the Trust is reduced to an amount less
than 10% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date, or 6.50% per annum, in the case of any Distribution Date
thereafter and (b) the related Net WAC Pass-Through Rate for such class for such
Distribution Date. With respect to each class of Class M-4 Certificates,
interest in respect of any Distribution Date will accrue during the related
Interest Accrual Period on the basis of a 360-day year consisting of twelve
30-day months.
The "Formula Rate" for the Class A-1 Certificates and the Mezzanine
Certificates (other than the Class M-4 Certificates) is the lesser of (a)
One-Month LIBOR determined as described under "--Calculation of One-Month LIBOR"
in this prospectus supplement plus the Certificate Margin and (b) the Maximum
Cap Rate.
The "Formula Rate" for the Class A-2 Certificates is the lesser of (a)
One-Month LIBOR determined as described under "--Calculation of One-Month LIBOR"
in this prospectus supplement plus the Certificate Margin and (b) beginning on
the Distribution Date in January 2006, the Maximum Cap Rate.
The Certificate Margin on the Class A-1 Certificates will be 0.49% in
the case of each Distribution Date through and including the first Distribution
Date on which the aggregate principal balance of the Mortgage Loans (and
properties acquired in respect thereof) remaining in the Trust is reduced to an
amount less than 10% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date, or 0.98%, in the case of any Distribution Date thereafter.
The Certificate Margin on the Class A-2 Certificates will be 0.49% in
the case of each Distribution Date through and including the first Distribution
Date on which the aggregate principal balance of the Mortgage Loans (and
properties acquired in respect thereof) remaining in the Trust is reduced to an
amount less than 10% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date, or 0.98%, in the case of any Distribution Date thereafter.
The Certificate Margin on the Class M-1 Certificates will be 1.15% in
the case of each Distribution Date through and including the first Distribution
Date on which the aggregate principal balance of the Mortgage Loans (and
properties acquired in respect thereof) remaining in the Trust is reduced to an
amount less than 10% of the sum of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, or 1.725%, in the case of any
Distribution Date thereafter.
The Certificate Margin on the Class M-2 Certificates will be 2.10% in
the case of each Distribution Date through and including the first Distribution
Date on which the aggregate principal balance of the Mortgage Loans (and
properties acquired in respect thereof) remaining in the Trust is reduced to an
amount less than 10% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date, or 3.15%, in the case of any Distribution Date thereafter.
The Certificate Margin on the Class M-3 Certificates will be 3.00% in
the case of each Distribution Date through and including the first Distribution
Date on which the aggregate principal balance of the Mortgage Loans (and
properties acquired in respect thereof) remaining in the Trust is reduced to an
amount less than 10% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date, or 4.50%, in the case of any Distribution Date thereafter.
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The "Net WAC Pass-Through Rate" for any Distribution Date and the
Offered Certificates will be a per annum rate, subject to adjustment, in the
case of the Offered Certificates (other than the Class M-4 Certificates), based
on the actual number of days elapsed in the related Interest Accrual Period,
equal to (i) in the case of the Class A-1 Certificates, the weighted average of
the Expense Adjusted Net Mortgage Rates of the Group I Mortgage Loans, (ii) in
the case of the Class A-2 Certificates, the weighted average of the Expense
Adjusted Net Mortgage Rates of the Group II Mortgage Loans and (iii) in the case
of each class of Mezzanine Certificates, the weighted average of the Expense
Adjusted Net Mortgage Rates of all of the Mortgage Loans.
The "Expense Adjusted Net Mortgage Rate" for any Mortgage Loan for any
Distribution Date will be a per annum rate equal to the applicable Mortgage Rate
for such Mortgage Loan as of the first day of the month preceding the month in
which such Distribution Date occurs minus the sum of (i) the Trustee Fee Rate,
(ii) the Servicing Fee Rate and (iii) the PMI Insurer Fee Rate, if applicable.
The "Maximum Cap Rate" for any Distribution Date and the Offered
Certificates is a per annum rate, subject to adjustment, in the case of the
Offered Certificates (other than the Class M-4 Certificates), based on the
actual number of days elapsed in the related Interest Accrual Period, equal to
the weighted average of the Expense Adjusted Net Maximum Mortgage Rates of the
Mortgage Loans.
The "Expense Adjusted Net Maximum Mortgage Rate" for any Mortgage Loan
for any Distribution Date will be a per annum rate equal to the applicable
Maximum Mortgage Rate (or the Mortgage Rate for such Mortgage Loan in the case
of any fixed-rate Mortgage Loans) as of the first day of the month preceding the
month in which the Distribution Date occurs minus the sum of (i) the Trustee Fee
Rate, (ii) the Servicing Fee Rate and (iii) the PMI Insurer Fee Rate, if
applicable.
If on any Distribution Date, the Pass-Through Rate for any class of
Offered Certificates is the related Net WAC Pass-Through Rate, then the "Net WAC
Rate Carryover Amount" for such class for such Distribution Date is an amount
equal to the sum of (i) the excess of (x) the amount of interest such class of
Certificates would have accrued for such Distribution Date had such Pass-Through
Rate been the applicable Formula Rate (in the case of the Offered Certificates
(other than the Class M-4 Certificates)) or the related fixed rate (in the case
of the Class M-4 Certificates), over (y) the amount of interest such class of
Certificates accrued for such Distribution Date at the related Net WAC
Pass-Through Rate and (ii) the unpaid portion of any related Net WAC Rate
Carryover Amount from the prior Distribution Date together with interest accrued
on such unpaid portion for the most recently ended Interest Accrual Period at
the applicable Formula Rate (in the case of the Offered Certificates (other than
the Class M-4 Certificates)) or the related fixed rate (in the case of the Class
M-4 Certificates) for such class for such Interest Accrual Period. Any Net WAC
Rate Carryover Amount on any class of Offered Certificates will be distributed
on such Distribution Date or future Distribution Dates from and to the extent of
funds available therefor in accordance with the priorities described in under
"--Overcollateralization Provisions" in this prospectus supplement.
On the Closing Date, the Trustee will establish a segregated trust
account (the "Net WAC Rate Carryover Reserve Account") from which distributions
in respect of Net WAC Rate Carryover Amounts on the Offered Certificates will be
made. The Net WAC Rate Carryover Reserve Account will be an asset of the Trust
but not of any REMIC. Amounts in the Net WAC Rate Carryover Reserve Account,
with respect to the Class A-2 Certificates, the Class M-1 Certificates and the
Class M-2 Certificates will be supplemented by any amount received by the
Trustee under the cap contracts pursuant to which the counterparty thereunder
will be obligated to make payments when one-month LIBOR for any period exceeds
the related percentage set forth in the cap contracts, subject to a maximum
rate, and which payments will be received by the Trustee for the benefit of the
holders of the Class A-2 Certificates, the Class M-1 Certificates and the Class
M-2 Certificates.
On each Distribution Date, to the extent required following the
distribution of the Available Funds as described under
"--Distributions--General" in this prospectus supplement, the Trustee will
withdraw from amounts in the Net WAC Rate Carryover Reserve Account to
distribute to the Offered Certificates any Net WAC Rate Carryover Amounts in the
following order of priority, in each case to the extent of amounts remaining in
the Net WAC Rate Carryover Reserve Account:
first, to the Class A-1 Certificates and the Class A-2 Certificates,
PRO RATA, based on the respective Net WAC Rate Carryover Amounts for such
classes of Certificates, until each such amount has been paid in full, first,
with respect
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to the Class A-2 Certificates, from payments made under the related cap contract
and second, from amounts on deposit in the Net WAC Rate Carryover Reserve
Account, but only to the extent of amounts on deposit in the Net WAC Rate
Carryover Reserve Account other than amounts paid under the cap contracts;
second, to the Class M-1 Certificates, first, from payments made under
the related cap contract and second, from amounts on deposit in the Net WAC Rate
Carryover Reserve Account other than amounts paid under the cap contracts;
third, to the Class M-2 Certificates; first, from payments made under
the related cap contract and second, from amounts on deposit in the Net WAC Rate
Carryover Reserve Account other than amounts paid under the cap contracts;
fourth, to the Class M-3 Certificate, but only to the extent of amounts
on deposit in the Net WAC Rate Carryover Reserve Account other than amounts paid
under the cap contracts; and
fifth, to the Class M-4 Certificates, but only to the extent of amounts
on deposit in the Net WAC Rate Carryover Reserve Account other than amounts paid
under the cap contracts.
The Pass-Through Rate on the Offered Certificates for the Interest
Accrual Period beginning on a Distribution Date, to the extent it has been
determined, and for the immediately preceding Interest Accrual Period will be
made available via the Trustee's internet website, together with the monthly
statements required by the Pooling and Servicing Agreement. The Trustee's
internet website will initially be located at https:\\www.corporatetrust.db.com
and assistance in using the website can be obtained by calling the Trustee's
investor relations desk at 1-800-735-7777. Parties that are unable to use the
above distribution method are entitled to have a paper copy mailed to them via
first class mail by calling the investor relations desk and indicating such.
THE CAP CONTRACTS
Each of the Class A-2 Certificates, the Class M-1 Certificates and the
Class M-2 Certificates, will have the benefit of a cap contract. Pursuant to
each cap contract, Swiss Re Financial Products Corporation (together with any
successor, the "Counterparty") will agree to pay to the Trust a monthly payment
in an amount equal to: (a) in the case of the Class A-2 Certificates, the
product of: (1) (x) for the Distribution Date in February 2003 through and
including the Distribution Date in December 2004, the excess, if any, of LIBOR
over 5.80% or (y) for the Distribution Date in January 2005 through and
including the Distribution Date in December 2005, the excess, if any, of LIBOR
over 6.40%; (2) the notional amount for such Interest Accrual Period set forth
in the related cap contract; and (3) a fraction, the numerator of which is the
actual number of days elapsed from the previous Distribution Date to but
excluding the current Distribution Date (or, for the first Distribution Date,
the actual number of days elapsed from the Closing Date to but excluding the
first Distribution Date), and the denominator of which is 360; (b) in the case
of the Class M-1 Certificates, the product of: (1) for the Distribution Date in
February 2003 through the Distribution Date in December 2004, the excess, if
any, of LIBOR over 4.85%, up to a maximum LIBOR of 7.40%; (2) the notional
amount for such Interest Accrual Period set forth in the related cap contract;
and (3) a fraction, the numerator of which is the actual number of days elapsed
from the previous Distribution Date to but excluding the current Distribution
Date (or, for the first Distribution Date, the actual number of days elapsed
from the Closing Date to but excluding the first Distribution Date), and the
denominator of which is 360 or (c) in the case of the M-2 Certificates, the
product of: (1) for the Distribution Date in February 2003 through the
Distribution Date in December 2004, the excess, if any, of LIBOR over 3.85%, up
to a maximum LIBOR of 7.40%; (2) the notional amount for such Interest Accrual
Period set forth in the related cap contract; and (3) a fraction, the numerator
of which is the actual number of days elapsed from the previous Distribution
Date to but excluding the current Distribution Date (or, for the first
Distribution Date, the actual number of days elapsed from the Closing Date to
but excluding the first Distribution Date), and the denominator of which is 360.
The notional amount for the cap contract relating to the Class A-2 Certificates
declines in accordance with a schedule set forth in the related cap contract.
The notional amount for the cap contracts relating to the Class M-1 Certificates
and the Class M-2 Certificates will be fixed for the life of the related cap
contract. The cap contract relating to the Class A-2 Certificates will terminate
after the Distribution Date in December 2005 and the cap contracts relating to
the Class M-1 Certificates and the Class M-2 Certificates will terminate after
the Distribution Date in December 2004.
The Counterparty is a Delaware corporation and an indirect, wholly
owned subsidiary of Swiss Reinsurance Company ("Swiss Re"), a Swiss corporation.
The Counterparty currently has a long-term counterparty credit rating of "AA+"
from S&P. The obligations of the Counterparty under the cap contracts are fully
and unconditionally guaranteed
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by Swiss Re. Swiss Re currently has an insurance financial strength rating of
"AA+ (stable)" and a short-term rating of "A-1+" from S&P and an insurance
financial strength rating of "AA1 (stable)" and a short-term rating of "Prime-1"
from Moody's. Except for the information provided in this paragraph, the
Counterparty and Swiss Re have not been involved in the preparation of, and do
not accept responsibility for, this prospectus supplement or the accompanying
prospectus.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period (other than the first
Interest Accrual Period) and the Offered Certificates (other than the Class M-4
Certificates), on the second business day preceding such Interest Accrual
Period, (each such date, an "Interest Determination Date"), the Trustee will
determine One-Month LIBOR for the next Interest Accrual Period. With respect to
the first Interest Accrual Period, on the Closing Date, the Trustee will
determine One- Month LIBOR for such Interest Accrual Period based on the
information available on the second business day preceding the Closing Date.
"One-Month LIBOR" means, as of any Interest Determination Date, the London
interbank offered rate for one-month U.S. dollar deposits which appears on
Telerate Page 3750 (as defined herein) as of 11:00 a.m. (London time) on such
date. If such rate does not appear on Telerate Page 3750, the rate for that day
will be determined on the basis of the offered rates of the Reference Banks for
one-month U.S. dollar deposits, as of 11:00 a.m. (London time) on such Interest
Determination Date. The Trustee will request the principal London office of each
of the Reference Banks to provide a quotation of its rate. If on such Interest
Determination Date two or more Reference Banks provide such offered quotations,
One-Month LIBOR for the related Interest Accrual Period will be the arithmetic
mean of such offered quotations (rounded upwards if necessary to the nearest
whole multiple of 0.0625%). If on such Interest Determination Date fewer than
two Reference Banks provide such offered quotations, One-Month LIBOR for the
related Interest Accrual Period will be the higher of (x) One-Month LIBOR as
determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate.
As used in this section, "business day" means a day on which banks are
open for dealing in foreign currency and exchange in London and New York City;
"Telerate Page 3750" means the display page currently so designated on the Dow
Jones Telerate Capital Markets Report (or such other page as may replace that
page on that service for the purpose of displaying comparable rates or prices);
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) which have been designated
as such by the Trustee and (iii) not controlling, controlled by, or under common
control with, the Depositor or the Originator; and "Reserve Interest Rate" will
be the rate per annum that the Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole multiple of
0.0625%) of the one-month U.S. dollar lending rates which New York City banks
selected by the Trustee (after consultation with the Depositor) are quoting on
the relevant Interest Determination Date to the principal London offices of
leading banks in the London interbank market or, (ii) in the event that the
Trustee can determine no such arithmetic mean, the lowest one-month U.S. dollar
lending rate which New York City banks selected by the Trustee (after
consultation with the Depositor) are quoting on such Interest Determination Date
to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Offered Certificates for the related Interest Accrual Period
will (in the absence of manifest error) be final and binding.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
Holders of the Offered Certificates will be entitled to receive on each
Distribution Date, interest distributions in an aggregate amount equal to
interest accrued during the related Interest Accrual Period on the Certificate
Principal Balances thereof at the then-applicable Pass-Through Rates thereon, in
the priorities set forth below.
I. On each Distribution Date, the Group I Interest Remittance Amount
will be distributed in the following order of priority:
(i) to the holders of the Class A-1 Certificates, the Senior Interest
Distribution Amount allocable to such class; and
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(ii) to the holders of the Class A-2 Certificates, the Senior Interest
Distribution Amount for such class, to the extent remaining unpaid
after the distribution of the Group II Interest Remittance Amount as
set forth in II below.
II. On each Distribution Date, the Group II Interest Remittance Amount
will be distributed in the following order of priority:
(i) to the holders of the Class A-2 Certificates, the Senior Interest
Distribution Amount allocable to such class; and
(ii) to the holders of the Class A-1 Certificates, the Senior Interest
Distribution Amount for such class, to the extent remaining unpaid
after the distribution of the Group I Interest Remittance Amount as set
forth in I above.
III. On each Distribution Date, following the distributions of interest
to the holders of the Class A Certificates, any Group I Interest Remittance
Amount and any Group II Interest Remittance Amount remaining will be distributed
in the following order of priority:
(i) to the holders of the Class M-1 Certificates, the Interest
Distribution Amount allocable to such Certificates;
(ii) to the holders of the Class M-2 Certificates, the Interest
Distribution Amount allocable to such Certificates;
(iii) to the holders of the Class M-3 Certificates, the Interest
Distribution Amount allocable to such Certificates; and
(iv) to the holders of the Class M-4 Certificates, the Interest
Distribution Amount allocable to such Certificates.
Solely for federal income tax purposes, the Interest Distribution
Amount for the Class A Certificates will be inclusive of amounts, if any, in
respect of the Excess Group Net WAC Pass-Through Rate Amount and net of amounts,
if any, in respect of the Excess Pool Net WAC Pass-Through Rate Amount, in each
case distributable from or to a reserve account (the "Excess Net WAC Rate
Reserve Account").
On any Distribution Date, any shortfalls resulting from application of
the Relief Act and any Prepayment Interest Shortfalls to the extent not covered
by Compensating Interest paid by the Master Servicer will be allocated first, to
the interest distribution amount with respect to the Class CE Certificates, and
thereafter, to the Interest Distribution Amounts with respect to the Offered
Certificates on a PRO RATA basis based on the respective amounts of interest
accrued on such Certificates for such Distribution Date. The holders of the
Offered Certificates will not be entitled to reimbursement for any such interest
shortfalls.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
I. On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the Group I Principal Distribution Amount will be made in the
following amounts and order of priority:
(i) to the holders of the Class A-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; and
(ii) to the holders of the Class A-2 Certificates, after taking into
account the distribution of the Group II Principal Distribution Amount
as described herein, until the Certificate Principal Balance of the
Class A-2 Certificates has been reduced to zero.
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II. On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the Group II Principal Distribution Amount will be made in the
following amounts and order of priority:
(i) to the holders of the Class A-2 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; and
(ii) to the holders of the Class A-1 Certificates, after taking into
account the distribution of the Group I Principal Distribution Amount
as described herein, until the Certificate Principal Balance of the
Class A-1 Certificates has been reduced to zero.
III. On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the sum of the Group I Principal Distribution Amount and the Group II
Principal Distribution Amount remaining undistributed for such Distribution Date
will be made in the following amounts and order of priority:
(i) to the holders of the Class M-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
(ii) to the holders of the Class M-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iii) to the holders of the Class M-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(iv) to the holders of the Class M-4 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
IV. On each Distribution Date (a) on or after the Stepdown Date and (b)
on which a Trigger Event is not in effect, distributions in respect of principal
to the extent of the Group I Principal Distribution Amount will be made in the
following amounts and order of priority:
(i) to the holders of the Class A-1 Certificates, the Class A-1
Principal Distribution Amount, until the Certificate Principal Balance
thereof has been reduced to zero;
(ii) to the extent of the portion, if any, of the Class A-1 Principal
Distribution Amount remaining undistributed pursuant to clause IV(i)
above, to the holders of the Class A-2 Certificates, after taking into
account the distribution of the Group II Principal Distribution Amount
as described herein, until the Certificate Principal Balance thereof
has been reduced to zero; and
(iii) to the holders of the Class A-2 Certificates, after taking into
account the distribution of the Group II Principal Distribution Amount,
as described herein, up to an amount equal to the Class A-2 Principal
Distribution Amount, until the Certificate Principal Balance of the
Class A-2 Certificates has been reduced to zero.
V. On each Distribution Date (a) on or after the Stepdown Date and (b)
on which a Trigger Event is not in effect, distributions in respect of principal
to the extent of the Group II Principal Distribution Amount will be made in the
following amounts and order of priority:
(i) to the holders of the Class A-2 Certificates, the Class A-2
Principal Distribution Amount, until the Certificate Principal Balance
thereof has been reduced to zero;
(ii) to the extent of the portion, if any, of the Class A-2 Principal
Distribution Amount remaining undistributed pursuant to clause V(i)
above, to the holders of the Class A-1 Certificates, after taking into
account the distribution of the Group I Principal Distribution Amount
as described herein, until the Certificate Principal Balance thereof
has been reduced to zero; and
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(iii) to the holders of the Class A-1 Certificates, after taking into
account the distribution of the Group I Principal Distribution Amount,
as described herein, up to an amount equal to the Class A-1 Principal
Distribution Amount, until the Certificate Principal Balance of thereof
has been reduced to zero.
VI. On each Distribution Date (a) on or after the Stepdown Date and (b)
on which a Trigger Event is not in effect, distributions in respect of principal
to the extent of the sum of the Group I Principal Distribution Amount and the
Group II Principal Distribution Amount remaining undistributed for such
Distribution Date will be made in the following amounts and order of priority:
(i) to the holders of the Class M-1 Certificates, the Class M-1
Principal Distribution Amount, until the Certificate Principal Balance
thereof has been reduced to zero;
(ii) to the holders of the Class M-2 Certificates, the Class M-2
Principal Distribution Amount, until the Certificate Principal Balance
thereof has been reduced to zero;
(iii) to the holders of the Class M-3 Certificates, the Class M-3
Principal Distribution Amount, until the Certificate Principal Balance
thereof has been reduced to zero; and
(iv) to the holders of the Class M-4 Certificates, the Class M-4
Principal Distribution Amount, until the Certificate Principal Balance
thereof has been reduced to zero;.
The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the Mortgage Loans evidenced by the Subordinate Certificates. Increasing the
respective percentage interest in the Trust of the Subordinate Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders
of the Offered Certificates consists of subordination, as described below,
excess interest and overcollateralization, as described under
"--Overcollateralization Provisions" herein and the PMI Policy, as described
under "--The PMI Policy" herein.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described herein, to the
rights of the holders of the Class A Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Certificates of the full amount of their scheduled monthly distributions
of interest and principal and to afford such holders protection against Realized
Losses.
The protection afforded to the holders of the Class A Certificates by
means of the subordination of the Subordinate Certificates will be accomplished
by the preferential right of the holders of the Class A Certificates to receive
on any Distribution Date, prior to distribution on the Subordinate Certificates,
distributions in respect of interest and principal, subject to available funds.
In addition, the rights of the holders of Mezzanine Certificates with
lower numerical class designations will be senior to the rights of holders of
Mezzanine Certificates with higher numerical class designations, and the rights
of the holders of the Mezzanine Certificates to receive distributions in respect
of the Mortgage Loans will be senior to the rights of the holders of the Class
CE Certificates, in each case to the extent described herein. This subordination
is intended to enhance the likelihood of regular receipt by the holders of more
senior Certificates of distributions in respect of interest and principal and to
afford such holders protection against Realized Losses.
OVERCOLLATERALIZATION PROVISIONS
The weighted average Expense Adjusted Net Mortgage Rate for the
Mortgage Loans is generally expected to be higher than the weighted average of
the Pass-Through Rates on the Offered Certificates, thus generating excess
interest collections which, in the absence of Realized Losses, will not be
necessary to fund interest distributions on the
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Offered Certificates. The Pooling and Servicing Agreement requires that, on each
Distribution Date, the Net Monthly Excess Cashflow, if any, be applied on such
Distribution Date as an accelerated distribution of principal on the class or
classes of Offered Certificates then entitled to receive distributions in
respect of principal, but only to the limited extent hereafter described.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
will be distributed as follows:
FIRST, to the holders of the class or classes of Certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the Overcollateralization Increase Amount distributable as
part of the Group I Principal Distribution Amount or the Group II
Principal Distribution Amount as described herein;
SECOND, to the holders of the Class M-1 Certificates, in an amount
equal to the Interest Carry Forward Amount allocable to such
Certificates;
THIRD, to the holders of the Class M-2 Certificates, in an amount equal
to the Interest Carry Forward Amount allocable to such Certificates;
FOURTH, to the holders of the Class M-3 Certificates, in an amount
equal to the Interest Carry Forward Amount allocable to such
Certificates;
FIFTH, to the holders of the Class M-4 Certificates, in an amount equal
to the Interest Carry Forward Amount allocable to such Certificates;
SIXTH, to make payments to the Net WAC Rate Carryover Reserve Account,
to the extent required to distribute to the holders of the Offered
Certificates any Net WAC Rate Carryover Amounts for such classes, after
taking into account amounts, if any, received under the cap contracts
for the benefit of the Class A-2 Certificates, the Class M-1
Certificates and the Class M-2 Certificates;
SEVENTH, to the holders of the Class CE Certificates as provided in the
Pooling and Servicing Agreement; and
EIGHTH, to the holders of the Class R Certificates, any remaining
amounts; provided that if such Distribution Date is the Distribution
Date immediately following the expiration of the latest prepayment
charge term or any Distribution Date thereafter, then any such
remaining amounts will be distributed FIRST, to the holders of the
Class P Certificates, until the Certificate Principal Balance thereof
has been reduced to zero; and SECOND, to the holders of the Class R
Certificates.
On each Distribution Date, after making the distributions of the
remainder of the Net Monthly Excess Cashflow as described above, the Trustee
will withdraw from the Net WAC Rate Carryover Reserve Account the amount
deposited therein pursuant to subclause sixth above and will distribute these
amounts to the holders of the Offered Certificates in the order and priority set
forth under "--Pass-Through Rates" herein.
On each Distribution Date, the Trustee will withdraw from the
distribution account all amounts representing prepayment charges in respect of
the Mortgage Loans received during the related Prepayment Period and will
distribute these amounts to the holders of the Class P Certificates.
In the event that Realized Losses are incurred on the Mortgage Loans,
such Realized Losses may result in an overcollateralization deficiency since, in
the absence of Net Monthly Excess Cashflow applied pursuant to clause first
above, such Realized Losses will reduce the principal balance of the Mortgage
Loans without a corresponding reduction to the aggregate Certificate Principal
Balances of the Offered Certificates. In such event, the Pooling and Servicing
Agreement requires the payment from Net Monthly Excess Cashflow, subject to
available funds, of an amount equal to such overcollateralization deficiency,
which will constitute a principal distribution on the Offered Certificates in
reduction of the Certificate Principal Balances thereof. This has the effect of
accelerating the amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans, and of increasing the Overcollateralized
Amount.
In the event that the Overcollateralization Target Amount is permitted
to step down on any Distribution Date, the Pooling and Servicing Agreement
provides that a portion of the principal which would otherwise be distributed to
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the holders of the Offered Certificates on such Distribution Date will be
distributed to the holders of the Class CE Certificates pursuant to the
priorities set forth above. This has the effect of decelerating the amortization
of the Offered Certificates relative to the amortization of the Mortgage Loans,
and of reducing the Overcollateralized Amount. However, if on any Distribution
Date a Trigger Event is in effect, the Overcollateralization Target Amount will
not be permitted to step down on such Distribution Date.
THE PMI INSURER
Mortgage Guaranty Insurance Corporation (the "PMI Insurer"), a
Wisconsin corporation with its principal offices in Milwaukee, Wisconsin, is a
monoline private mortgage insurance company and a wholly-owned subsidiary of
MGIC Investment Corporation. The PMI Insurer is licensed in 50 states and the
District of Columbia to offer such insurance and is approved as a private
mortgage insurer by Fannie Mae and Freddie Mac. The PMI Insurer is rated "AA+"
by S&P, "AA+" by Fitch and "Aa2" by Moody's with respect to its insurer
financial strength. The rating agency issuing the insurer financial strength
rating can withdraw or change its rating at any time. For further information
regarding the PMI Insurer, investors are directed to MGIC Investment
Corporation's periodic reports filed with the Securities and Exchange
Commission, which are publicly available.
THE PMI POLICY
Approximately 69.58% of the Group I Mortgage Loans and approximately
60.15% of the Group II Mortgage Loans, in each case by aggregate principal
balance of the related Loan Group as of the Cut-off Date, will be insured by the
PMI Insurer, pursuant to a primary mortgage insurance policy (the "PMI Policy"
and the Mortgage Loans covered by such policy, the "PMI Mortgage Loans"). The
amount of coverage provided by the PMI Policy (the "Insured Percentage of the
Claim") varies on a loan-by-loan basis based upon the original loan-to-value
ratio of the Mortgage Loan, with the actual coverage amounts ranging from 1.00%
to 37.00%.
The PMI Policy is required to remain in force with respect to each PMI
Mortgage Loan until (i) the principal balance of the PMI Mortgage Loan is paid
in full; (ii) the principal balance of the PMI Mortgage Loan has amortized down
to a level that results in a loan-to-value ratio for the Mortgage Loan of 55.00%
or less; provided, however, that no coverage of any PMI Mortgage Loan under the
PMI policy is required where prohibited by applicable law; or (iii) any event
specified in the PMI Policy occurs that allows for the termination of the PMI
Policy by the PMI Insurer.
The PMI Policy may not be assigned or transferred without the prior
written consent of the PMI Insurer, provided, however that the PMI Insurer has
previously provided written consent to the assignment of coverage on individual
PMI Mortgage Loans from the Trustee to the Originator in connection with any
Mortgage Loan repurchased or substituted for by the Originator.
The PMI Policy generally requires that delinquencies on any PMI
Mortgage Loan must be reported to the PMI Insurer within four months of default,
and appropriate proceedings to obtain title to the property securing the PMI
Mortgage Loan must be commenced within six months of default. The PMI Policy
contains provisions substantially as follows: (i) for the insured to present a
claim, the insured must have acquired, and tendered to the PMI Insurer, good and
merchantable title to the property securing the PMI Mortgage Loan, free and
clear of all liens and encumbrances, including, but not limited to, any right of
redemption by the mortgagor unless such acquisition of good and merchantable
title is excused under the terms of the PMI Policy; (ii) a claim generally
includes unpaid principal, accrued interest to the date of such tender to the
PMI Insurer by the insured, and certain expenses; (iii) when a claim is
presented, the PMI Insurer will have the option of either (A) paying the claim
in full, taking title to the property securing the PMI Mortgage Loan, and
arranging for its sale or (B) paying the Insured Percentage of the Claim, with
the insured retaining title to the property securing the PMI Mortgage Loan; (iv)
claims generally must be filed within 60 days after the insured has acquired
good and merchantable title to the property securing the PMI Mortgage Loan and
(v) a claim generally must be paid within 60 days after the claim is filed by
the insured.
No payment for a loss will be made under the PMI Policy unless the
property securing the PMI Mortgage Loan is in the same physical condition as
when the PMI Mortgage Loan was originally insured, except for reasonable wear
and tear and unless premiums on the standard homeowner's insurance policy, real
estate taxes and foreclosure protection and preservation expenses have been
advanced by or on behalf of the insured.
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Unless approved in writing by the PMI Insurer, the insured under the
PMI Policy may not make any change in the terms of a PMI Mortgage Loan,
including the borrowed amount, interest rate, term or amortization schedule of
the PMI Mortgage Loan, except as specifically permitted by terms of the PMI
Mortgage Loan; nor make any change in the property or other collateral securing
the PMI Mortgage Loan; nor release any mortgagor under the PMI Mortgage Loan
from liability. If a PMI Mortgage Loan is assumed with the insured's approval,
the PMI Insurer's liability for coverage of the PMI Mortgage Loan under the PMI
Policy generally will terminate as of the date of such assumption, unless the
PMI Insurer approves the assumption in writing.
The PMI Policy specifically excludes coverage of (i) any claim
resulting from a default existing at the inception of coverage or occurring
after lapse or cancellation of coverage; (ii) certain claims where there is an
environmental condition which existed on the property securing the PMI Mortgage
Loan, whether or not known by the person or persons submitting an application
for coverage of the PMI Mortgage Loan, as of the effective date of coverage;
(iii) any claim involving a PMI Mortgage Loan which is for the purchase of the
Mortgaged Property, and for which the mortgagor did not make a down payment as
described in the application for coverage; (iv) any claim, if the mortgage, deed
of trust or other similar instrument did not provide the insured at origination
with a first lien on the property securing the PMI Mortgage Loan; (v) certain
claims involving or arising out of any breach by the insured of its obligations
under, or its failure to comply with the terms of, the PMI Policy or of its
obligations as imposed by operation of law and (vi) any claim arising from the
failure of the borrower under a PMI Mortgage Loan to make any balloon payment,
if applicable, under the PMI Mortgage Loan.
In issuing the PMI Policy, the PMI Insurer has relied upon certain
information and data regarding the PMI Mortgage Loans furnished to the PMI
Insurer by the Originator. The PMI Policy will not insure against a loss
sustained by reason of a default arising from or involving certain matters,
including (i) fraud or negligence in origination or servicing of the PMI
Mortgage Loans, including, but not limited to, misrepresentation by the
borrower, lender or other persons involved in the origination of the PMI
Mortgage Loan or the application for insurance; (ii) failure to construct a
property securing a PMI Mortgage Loan in accordance with specified plans or
(iii) physical damage to a property securing a PMI Mortgage Loan.
The preceding description of the PMI Policy is only a brief outline and
does not purport to summarize or describe all of the provisions, terms and
conditions of the PMI Policy. For a more complete description of these
provisions, terms and conditions, reference is made to the PMI Policy, a copy of
which is available upon request from the Trustee.
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date, first, to Net Monthly Excess Cashflow, second, to the Class
CE Certificates, third, to the Class M-4 Certificates, fourth, to the Class M-3
Certificates, fifth, to the Class M-2 Certificates and sixth, to the Class M-1
Certificates. The Pooling and Servicing Agreement does not permit the allocation
of any Realized Losses to the Class A Certificates or to the Class P
Certificates. Investors in the Class A Certificates should note, however, that
although Realized Losses cannot be allocated to such Certificates, under certain
loss scenarios there will not be enough principal and interest on the Mortgage
Loans to distribute to the holders of the Class A Certificates all principal and
interest amounts to which they are then entitled.
Once Realized Losses have been allocated to the Mezzanine Certificates,
such amounts with respect to such Certificates will no longer accrue interest,
such amounts will not be reinstated thereafter and no amounts will be
distributed with respect to those written down amounts (even if Net Monthly
Excess Cashflow and/or the Overcollateralized Amount are greater than zero on
any subsequent Distribution Dates).
Any allocation of a Realized Loss to a Mezzanine Certificate will be
made by reducing the Certificate Principal Balance thereof by the amount so
allocated as of the Distribution Date in the month following the calendar month
in which such Realized Loss was incurred. Notwithstanding anything to the
contrary described herein, in no event will the Certificate Principal Balance of
any Mezzanine Certificate be reduced more than once in respect of any particular
amount both (i) allocable to such Certificate in respect of Realized Losses and
(ii) distributable as principal to the holder of such Certificate from Net
Monthly Excess Cashflow.
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DEFINITIONS
The "Available Funds" for any Distribution Date is equal to the sum,
net of amounts reimbursable or payable therefrom to the Master Servicer or the
Trustee, of (i) the aggregate amount of scheduled monthly payments on the
Mortgage Loans due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the Servicing Fee, the Trustee
Fee and the PMI Insurer Fee, if applicable, for such Distribution Date, (ii)
unscheduled payments in respect of the Mortgage Loans, including prepayments,
insurance proceeds, liquidation proceeds and proceeds from repurchases of and
substitutions for the Mortgage Loans occurring during the related Prepayment
Period, (iii) proceeds from the repurchase of the Mortgage Loans due to the
Optional Termination of the Trust, (iv) all Advances with respect to the
Mortgage Loans received for such Distribution Date, and (v) any Compensating
Interest paid by the Master Servicer. The holders of the Class P Certificates
will be entitled to all prepayment charges received on the Mortgage Loans and
such amounts will not be available for distribution to the Offered Certificates.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service
Reduction.
The "Certificate Principal Balance" of the Class A Certificates,
Mezzanine Certificates and Class P Certificates as of any date of determination
is equal to the initial Certificate Principal Balance thereof reduced by the
aggregate of (a) all amounts allocable to principal previously distributed with
respect to such Certificate and (b) with respect to any Mezzanine Certificate,
any reductions in the Certificate Principal Balance thereof deemed to have
occurred in connection with allocations of Realized Losses in the manner
described herein. The "Certificate Principal Balance" of the Class CE
Certificates as of any date of determination is equal to the excess, if any, of
(a) the then aggregate principal balance of the Mortgage Loans over (b) the then
aggregate Certificate Principal Balance of the Class A Certificates, the
Mezzanine Certificates and the Class P Certificates.
The "Class A Principal Distribution Amount" is an amount equal to the
sum of (i) the Class A-1 Principal Distribution Amount and (ii) the Class A-2
Principal Distribution Amount.
The "Class A-1 Allocation Percentage" for any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (x) the Group I
Principal Remittance Amount for such Distribution Date and the denominator of
which is (y) the Principal Remittance Amount for such Distribution Date.
The "Class A-1 Principal Distribution Amount" is an amount equal to the
excess of (x) the Certificate Principal Balance of the Class A-1 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) approximately 74.00% and (ii) the aggregate principal balance of
the Group I Mortgage Loans as of the last day of the related Due Period (after
giving effect to scheduled payments of principal due during the related Due
Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Group I Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) minus approximately $1,369,030.
The "Class A-2 Allocation Percentage" for any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (x) the Group II
Principal Remittance Amount for such Distribution Date and the denominator of
which is (y) the Principal Remittance Amount for such Distribution Date.
The "Class A-2 Principal Distribution Amount" is an amount equal to the
excess of (x) the Certificate Principal Balance of the Class A-2 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) approximately 74.00% and (ii) the aggregate principal balance of
the Group II Mortgage Loans as of the last day of the related Due Period (after
giving effect to scheduled payments of principal due during the related Due
Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Group II Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) minus approximately $630,996.
The "Class M-1 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the payment of the Class
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A Principal Distribution Amount on such Distribution Date) and (ii) the
Certificate Principal Balance of the Class M-1 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 82.50% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus approximately $2,000,026.
The "Class M-2 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the payment of the Class A
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates (after taking into account the
payment of the Class M-1 Principal Distribution Amount on such date) and (iii)
the Certificate Principal Balance of the Class M-2 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 89.50% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus approximately $2,000,026.
The "Class M-3 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the payment of the Class A
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates (after taking into account the
payment of the Class M-1 Principal Distribution Amount on such date), (iii) the
Certificate Principal Balance of the Class M-2 Certificates (after taking into
account the payment of the Class M-2 Principal Distribution Amount on such date)
and (iv) the Certificate Principal Balance of the Class M-3 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) approximately 95.50% and (ii) the aggregate principal balance of
the Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) and (B) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus approximately
$2,000,026.
The "Class M-4 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the payment of the Class A
Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates (after taking into account the
payment of the Class M-1 Principal Distribution Amount on such date), (iii) the
Certificate Principal Balance of the Class M-2 Certificates (after taking into
account the payment of the Class M-2 Principal Distribution Amount on such
date), (iv) the Certificate Principal Balance of the Class M-3 Certificates
(after taking into account the payment of the Class M-3 Principal Distribution
Amount on such date) and (v) the Certificate Principal Balance of the Class M-4
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) approximately 97.00% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) minus
approximately $2,000,026.
The "Credit Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the aggregate Certificate Principal Balance
of the Subordinate Certificates by (y) the aggregate principal balance of the
Mortgage Loans, calculated after taking into account distributions of principal
on the Mortgage Loans and distribution
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of the Group I Principal Distribution Amount and the Group II Principal
Distribution Amount to the holders of the Certificates then entitled to
distributions of principal on such Distribution Date.
A "Debt Service Reduction" is any reduction in the amount which a
mortgagor is obligated to pay on a monthly basis with respect to a Mortgage Loan
as a result of any proceeding initiated under the United States Bankruptcy Code,
other than a reduction attributable to a Deficient Valuation.
A "Deficient Valuation" with respect to any Mortgage Loan is a
valuation by a court of competent jurisdiction of the Mortgaged Property in an
amount less than the then outstanding indebtedness under the Mortgage Loan,
which valuation results from a proceeding initiated under the United States
Bankruptcy Code.
The "Determination Date" with respect to any Distribution Date will be
the 10th day of the calendar month in which such Distribution Date occurs or, if
such 10th day is not a Business Day, the Business Day immediately preceding such
10th day.
The "Due Period" with respect to any Distribution Date commences on the
second day of the month immediately preceding the month in which such
Distribution Date occurs and ends on the first day of the month in which such
Distribution Date occurs.
"Excess Group Net WAC Pass-Through Rate Amount": For any Distribution
Date and the Class A-1 Certificates, the positive excess, if any, of (i) the
amount of interest accrued on the Class A-1 Certificates for such Distribution
Date calculated at the Net WAC Pass-Through Rate for the Class A-1 Certificates
over (ii) the amount of interest accrued on the Class A-1 Certificates at the
Pool Net WAC Pass-Through Rate (as defined in the Pooling and Servicing
Agreement). For any Distribution Date and the Class A-2 Certificates, the
positive excess, if any, of (i) the amount of interest accrued on the Class A-2
Certificates for such Distribution Date calculated at the Net WAC Pass- Through
Rate for the Class A-2 Certificates over (ii) the amount of interest accrued on
the Class A-2 Certificates at the Pool Net WAC Pass-Through Rate.
"Excess Pool Net WAC Pass-Through Rate Amount": For any Distribution
Date and the Class A-1 Certificates, the positive excess, if any, of (i) the
amount of interest accrued on the Class A-1 Certificates for such Distribution
Date calculated at the Pool Net WAC Pass-Through Rate over (ii) the amount of
interest accrued on the Class A-1 Certificates at the Net WAC Pass-Through Rate
for the Class A-1 Certificates. For any Distribution Date and the Class A-2
Certificates, the positive excess, if any, of (i) the amount of interest accrued
on the Class A-2 Certificates for such Distribution Date calculated at the Pool
Net WAC Pass-Through Rate over (ii) the amount of interest accrued on such Class
A-2 Certificates at the Net WAC Pass-Through Rate for the Class A-2
Certificates.
The "Group I Interest Remittance Amount" for any Distribution Date is
that portion of the Available Funds for such Distribution Date that represents
interest received or advanced on the Group I Mortgage Loans.
The "Group I Principal Distribution Amount" for any Distribution Date
will be the sum of (i) the principal portion of all scheduled monthly payments
on the Group I Mortgage Loans due during the related Due Period, whether or not
received on or prior to the related Determination Date; (ii) the principal
portion of all proceeds received in respect of the repurchase of a Group I
Mortgage Loan (or, in the case of a substitution, certain amounts representing a
principal adjustment) as required by the Pooling and Servicing Agreement during
the related Prepayment Period; (iii) the principal portion of all other
unscheduled collections, including insurance proceeds, liquidation proceeds and
all full and partial principal prepayments, received during the related
Prepayment Period, to the extent applied as recoveries of principal on the Group
I Mortgage Loans; and (iv) the Class A-1 Allocation Percentage of the amount of
any Overcollateralization Increase Amount for such Distribution Date MINUS (v)
the Class A-1 Allocation Percentage of the amount of any Overcollateralization
Reduction Amount for such Distribution Date. In no event will the Group I
Principal Distribution Amount with respect to any Distribution Date be (x) less
than zero or (y) greater than the then outstanding aggregate Certificate
Principal Balance of the Offered Certificates.
The "Group I Principal Remittance Amount" for any Distribution Date
will be the sum of the amounts described in clauses (i) through (iii) of the
definition of Group I Principal Distribution Amount.
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The "Group II Interest Remittance Amount" for any Distribution Date is
that portion of the Available Distribution Amount for such Distribution Date
that represents interest received or advanced on the Group II Mortgage Loans.
The "Group II Principal Distribution Amount" for any Distribution Date
will be the sum of (i) the principal portion of all scheduled monthly payments
on the Group II Mortgage Loans due during the related Due Period, whether or not
received on or prior to the related Determination Date; (ii) the principal
portion of all proceeds received in respect of the repurchase of a Group II
Mortgage Loan (or, in the case of a substitution, certain amounts representing a
principal adjustment) as required by the Pooling and Servicing Agreement during
the related Prepayment Period; (iii) the principal portion of all other
unscheduled collections, including insurance proceeds, liquidation proceeds and
all full and partial principal prepayments, received during the related
Prepayment Period, to the extent applied as recoveries of principal on the Group
II Mortgage Loans; and (iv) the Class A-2 Allocation Percentage of the amount of
any Overcollateralization Increase Amount for such Distribution Date MINUS (v)
the Class A-2 Allocation Percentage of the amount of any Overcollateralization
Reduction Amount for such Distribution Date. In no event will the Group II
Principal Distribution Amount with respect to any Distribution Date be (x) less
than zero or (y) greater than the then outstanding aggregate Certificate
Principal Balance of the Offered Certificates.
The "Group II Principal Remittance Amount" for any Distribution Date
will be the sum of the amounts described in clauses (i) through (iii) of the
definition of Group II Principal Distribution Amount.
The "Interest Accrual Period" for any Distribution Date and the Offered
Certificates (other than the Class M-4 Certificates) is the period commencing on
the Distribution Date in the month immediately preceding the month in which such
Distribution Date occurs (or, in the case of the first period, commencing on the
Closing Date) and ending on the day preceding such Distribution Date, and all
distributions of interest on the Offered Certificates (other than the Class M-4
Certificates) will be based on a 360-day year and the actual number of days in
the applicable Interest Accrual Period. The Interest Accrual Period for any
Distribution Date and the Class M-4 Certificates is the calendar month preceding
the month of such Distribution Date based on a 360-day year consisting of twelve
30-day months.
The "Interest Carry Forward Amount" with respect to any class of
Offered Certificates and any Distribution Date is equal to the amount, if any,
by which the Interest Distribution Amount for such class of Certificates for the
immediately preceding Distribution Date exceeded the actual amount distributed
on such Certificates in respect of interest on such immediately preceding
Distribution Date, together with any Interest Carry Forward Amount with respect
to such Certificates remaining unpaid from the previous Distribution Date plus
interest accrued thereon at the related Pass-Through Rate on such Certificates
for the most recently ended Interest Accrual Period. The Interest Carry Forward
Amount with respect to the Class A Certificates, if any, is distributed as part
of the Senior Interest Distribution Amount on each Distribution Date. The
Interest Carry Forward Amount with respect to the Mezzanine Certificates, if
any, may be carried forward to succeeding Distribution Dates and, subject to
available funds, will be distributed in the manner set forth in
"--Overcollateralization Provisions" herein.
The "Interest Distribution Amount" for the Offered Certificates of any
class on any Distribution Date is equal to (i) interest accrued during the
related Interest Accrual Period on the Certificate Principal Balance of that
class immediately prior to such Distribution Date at the then applicable
Pass-Through Rate for such class plus, solely for federal income tax purposes,
(ii) the amount of the Excess Group Net WAC Pass-Through Rate Amount, if any,
for such class for such Distribution Date, and reduced (to not less than zero),
in the case of each such class, by (x) the amount of the Excess Pool Net WAC
Rate Amount, if any, for such Distribution Date and (y) the allocable share, if
any, for such class of Prepayment Interest Shortfalls to the extent not covered
by Compensating Interest paid by the Master Servicer or excess interest and
shortfalls resulting from the application of the Relief Act.
The "Net Monthly Excess Cashflow" for any Distribution Date is equal to
the sum of (a) any Overcollateralization Reduction Amount and (b) the excess of
(x) the Available Funds for such Distribution Date over (y) the sum for such
Distribution Date of (i) the Senior Interest Distribution Amount distributable
to the Class A Certificates, (ii) the Interest Distribution Amounts
distributable to the holders of the Mezzanine Certificates and (iii) the
Principal Remittance Amount.
The "Overcollateralization Increase Amount" with respect to any
Distribution Date equals the amount, if any, by which the Overcollateralization
Target Amount exceeds the Overcollateralized Amount on such Distribution Date
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(calculated for this purpose only after taking into account the distributions to
be made of the Principal Remittance Amount on such Distribution Date).
The "Overcollateralization Reduction Amount" with respect to any
Distribution Date is the lesser of (A) the Principal Remittance Amount on such
Distribution Date or (B) the excess, if any, of (i) the Overcollateralized
Amount for such Distribution Date (calculated for this purpose only after
assuming that 100% of the Principal Remittance Amount on such Distribution Date
have been distributed) over (ii) the Overcollateralization Target Amount for
such Distribution Date.
The "Overcollateralization Target Amount" with respect to any
Distribution Date, (i) prior to the Stepdown Date, an amount equal to
approximately $6,000,078, (ii) on or after the Stepdown Date provided a Trigger
Event is not in effect, the greater of (x) 3.00% of the then current aggregate
outstanding principal balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (y) approximately $2,000,026, or (iii) on or after the Stepdown Date
and if a Trigger Event is in effect, the Overcollateralization Target Amount for
the immediately preceding Distribution Date.
The "Overcollateralized Amount" with respect to any Distribution Date
is the excess, if any, of (a) the sum of the aggregate principal balance of the
Mortgage Loans (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) over (b) the sum of the aggregate Certificate Principal Balances of the
Class A Certificates, the Mezzanine Certificates and the Class P Certificates,
after giving effect to distributions to be made on such Distribution Date).
The "PMI Insurer Fee" for any Distribution Date is the premium for the
PMI Policy payable by the Trustee from amounts on deposit in the Trust on the
aggregate principal balance of such PMI Mortgage Loans as of the first day of
the related Due Period (after giving effect to scheduled payments of principal
due during the Due Period relating to the previous Distribution Date, to the
extent received or advanced) plus any applicable taxes on premiums for PMI
Mortgage Loans located in West Virginia and Kentucky.
The "PMI Insurer Fee Rate" for any Distribution Date is equal to a rate
per annum set forth in the Pooling and Servicing Agreement.
The "Prepayment Period" with respect to any Distribution Date is the
period commencing on the day after the Determination Date in the month preceding
the month in which such Distribution Date falls (or, in the case of the first
Distribution Date, commencing January 1, 2003) and ending on the Determination
Date of the calendar month in which such Distribution Date falls.
The "Principal Remittance Amount" for any Distribution Date will be the
sum of (i) the Group I Principal Remittance Amount and (ii) the Group II
Principal Remittance Amount.
A "Realized Loss" is (a) the amount of any Bankruptcy Loss or (b) with
respect to any defaulted Mortgage Loan that is finally liquidated through
foreclosure sale, disposition of the related Mortgaged Property (if acquired on
behalf of the certificateholders by foreclosure or deed in lieu of foreclosure)
or otherwise, is the amount of loss realized, if any, equal to the portion of
the unpaid principal balance remaining, if any, plus interest thereon through
the last day of the month in which such Mortgage Loan was finally liquidated,
after application of all amounts recovered (net of amounts reimbursable to the
Master Servicer for Advances, servicing advances and other related expenses,
including attorney's fees) towards interest and principal owing on the Mortgage
Loan.
The "Senior Interest Distribution Amount" on any Distribution Date is
equal to the sum of the Interest Distribution Amount for such Distribution Date
for the Class A Certificates and the Interest Carry Forward Amount, if any, for
that Distribution Date for the Class A Certificates.
The "Stepdown Date" for any Distribution Date is the earlier of (i) the
first Distribution Date on which the aggregate Certificate Principal Balance of
the Class A Certificates has been reduced to zero and (ii) the later to occur of
(x) the Distribution Date occurring in February 2006 and (y) the first
Distribution Date on which the Credit
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Enhancement Percentage (calculated for this purpose only after taking into
account distributions of principal on the Mortgage Loans, but prior to any
distribution of the Principal Distribution Amount to the holders of the
Certificates then entitled to distributions of principal on such Distribution
Date) is greater than or equal to approximately 26.00%.
A "Trigger Event" is in effect with respect to any Distribution Date
if:
(a) the percentage obtained by dividing (x) the principal amount of
Mortgage Loans delinquent 60 days or more (including Mortgage Loans in
foreclosure, Mortgage Loans with respect to which the related Mortgaged
Properties have been acquired by the Trust and Mortgage Loans with respect to
which the related borrowers are the subject of bankruptcy proceedings) by (y)
the aggregate principal balance of the Mortgage Loans, in each case, as of the
last day of the previous calendar month, exceeds 16.50%; or
(b) the aggregate amount of Realized Losses incurred since the Cut-off
Date through the last day of the related Due Period divided by the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date exceeds the
applicable percentages set forth below with respect to such Distribution Date:
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
- --------------------------------------------------------------------
February 2006 through January 2007 2.75%
February 2007 through January 2008 4.00%
February 2008 through January 2009 5.25%
February 2009 through January 2010 5.75%
February 2010 and thereafter 6.00%
ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each Distribution Date
from its own funds (or from funds in the distribution account that are not
included in the Available Funds for such Distribution Date or a combination of
both) an amount equal to the aggregate of all payments of principal and interest
(net of the Servicing Fee) that were due during the related Due Period on the
Mortgage Loans and that were delinquent on the related Determination Date, plus
certain amounts representing assumed payments not covered by any current net
income on the Mortgaged Properties acquired by foreclosure or deed in lieu of
foreclosure (any such advance, an "Advance" and together, the "Advances").
Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, insurance
proceeds, condemnation proceeds and liquidation proceeds. The purpose of making
such Advances is to maintain a regular cash flow to the Certificateholders,
rather than to guarantee or insure against losses. The Master Servicer will not
be required, however, to make any Advances with respect to reductions in the
amount of the monthly payments on the Mortgage Loans due to bankruptcy
proceedings or the application of the Relief Act. Subject to the recoverability
standard above, the Master Servicer's obligation to make Advances as to any
Mortgage Loan will continue until the Mortgage Loan is paid in full or until the
recovery of all Liquidation Proceeds thereon.
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made. The
Master Servicer may recover at any time from amounts in the collection account
the amount of any Advance that the Master Servicer deems nonrecoverable or that
remains unreimbursed to the Master Servicer from the related liquidation
proceeds after the final liquidation of the related Mortgage Loan. In addition,
the Master Servicer may, at any time, withdraw from the collection account funds
that were not included in the Available Funds for the preceding Distribution
Date to reimburse itself for Advances previously made by the Master Servicer. In
the event the Master Servicer fails in its obligation to make any required
Advance, the Trustee, in its capacity as successor Master Servicer, will be
obligated to make any such Advance, to the extent required in the Pooling and
Servicing Agreement.
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In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, the cost of (i) the preservation, restoration, inspection
and protection of the Mortgaged Properties, (ii) any environmental audit, (iii)
any enforcement or judicial proceedings, including foreclosures and (iv) the
management and liquidation of Mortgaged Properties acquired in satisfaction of
the related mortgage. Each such expenditure will constitute a "Servicing
Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including liquidation
proceeds, released Mortgaged Property proceeds, insurance proceeds, condemnation
proceeds and such other amounts as may be collected by the Master Servicer from
the related mortgagor or otherwise relating to the Mortgage Loan in respect of
which such unreimbursed amounts are owed. The Master Servicer may recover at any
time from amounts in the collection account the amount of any Servicing Advance
that the Master Servicer deems nonrecoverable or that remains unreimbursed to
the Master Servicer from the related liquidation proceeds after the final
liquidation of the related Mortgage Loan. See "Description of the
Certificates--Allocation of Available Funds."
The Pooling and Servicing Agreement provides that the Master Servicer
may enter into a facility with any person which provides that such person (an
"Advancing Person") may directly or indirectly fund Advances and/or Servicing
Advances, although no such facility will reduce or otherwise affect the Master
Servicer's obligation to fund such Advances and/or Servicing Advances. Any
Advances and/or Servicing Advances made by an Advancing Person would be
reimbursed to the Advancing Person in the same manner as reimbursements would be
made to the Master Servicer if such advances were funded by the Master Servicer.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, a form of which is filed as an exhibit to the Registration Statement.
A Current Report on Form 8-K relating to the Certificates containing a copy of
the Pooling and Servicing Agreement as executed will be filed by the Depositor
with the Securities and Exchange Commission following the issuance of the
Certificates. The Trust created under the Pooling and Servicing Agreement will
consist of (i) all of the Depositor's right, title and interest in the Mortgage
Loans, the related Mortgage Notes, Mortgages and other related documents, (ii)
all payments on or collections in respect of the Mortgage Loans due after the
Cut-off Date, together with any proceeds thereof, (iii) any Mortgaged Properties
acquired on behalf of certificateholders by foreclosure or by deed in lieu of
foreclosure, and any revenues received thereon, (iv) the rights of the Trustee
under all insurance policies, including the PMI Policy, required to be
maintained pursuant to the Pooling and Servicing Agreement, (v) the Net WAC Rate
Carryover Reserve Account and the Excess Net WAC Rate Reserve Account, (vi)
rights of the Depositor under the Mortgage Loan Purchase Agreement and (vii) the
rights of the Trustee under the cap contracts.
The NIMS Insurer, if any, will be a third party beneficiary of the
Pooling and Servicing Agreement to the extent set forth in the Pooling and
Servicing Agreement. In addition, the NIMS Insurer, if any, will have several
rights under the Pooling and Servicing Agreement including, but not limited to,
the rights set forth under "Risk Factors Rights of the NIMS Insurer May
Negatively Impact the Offered Certificates" in this prospectus supplement.
Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the Trust, the terms and conditions
of the Pooling and Servicing Agreement and the Offered Certificates. The
Depositor will provide to a prospective or actual certificateholder without
charge, on written request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to Ameriquest Mortgage
Securities Inc., 1110 Town & Country Road, Suite 1100, Orange, California 92868,
Attention: Capital Markets.
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ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will deliver to the Trustee (or to another custodian on
the Trustee's behalf) with respect to each Mortgage Loan (i) the mortgage note
endorsed without recourse in blank to reflect the transfer of the Mortgage Loan,
(ii) the original mortgage with evidence of recording indicated thereon and
(iii) an assignment of the mortgage in recordable form endorsed in blank without
recourse, reflecting the transfer of the Mortgage Loan. The assignments of
Mortgage are generally required to be recorded by or on behalf of the Depositor
in the appropriate offices for real property records; provided, however, the
Depositor will not cause to be recorded any Assignment which relates to a
Mortgage Loan in any jurisdiction (except with respect to any mortgage loan
located in the State of Maryland) unless such failure to record would result in
a withdrawal or a downgrading by any Rating Agency of the rating on any class of
Certificates; provided, however, upon the occurrence of certain events set forth
in the Pooling and Servicing Agreement, each such assignment of mortgage will be
recorded, or submitted for recording by the Originator, at the Originator's
expense (or, if the Originator is unable to pay the cost of recording the
assignments of mortgage, such expense will be paid by the Trustee, which expense
will be reimbursed by the Trust) as set forth in the Pooling and Servicing
Agreement.
The Originator will make certain representations and warranties as of
the Closing Date as to the accuracy in all material respects of certain
information furnished to the Trustee with respect to each Mortgage Loan (e.g.,
Principal Balance and the Mortgage Rate). In addition, the Originator will
represent and warrant, among other things that at the time of transfer to the
Depositor: (i) the Originator has transferred or assigned all of its right,
title and interest in each Mortgage Loan and the related documents, free of any
lien; (ii) each Mortgage Loan complied, at the time of origination, in all
material respects with applicable state and/or federal laws; (iii) the Mortgage
Loans are not subject to the requirements of the Home Ownership and Equity
Protection Act of 1994 (the "Homeownership Act"); (iv) no proceeds from any
Mortgage Loan were used to purchase single premium credit insurance policies as
part of the origination of, or as a condition to closing, such Mortgage Loan;
(v) the Master Servicer for such Mortgage Loan has accurately and fully reported
its mortgagor credit files to each of the credit repositories in a timely
manner; (vi) no Mortgage Loan originated before October 1, 2002 has a prepayment
charge term longer than five years after its date of origination and no Mortgage
Loan originated on or after October 1, 2002 has a prepayment charge term longer
than three years after its date of origination and (vii) no Mortgage Loan
originated on or after October 1, 2002 is secured by property located in the
State of Georgia. Upon discovery of a breach of any such representation and
warranty which materially and adversely affects the interests of the
Certificateholders in the related Mortgage Loan and related documents, the
Originator, subject to the terms of the Pooling and Servicing Agreement, will
have a period of 90 to 120 days after the earlier of discovery or receipt of
written notice of the breach to effect a cure. If the breach cannot be cured
within the 90 to 120 day period, the Originator will be obligated to repurchase
or replace the affected Mortgage Loan in the manner described in the prospectus
and the Mortgage Loan Purchase Agreement. The same procedure and limitations
that are set forth above for the substitution or repurchase of Deleted Mortgage
Loans as a result of deficient documentation relating thereto will apply to the
substitution or repurchase of a Deleted Mortgage Loan as a result of a breach of
a representation or warranty in the Mortgage Loan Purchase Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Originator as
described in the preceding paragraphs are referred to as "Deleted Mortgage
Loans."
THE ORIGINATOR AND MASTER SERVICER
Ameriquest Mortgage Company provided the information set forth in the
following paragraphs. None of the Depositor, the Trustee, the Underwriters or
any of their respective affiliates have made or will make any representation as
to the accuracy or completeness of such information.
Ameriquest Mortgage Company (sometimes referred to herein as
"Ameriquest," the "Originator" or the "Master Servicer"), a Delaware
corporation, is a specialty finance company engaged in the business of
originating, purchasing and selling retail and wholesale sub-prime mortgage
loans secured by one- to four-family residences. Ameriquest's mortgage business
was begun in 1979 as a savings and loan association and later as a federal
savings bank. In 1994 Ameriquest ceased depository operations to focus entirely
on its mortgage banking business. In May 1997, Ameriquest sold its wholesale
operations and reorganized its retail lending and servicing operations under the
name of "Ameriquest Mortgage Company" (the "Reorganization"). In January of
2000, Ameriquest recommenced wholesale lending as a separate division (a.k.a.
Argent Mortgage Company, LLC) while continuing its retail and servicing
operations. As of
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January 1, 2003, the wholesale lending division of Ameriquest reorganized its
business as a wholly owned subsidiary of Ameriquest under the name of Argent
Mortgage Company, LLC. Substantially all of the Mortgage Loans were originated
by Argent Mortgage Company, LLC.
Pursuant to the Pooling and Servicing Agreement, Ameriquest will serve
as the Master Servicer for the Mortgage Loans. Ameriquest is approved as a
seller/servicer for Fannie Mae and Freddie Mac and as a non-supervised mortgagee
by the U.S. Department of Housing and Urban Development. As of September 30,
2002, Ameriquest had 208 retail offices (consisting of 51 loan origination
centers located in California and 157 loan origination centers located
throughout the rest of the United States) and three wholesale offices
(consisting of one loan fulfillment center located in California, one loan
fulfillment center located in Illinois and one loan fulfillment center located
in New York).
LENDING ACTIVITIES AND LOAN SALES. Ameriquest Mortgage Company
currently originates real estate loans through its network of retail and
wholesale offices and loan origination centers. Ameriquest also participates in
secondary market activities by originating and selling mortgage loans while
continuing to service the majority of the loans sold. In other cases
Ameriquest's whole loan sale agreements provide for the transfer of servicing
rights.
Ameriquest's primary lending activity is funding loans to enable
mortgagors to purchase or refinance residential real property, which loans are
secured by first or second liens on the related real property. Ameriquest's
single-family real estate loans are predominantly "conventional" mortgage loans,
meaning that they are not insured by the Federal Housing Administration or
partially guaranteed by the U.S. Department of Veterans Affairs.
RETAIL ORIGINATIONS. The following table summarizes Ameriquest's retail
originated one- to four-family residential mortgage loan origination and sales
activity for the periods shown below. Sales activity may include sales of
mortgage loans purchased by Ameriquest from other loan originators.
RETAIL ORIGINATIONS
NINE MONTHS
ENDING
SEPTEMBER 30,
-------------
1999 2000 2001 2002
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Originations........... $4,245,083 $3,716,937 $5,444,482 $6,114,838
Sales.................. $4,566,087 $3,740,295 $4,642,246 $5,236,957
WHOLESALE ORIGINATIONS. The following table summarizes Ameriquest's
wholesale originated one- to four-family residential mortgage loan origination
and sales activity for the periods shown below. Sales activity may include sales
of mortgage loans purchased by Ameriquest from other loan originators.
WHOLESALE ORIGINATIONS
NINE MONTHS
ENDING
SEPTEMBER 30,
1999 2000 2001 2002
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Originations............ $0 $52,086 $736,928 $2,690,528
Sales................... $0 $47,511 $570,244 $1,603,718
LOAN SERVICING. Ameriquest services all of the mortgage loans it
originates which are retained in its portfolio and continues to service a
majority of the loans that have been sold to investors. Servicing includes
collecting and remitting loan payments, accounting for principal and interest,
contacting delinquent mortgagors, and supervising foreclosure in the event of
unremedied defaults. Ameriquest's servicing activities are audited periodically
by applicable regulatory authorities. Certain financial records of Ameriquest
relating to its loan servicing activities are reviewed annually as part of the
audit of Ameriquest's financial statements conducted by its independent
accountants.
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COLLECTION PROCEDURES; DELINQUENCY AND LOSS EXPERIENCE. When a
mortgagor fails to make a required payment on a residential mortgage loan,
Ameriquest attempts to cause the deficiency to be cured by corresponding or
making telephone contact with the mortgagor. Pursuant to Ameriquest's customary
procedures for residential mortgage loans serviced by it for its own account,
Ameriquest generally mails a notice of intent to foreclose to the mortgagor
within ten days after the loan has become 31 days past due (two payments due but
not received) and upon expiration of the notice of intent to foreclose,
generally one month thereafter, if the loan remains delinquent, typically
institutes appropriate legal action to foreclose on the property securing the
loan. If foreclosed, the property is sold at a public or private sale.
Ameriquest, in its capacity as Master Servicer, typically enters a bid based
upon an analysis of the property value, estimated marketing and carrying costs
and presence of junior liens, which may be equal to or less than the full amount
owed. In the event the property is acquired at the foreclosure sale by
Ameriquest, as Master Servicer, it is placed on the market for sale through
local real estate brokers experienced in the sale of similar properties.
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AMERIQUEST RESIDENTIAL LOAN SERVICING PORTFOLIO--RETAIL ORIGINATIONS
The following table sets forth the delinquency and loss experience at
the dates indicated for residential (one- to four-family) retail first lien
mortgage loans serviced by Ameriquest that were originated or purchased by
Ameriquest's retail division (including loans originated or purchased by
Ameriquest prior to the Reorganization):
AT SEPTEMBER 30,
----------------
1999 2000 2001 2002
(DOLLARS IN THOUSANDS)
---------------------------------------------------- ------------------
Total Outstanding Principal Balance............ $ 6,525,485 $ 6,627,984 $ 9,222,114 $12,567,137
Number of Loans................................ 75,353 72,684 88,439 112,409
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance..................... $ 85,863 $ 146,623 $ 202,886 $ 237,505
Number of Loans....................... 1,125 1,763 2,231 2,430
Delinquency as a Percentage of Total
Outstanding Principal Balance......... 1.32% 2.21% 2.20% 1.89%
Delinquency as a Percentage
of Number of Loans.................. 1.49% 2.43% 2.52% 2.16%
61-90 Days
Principal Balance..................... $ 49,939 $ 75,657 $ 105,885 $ 139,037
Number of Loans....................... 626 907 1,158 1,422
Delinquency as a Percentage of Total
Outstanding Principal Balance......... 0.77% 1.14% 1.15% 1.11%
Delinquency as a Percentage
of Number of Loans.................. 0.83% 1.25% 1.31% 1.27%
91 Days or More
Principal Balance..................... $ 259,658 $ 324,110 $ 464,791 $ 588,899
Number of Loans....................... 3,340 4,123 5,267 6,447
Delinquency as a Percentage of Total
Outstanding Principal Balance......... 3.98% 4.89% 5.04% 4.69%
Delinquency as a Percentage
of Number of Loans.................. 4.43% 5.67% 5.96% 5.74%
Total Delinquencies:
Principal Balance..................... $ 395,460 $ 546,390 $ 773,562 $ 965,441
Number of Loans....................... 5,091 6,793 8,656 10,299
Delinquency as a Percentage of Total
Outstanding Principal Balance......... 6.06% 8.24% 8.39% 7.68%
Delinquency as a Percentage
of Number of Loans.................. 6.76% 9.35% 9.79% 9.16%
FORECLOSURES PENDING(1)
Principal Balance..................... $ 242,586 $ 275,390 $ 357,006 $ 431,507
Number of Loans....................... 3,108 3,477 4,000 4,682
Foreclosures Pending as a Percentage of
Total Outstanding Principal Balance... 3.72% 4.15% 3.87% 3.43%
Foreclosures Pending as a Percentage of
Number of Loans....................... 4.12% 4.78% 4.52% 4.17%
NET LOAN LOSSES for the
Period (2)(3)................................ $ 26,566 $ 37,530 $ 66,526 $ 61,736
NET LOAN LOSSES as a Percentage of Total
Outstanding Principal Balance(3).............. 0.48% 0.54% 0.86% 0.78%
- ----------
(1) Includes mortgage loans which are in foreclosure but as to which title
to the mortgaged property has not been acquired, at the end of the
period indicated. Foreclosures pending are included in the
delinquencies set forth above.
(2) The net loan loss for any such loan is equal to the difference between
(a) the principal balance plus accrued interest through the date of
liquidation plus all liquidation expenses related to such loan and (b)
all amounts received in connection with the liquidation of such loan.
(3) Annualized from January 1 of the year indicated through the date
indicated.
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AMERIQUEST RESIDENTIAL LOAN SERVICING PORTFOLIO--WHOLESALE ORIGINATIONS
The following table sets forth the delinquency and loss experience at
the dates indicated for residential (one- to four-family) wholesale first lien
mortgage loans serviced by Ameriquest that were originated or purchased by
Ameriquest, either directly, or through Argent Mortgage Company, LLC:
AT SEPTEMBER 30,
----------------
1999 2000 2001 2002
(DOLLARS IN THOUSANDS)
-------------------------------------------- ------------------
Total Outstanding Principal Balance.......... $ 0 $ 40,746 $ 664,002 $3,145,023
Number of Loans.............................. 0 230 3,459 17,945
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance................... $ 0 $ 1,046 $ 6,753 $ 27,631
Number of Loans..................... 0 6 36 153
Delinquency as a Percentage of Total
Outstanding Principal Balance....... 0.00% 2.57% 1.02% 0.88%
Delinquency as a Percentage
of Number of Loans................ 0.00% 2.61% 1.04% 0.85%
61-90 Days
Principal Balance................... $ 0 $ 0 $ 3,051 $ 15,101
Number of Loans..................... 0 0 15 74
Delinquency as a Percentage of Total
Outstanding Principal Balance....... 0.00% 0.00% 0.46% 0.48%
Delinquency as a Percentage
of Number of Loans................ 0.00% 0.00% 0.43% 0.41%
91 Days or More
Principal Balance................... $ 0 $ 301 $ 4,502 $ 24,084
Number of Loans..................... 0 3 22 138
Delinquency as a Percentage of Total
Outstanding Principal Balance....... 0.00% 0.74% 0.68% 0.77%
Delinquency as a Percentage
of Number of Loans................ 0.00% 1.30% 0.64% 0.77%
Total Delinquencies:
Principal Balance................... $ 0 $ 1,347 $ 14,306 $ 66,816
Number of Loans..................... 0 9 73 365
Delinquency as a Percentage of Total
Outstanding Principal Balance....... 0.00% 3.31% 2.15% 2.12%
Delinquency as a Percentage
of Number of Loans................ 0.00% 3.91% 2.11% 2.03%
FORECLOSURES PENDING(1)
Principal Balance................... $ 0 $ 202 $ 4,367 $ 14,716
Number of Loans..................... 0 2 21 81
Foreclosures Pending as a Percentage
of Total Outstanding Principal
Balance............................. 0.00% 0.50% 0.66% 0.47%
Foreclosures Pending as a Percentage
of Number of Loans.................. 0.00% 0.87% 0.61% 0.45%
NET LOAN LOSSES for the
Period (2)(3).............................. $ 0 $ 0 $ 52 $ 192
NET LOAN LOSSES as a Percentage of Total
Outstanding Principal Balance(3)............. 0.00% 0.00% 0.02% 0.02%
- ----------
(1) Includes mortgage loans which are in forebut as to which title to
the mortgaged property has not been acquired. Foreclosures pending are
included in the delinquencies set forth above.
(2) The net loan loss for any such loan is equal to the difference between (a)
the principal balance plus accrued interest through the date of liquidation
plus all liquidation expenses related to such loan and (b) all amounts
received in connection with the liquidation of such loan.
(3) Annualized from January 1 of the year indicated through the date indicated.
As of September 30, 2002, 1,524 one- to four-family residential
properties relating to loans in Ameriquest's retail servicing portfolio and 17
one- to four-family residential property relating to loans in Ameriquest's
wholesale servicing portfolio had been acquired through foreclosure or deed in
lieu of foreclosure and were not liquidated.
The delinquency and loss experience percentages set forth above in the
immediately preceding tables are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of retail residential loans serviced by
Ameriquest has increased from $6,525,485,000
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at December 31, 1999 to approximately $12,567,137,000 at September 30, 2002 and
the total outstanding principal balance of wholesale residential loans serviced
by Ameriquest has increased from $0.00 at December 31, 1999 to approximately
$3,145,023,000 at September 30, 2002, the total outstanding principal balance of
all loans serviced as of the end of any indicated period includes many loans
that will not have been outstanding long enough to give rise to some or all of
the indicated periods of delinquency. In the absence of such substantial and
continual additions of newly originated loans to the total amount of loans
serviced, the percentages indicated above would be higher and could be
substantially higher. The actual delinquency percentages with respect to the
Mortgage Loans may be expected to be substantially higher than the delinquency
percentages indicated above because the composition of the Mortgage Loans will
not change.
There can be no assurance that the delinquency and loss experience of
the Mortgage Loans will correspond to the loss experience of Ameriquest's
servicing portfolio set forth in the foregoing tables. The statistics shown
above represent the delinquency and loss experience for Ameriquest's total
servicing portfolio only for the periods presented, whereas the aggregate
delinquency and loss experience on the Mortgage Loans will depend on the results
obtained over the life of the Trust. Ameriquest's servicing portfolio includes
mortgage loans with payment and other characteristics that are not
representative of the payment and other characteristics of the Mortgage Loans. A
substantial number of the Mortgage Loans may also have been originated based on
Ameriquest underwriting guidelines that are less stringent than those generally
applicable to the servicing portfolio reflected in the foregoing table. If the
residential real estate market should experience an overall decline in property
values, the actual rates of delinquencies, foreclosures and losses could be
higher than those previously experienced by Ameriquest. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
THE TRUSTEE
Deutsche Bank National Trust Company, a national banking association,
will act as Trustee for the Certificates pursuant to the Pooling and Servicing
Agreement. The Trustee's offices for notices under the Pooling and Servicing
Agreement are located at Deutsche Bank National Trust Company, 1761 East St.
Andrew Place, Santa Ana, California 92705-4934, Attention: Trust
Administration-AQ03A1.
The Trustee will perform certain administrative functions with respect
to the certificates and will act as initial paying agent and certificate
registrar. The Trustee, in performing its duties under the Pooling and Servicing
Agreement, will act on behalf of the Trust in connection with any third-party
contracts.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling and Servicing Agreement will be equal to any
interest or other income earned on funds held in the distribution account as
provided in the Pooling and Servicing Agreement and the Trustee Fee. The Trustee
Fee is payable monthly and accrues at the Trustee Fee Rate of 0.0065% per annum
on the aggregate principal balance of the Mortgage Loans.
The Pooling and Servicing Agreement will provide that the Trustee and
any director, officer, employee or agent of the Trustee will be indemnified by
the Trust and will be held harmless against any loss, liability or expense (not
including expenses, disbursements and advances incurred or made by the Trustee,
including the compensation and the expenses and disbursements of its agents and
counsel, in the ordinary course of the Trustee's performance in accordance with
the provisions of the Pooling and Servicing Agreement) incurred by the Trustee
in connection with any pending or threatened claim or legal action arising out
of or in connection with the acceptance or administration of its obligations and
duties under the Pooling and Servicing Agreement, other than any loss, liability
or expense (i) resulting from a breach of the Master Servicer's obligations and
duties under the Pooling and Servicing Agreement (for which the Trustee receives
indemnity from the Master Servicer), (ii) that constitutes a specific liability
of the Trustee under the Pooling and Servicing Agreement or (iii) incurred by
reason of willful misfeasance, bad faith or negligence in the performance of the
Trustee's duties under the Pooling and Servicing Agreement or as a result of a
breach, or by reason of reckless disregard, of the Trustee's obligations and
duties under the Pooling and Servicing Agreement. In addition, the Pooling and
Servicing Agreement will provide that the Trustee and any director, officer,
employee or agent of the Trustee will be reimbursed from the Trust for all costs
associated with the transfer of servicing in the event of a Master Servicer
Event of Default (as defined in the Pooling and Servicing Agreement).
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its servicing activities for the Certificates will be equal to accrued
interest at the Servicing Fee Rate of 0.50% per annum with respect to each
Mortgage Loan for each calendar month on the same principal balance on which
interest on such Mortgage Loan accrues for such calendar month (the "Servicing
Fee"). As additional servicing compensation, the Master Servicer is entitled to
retain all ancillary income, including late charges, NSF fees, reconveyance fees
and assumption fees (with the exception of prepayment charges, which will be
distributed to the holders of the Class P Certificates) to the extent collected
from mortgagors, together with any interest or other income earned on funds held
in the collection account and any escrow accounts.
The Master Servicer is obligated to offset any Prepayment Interest
Shortfall on any Distribution Date with Compensating Interest to the extent of
its aggregate Servicing Fee for such Distribution Date. The Master Servicer is
obligated to pay certain insurance premiums and certain ongoing expenses
associated with the Mortgage Pool and incurred by the Master Servicer in
connection with its responsibilities under the Pooling and Servicing Agreement
and is entitled to reimbursement therefor as provided in the Pooling and
Servicing Agreement. See "Description of the Securities--Retained Interest;
Servicing or Administration Compensation and Payment of Expenses" in the
Prospectus for information regarding expenses payable by the Master Servicer and
"Federal Income Tax Consequences" herein regarding certain taxes payable by the
Master Servicer.
EVENTS OF DEFAULT
In addition to those Events of Default (as defined in the Prospectus)
described under "Description of the Securities--Events of Default under the
Governing Agreement and Rights Upon events of Default" in the Prospectus, upon
the occurrence of certain loss triggers with respect to the Mortgage Loans, the
Master Servicer may be removed as master servicer of the Mortgage Loans in
accordance with the terms of the Pooling and Servicing Agreement.
Any successor to the Master Servicer appointed under the Pooling and
Servicing Agreement must be a residential mortgage loan servicing institution
acceptable to each Rating Agency (as defined in the Prospectus) with a net worth
at the time of such appointment of at least $15,000,000. See "Description of the
Securities--Events of Default under the Governing Agreement and Rights Upon
Events of Default" in the Prospectus.
VOTING RIGHTS
At all times, 98% of all voting rights will be allocated among the
holders of the Class A Certificates, the Mezzanine Certificates and the Class CE
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates, 1% of all voting rights will be
allocated among the holders of the Class P Certificates and 1% of all voting
rights will be allocated among the holders of the Class R Certificates in
proportion to the percentage interests in such classes evidenced by their
respective Certificates.
TERMINATION
The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Certificates are
described in "Description of the Securities--Termination of the Trust Fund and
Disposition of Trust Fund Assets" in the Prospectus. The Master Servicer, or if
the Master Servicer fails to exercise such option, the NIMS Insurer, if any,
will have the right to purchase all remaining Mortgage Loans and any properties
acquired in respect thereof and thereby effect early retirement of the
Certificates on any Distribution Date following the Due Period during which the
aggregate principal balance of the Mortgage Loans (and properties acquired in
respect thereof) remaining in the Trust at the time of purchase is reduced to an
amount less than 10% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date. In the event the Master Servicer or the NIMS Insurer, if
any, exercises such option, the purchase price payable in connection therewith
generally will be equal to the fair market value of the Mortgage Loans and such
properties, plus accrued interest for each Mortgage Loan at the related Mortgage
Rate to but not including the first day of the month in which such repurchase
price is distributed, together with any amounts due to the Master Servicer for
servicing compensation at the Servicing Fee Rate and any unreimbursed Advances
and servicing advances. However, this option may be exercised only if (i) the
fair market value of the Mortgage Loans and REO Properties is at least equal to
the aggregate principal balance of the Mortgage Loans and the appraised value of
the
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REO Properties and (ii) the termination price is sufficient to pay all interest
accrued on, as well as amounts necessary to retire the principal balance of, the
notes guaranteed by the NIMS Insurer and any amounts owed to the NIMS Insurer at
the time the option is exercised. Proceeds from such repurchase will be included
in Available Funds and will be distributed to the holders of the Certificates in
accordance with the Pooling and Servicing Agreement.
In the event the Master Servicer or the NIMS Insurer, if any, exercises
such option, the portion of the purchase price allocable to the Offered
Certificates of each class will be, to the extent of available funds:
(i) 100% of the then outstanding Certificate Principal Balance of
the Offered Certificates, plus
(ii) one month's interest on the then outstanding Certificate
Principal Balance thereof at the then applicable Pass-Through
Rate for such class, plus
(iii) any previously accrued but unpaid interest thereon to which
the holders of such Certificates are entitled are entitled,
together with the amount of any Net WAC Rate Carryover Amounts
(payable to and from the Net WAC Rate Carryover Reserve
Account).
The holders of the Class R Certificates will pledge any amount received
by such holders in a termination in excess of par to the holders of the Class CE
Certificates. In no event will the Trust created by the Pooling and Servicing
Agreement continue beyond the expiration of 21 years from the death of the
survivor of the persons named in the Pooling and Servicing Agreement. See
"Description of the Securities--Termination of the Trust Fund and Disposition of
Trust Fund Assets" in the Prospectus.
SERVICING OF DELINQUENT MORTGAGE LOANS
The Master Servicer will be required to act with respect to delinquent
Mortgage Loans in accordance with procedures set forth in the Pooling and
Servicing Agreement. These procedures, as followed with respect to any
delinquent Mortgage Loan, may, among other things, result in (i) foreclosing on
such Mortgage Loan, (ii) accepting the deed to the related Mortgaged Property in
lieu of foreclosure, (iii) granting the borrower under such Mortgage Loan a
modification or forbearance or (iv) accepting payment from the borrower under
such Mortgage Loan of an amount less than the Principal Balance of such Mortgage
Loan in final satisfaction of such Mortgage Loan. HOWEVER, FOLLOWING THESE
PROCEDURES MAY NOT LEAD TO THE ALTERNATIVE THAT WOULD RESULT IN THE RECOVERY BY
THE TRUST OF THE HIGHEST NET PRESENT VALUE OF PROCEEDS ON SUCH MORTGAGE LOAN OR
OTHERWISE TO THE ALTERNATIVE THAT IS IN THE BEST INTERESTS OF THE
CERTIFICATEHOLDERS.
OPTIONAL PURCHASE OF DELINQUENT MORTGAGE LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or
more, the NIMS Insurer, if any, may, at its option and in accordance with the
terms of the Pooling and Servicing Agreement, purchase such Mortgage Loan from
the Trust at a purchase price for such Mortgage Loan generally equal to par plus
accrued interest. In addition, the Master Servicer will have the option to
purchase from the Trust Mortgage Loans that are delinquent in payment 90 days or
more at a purchase price for such Mortgage Loan generally equal to par plus
accrued interest, under certain circumstances set forth in the Pooling and
Servicing Agreement and, with respect to each such delinquent Mortgage Loan,
during certain prescribed time periods relating to the length of time such
Mortgage Loan has been delinquent, in each case as set forth in the Pooling and
Servicing Agreement.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
One or more elections will be made to treat designated portions of the
Trust (exclusive of the Net WAC Rate Carryover Reserve Account and the Excess
Net WAC Rate Reserve Account) as a real estate mortgage investment conduit (a
"REMIC") for federal income tax purposes. Upon the issuance of the Offered
Certificates, Thacher Proffitt & Wood, counsel to the Depositor, will deliver
its opinion generally to the effect that, assuming compliance with all
provisions of the Pooling and Servicing Agreement, for federal income tax
purposes, each REMIC elected by the Trust will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Class R Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the Trust and (ii) the Offered Certificates
(exclusive of any right of the holder of the Offered Certificates to receive
payments from the Net WAC Rate Carryover Reserve Account in respect of the Net
WAC Rate Carryover Amount and the rights of the holders of the Class A
Certificates to receive payments from the Excess Net WAC Rate Reserve Account in
respect of the Excess Group Net WAC Pass-Through Rate Amount), the Class CE
Certificates and the Class P Certificates will represent the "regular interests"
in, and generally will be treated as debt instruments of, a REMIC. See "Federal
Income Tax Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class M-3 Certificates
and the Class M-4 Certificates will, and the other classes of Offered
Certificates will not be treated as having been issued with original issue
discount. The prepayment assumption that will be used in determining the rate of
accrual of original issue discount, premium and market discount, if any, for
federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at the Prepayment
Assumption. No representation is made that the Mortgage Loans will prepay at
such rate or at any other rate. See "Federal Income Tax Consequences--REMICs" in
the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Offered Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered Certificates. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the Offered Certificates. Because of the uncertainty concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules of the OID Regulations relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such Certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Offered Certificates
should be treated as issued with original issue discount or should be governed
by the rules applicable to debt instruments having contingent payments or by
some other method not yet set forth in regulations. Prospective purchasers of
the Offered Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Offered Certificates, if such Certificates are
required to be treated as issued with original issue discount, generally would
be to report income with respect to such Certificates as original issue discount
for each period by computing such original issue discount (i) by assuming that
the value of the applicable index will remain constant for purposes of
determining the original yield to maturity of, and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Federal Income Tax
Consequences--REMICs" in the Prospectus.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
certificateholder, the amount of original issue discount allocable to that
period would be zero and the certificateholder will be permitted to offset that
negative amount only against future original issue discount, if any,
attributable to those certificates.
S-79
Certain of the Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a Certificate
will be treated as holding such Certificate with amortizable bond premium will
depend on such certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
certificateholder. Holders of such Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Federal Income Tax Consequences--REMICs" in the Prospectus.
Each holder of an Offered Certificate is deemed to own an undivided
beneficial ownership interest in a REMIC regular interest and the right to
receive payments from the Net WAC Rate Carryover Reserve Account in respect of
the Net WAC Rate Carryover Amount. Each holder of a Class A Certificate is also
deemed to own a beneficial interest in the right to receive payments from the
Excess Net WAC Rate Reserve Account in respect of Excess Group Net WAC
Pass-Through Rate Amount. Each holder of a Class A-2 Certificate, Class M-1
Certificate or Class M-2 Certificate is also deemed to own a beneficial interest
in the right to receive payments from the related cap contract. Each class of
Offered Certificates will also represent the obligation to make payments in
respect of the Excess Pool Net WAC Pass- Through Rate Amount, as required in the
Pooling and Servicing Agreement, which shall not be an interest in any REMIC but
a contractual obligation of the holders of the Offered Certificates. Neither the
Net WAC Rate Carryover Reserve Account nor the Excess Net WAC Rate Reserve
Account is an asset of any REMIC.
The treatment of amounts received by a holder of an Offered Certificate
under such holder's right to receive the Net WAC Rate Carryover Amount or, with
respect to holders of a Class A Certificate, the right to receive the Excess
Group Net WAC Pass-Through Rate Amount, will depend on the portion, if any, of
such holder's purchase price allocable thereto. Under the REMIC Regulations,
each holder of an Offered Certificate must allocate its purchase price for the
Offered Certificate between its undivided interest in the regular interest of
the related REMIC and its undivided interest in the right to receive payments
from the Net WAC Rate Carryover Reserve Account in respect of the Net WAC Rate
Carryover Amount and with respect to the Class A Certificates its undivided
interest in the right to receive payments from the Excess Net WAC Rate Reserve
Account in respect of the Excess Group Net WAC Pass-Through Rate Amount in
accordance with the relative fair market values of each property right. The
Trustee intends to treat payments made to the holders of the Offered
Certificates with respect to the Net WAC Rate Carryover Amount as includible in
income based on the regulations relating to notional principal contracts (the
"Notional Principal Contract Regulations"). The OID Regulations provide that the
Trust's allocation of the issue price is binding on all holders unless the
holder explicitly discloses on its tax return that its allocation is different
from the Trust's allocation. For tax reporting purposes, the Trustee intends to
treat the right to receive payments from the Net WAC Rate Carryover Reserve
Account in respect of Net WAC Rate Carryover Amounts and the right to receive
payments from the Excess Net WAC Rate Reserve Account in respect of Excess Group
Net WAC Pass-Through Rate Amounts as each having a DE MINIMIS value. Under the
REMIC Regulations, the Trustee is required to account for the REMIC regular
interest, the right to receive payments from the Net WAC Rate Carryover Reserve
Account in respect of the Net WAC Rate Carryover Amount and the right to receive
payments from the Excess Net WAC Rate Reserve Account in respect of Excess Group
Net WAC Pass- Through Rate Amounts as discrete property rights. Holders of the
Class A Certificates will be treated for federal income tax purposes as
receiving all amounts deposited into the Excess Net WAC Rate Reserve Account in
respect of the Excess Group Net WAC Pass-Through Rate Amount and than as paying
such amounts to holder of the applicable Class A Certificates or Class CE
Certificates, as applicable Holders of the Offered Certificates are advised to
consult their own tax advisors regarding the allocation of issue price, timing,
character and source of income and deductions resulting from the ownership of
such Certificates. Treasury regulations have been promulgated under Section 1275
of the Code generally providing for the integration of a "qualifying debt
instrument" with a hedge if the combined cash flows of the components are
substantially equivalent to the cash flows on a variable rate debt instrument.
However, such regulations specifically disallow integration of debt instruments
subject to Section 1272(a)(6) of the Code. holders of the Offered Certificates
will be unable to use the integration method provided for under such regulations
with respect to those Certificates. If the Trustee's treatment of payments of
the Net WAC Rate Carryover Amount and the Excess Group Net WAC Pass-Through Rate
Amount is respected, ownership of the right to the Net WAC Rate Carryover Amount
and the Excess Group Net WAC Pass-Through Rate Amount will entitle the owner to
amortize the separate price paid for the right to the Net WAC Rate Carryover
Amount and the Excess Group Net WAC Pass-Through Rate Amount under the Notional
Principal Contract Regulations
Upon the sale of an Offered Certificate the amount of the sale
allocated to the selling certificateholder's right to receive payments from the
Net WAC Rate Carryover Reserve Account in respect of the Net WAC Rate Carryover
Amount or, with respect to a Class A Certificate, the right to receive payments
from the Excess Net WAC Rate Reserve
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Account in respect of the Excess Group Net WAC Pass-Through Rate Amount would be
considered a "termination payment" under the Notional Principal Contract
Regulations allocable to the related Offered Certificate, as the case may be. A
holder of an Offered Certificate will have gain or loss from such a termination
of the right to receive payments from the Net WAC Rate Carryover Reserve Account
in respect of the Net WAC Rate Carryover Amount or, with respect to a Class A
Certificate, the right to receive payments from the Excess Net WAC Rate Reserve
Account in respect of the Excess Group Net WAC Pass-Through Rate Amount equal to
(i) any termination payment it received or is deemed to have received minus (ii)
the unamortized portion of any amount paid (or deemed paid) by the
certificateholder upon entering into or acquiring its interest in the right to
receive payments from the Net WAC Rate Carryover Reserve Account in respect of
the Net WAC Rate Carryover Amount or, with respect to a Class A Certificate, the
right to receive payments from the Excess Net WAC Rate Reserve Account in
respect of the Excess Group Net WAC Pass-Through Rate Amount, as applicable.
Gain or loss realized upon the termination of the right to receive
payments from the Net WAC Rate Carryover Reserve Account in respect of the Net
WAC Rate Carryover Amount or, with respect to a Class A Certificate, the right
to receive payments from the Excess Net WAC Rate Reserve Account in respect of
the Excess Group Net WAC Pass- Through Rate Amount will generally be treated as
capital gain or loss. Moreover, in the case of a bank or thrift institution,
Code Section 582(c) would likely not apply to treat such gain or loss as
ordinary.
It is possible that the right to receive payments in respect of the Net
WAC Rate Carryover Amounts could be treated as a partnership among the holders
of all of the Certificates or that the right to receive payments in respect of
any Excess Group Net WAC Pass-Through Rate Amount could be treated as a
partnership among the holders of the Class A and Class CE Certificates, in which
case holders of the such Certificates potentially would be subject to different
timing of income and foreign holders of such Certificates could be subject to
withholding in respect of any related Net WAC Carryover Amount or Excess Group
Net WAC Pass-Through Rate Amount. Holders of the Offered Certificates are
advised to consult their own tax advisors regarding the allocation of issue
price, timing, character and source of income and deductions resulting from the
ownership of their Certificates.
With respect to the Offered Certificates, this paragraph is relevant to
such Certificates exclusive of the rights of the holders of such Certificates to
receive certain payments in respect of the Net WAC Rate Carryover Amount and the
right of the Class A Certificates to receive payments in respect of the Excess
Group Net WAC Pass-Through Rate Amount. The Offered Certificates will be treated
as assets described in Section 7701(a)(19)(C) of the Code and "real estate
assets" under Section 856(c)(4)(A) of the Code, generally in the same proportion
that the assets in the Trust would be so treated. In addition, interest on the
Offered Certificates will be treated as "interest on obligations secured by
mortgages on real property" under Section 856(c)(3)(B) of the Code, generally to
the extent that the Offered Certificates are treated as "real estate assets"
under Section 856(c)(4)(A) of the Code. The Offered Certificates will also be
treated as "qualified mortgages" under Section 860G(a)(3) of the Code. See
"Federal Income Tax Consequences--REMICs" in the Prospectus.
Because the Net WAC Rate Carryover Amount and, with respect to a Class
A Certificate, the Excess Group Net WAC Pass-Through Rate Amount is treated as a
separate right of the Offered Certificates not payable by any REMIC elected by
the Trust, such right will not be treated as a qualifying asset for any
certificateholder that is a mutual savings bank, domestic building and loan
association, real estate investment trust, or real estate mortgage investment
conduit and any amounts received from the Net WAC Rate Carryover Reserve Account
or, with respect to a Class A Certificate, the Excess Net WAC Rate Reserve
Account will not be qualifying real estate income for real estate investment
trusts.
It is not anticipated that any REMIC elected by the Trust will engage
in any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on any REMIC elected by the Trust, such tax will be borne (i) by
the Trustee, if the Trustee has breached its obligations with respect to REMIC
compliance under the Pooling and Servicing Agreement, (ii) by the Master
Servicer, if the Master Servicer has breached its obligations with respect to
REMIC compliance under the Pooling and Servicing Agreement and (iii) otherwise
by the Trust, with a resulting reduction in amounts otherwise distributable to
holders of the Offered Certificates. See "Description of the Securities" and
"Federal Income Tax Consequences REMICs" in the Prospectus. The responsibility
for filing annual federal information returns and other reports will be borne by
the Trustee. See "Federal Income Tax Consequences--REMICs" in the Prospectus.
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TAX RETURN DISCLOSURE AND INVESTOR LIST REQUIREMENTS
Recent Treasury pronouncements directed at abusive tax shelter activity
appear to apply to transactions not conventionally regarded as tax shelters.
Temporary and proposed regulations require taxpayers to report certain
disclosures on IRS form 8886 if they participate in a "reportable transaction."
Organizers and sellers of the transaction are required to maintain records
including investor lists containing identifying information and to furnish those
records to the IRS upon demand. A transaction may be a "reportable transaction"
based upon any of several indicia, including the existence of book-tax
differences common to financial transactions, one or more of which may be
present with respect to your investment in the Certificates. There are pending
in the Congress legislative proposals that, if enacted, would impose significant
penalties for failure to comply with these disclosure requirements. Investors
should consult their own tax advisers concerning any possible disclosure
obligation with respect to their investment, and should be aware that the
depositor and other participants in the transaction intend to comply with such
disclosure and investor list maintenance requirements as they determine apply to
them with respect to this transaction.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated January 15, 2003, (the "Underwriting Agreement"), the Depositor
has agreed to sell, and each Underwriter severally has agreed to purchase a
portion of the Offered Certificates set forth opposite its respective name. Each
Underwriter is obligated to purchase all of its allocated portion of the Offered
Certificates if it purchases any.
ORIGINAL ORIGINAL ORIGINAL ORIGINAL ORIGINAL ORIGINAL
CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE
CLASS A-1 CLASS A-2 CLASS M-1 CLASS M-2 CLASS M-3 CLASS M-4
UNDERWRITERS CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------ ------------ ------------ ------------ ------------
UBS Warburg LLC $214,389,900 $ 98,814,600 $ 15,300,000 $ 12,600,000 $ 10,800,000 $ 2,700,000
Deutsche Bank Securities Inc. $ 11,910,550 $ 5,489,700 $ 850,000 $ 700,000 $ 600,000 $ 150,000
Morgan Stanley & Co. Incorporate$ 11,910,550 $ 5,489,700 $ 850,000 $ 700,000 $ 600,000 $ 150,000
Distribution of the Offered Certificates will be made from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be 99.57%
of the aggregate initial Certificate Principal Balance of the Offered
Certificates, plus accrued interest in the case of the Class M-4 Certificates.
In connection with the purchase and sale of the Offered Certificates, each
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts. In addition to the foregoing, the Depositor
will pay to UBS Warburg LLC a structuring fee equal to $1,000,000.
The Offered Certificates are offered subject to receipt and acceptance
by the Underwriters, to prior sale and to each Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Offered Certificates will be made
through the facilities of DTC, Clearstream and the Euroclear System on or about
the Closing Date. The Offered Certificates will be offered in Europe and the
United States of America.
The Underwriting Agreement provides that the Depositor and the
Originator will indemnify each Underwriter against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments an Underwriter may be required to make in respect
thereof.
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SECONDARY MARKET
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue. Each Underwriter
intends to establish a market in the classes of Offered Certificates purchased
by it but it is not obligated to do so. The primary source of information
available to investors concerning the Offered Certificates will be the monthly
reports made available via the Trustee's internet website, initially located at
https:\\www.corporatetrust.db.com, which will include information as to the
outstanding principal balance of the Offered Certificates and the status of the
applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Offered Certificates will be available
through any other source. In addition, the Depositor is not aware of any source
through which price information about the Offered Certificates will be generally
available on an ongoing basis. The limited nature of such information regarding
the Offered Certificates may adversely affect the liquidity of the Offered
Certificates, even if a secondary market for the Offered Certificates becomes
available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Depositor by Thacher Proffitt & Wood, New York, New York and
for the Underwriters by McKee Nelson LLP.
RATINGS
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated "Aaa" by Moody's Investors Service ("Moody's") and "AAA"
by Fitch Ratings ("Fitch") and Standard & Poor's Ratings Services, a division of
the McGraw-Hill Companies, Inc. ("S&P"; and together with Moody's and Fitch, the
"Rating Agencies"), that the Class M-1 Certificates be rated at least "Aa2" by
Moody's and "AA" by Fitch and S&P, that the Class M-2 Certificates be rated at
least "A2" by Moody's and "A" by Fitch and S&P, that the Class M-3 Certificates
be rated at least "Baa2" by Moody's and "BBB" by Fitch and S&P and that the
Class M-4 Certificates be rated at least "Baa3" by Moody's and "BBB-" by Fitch
and S&P.
The ratings of the Rating Agencies assigned to asset-backed
pass-through certificates address the likelihood of the receipt by
certificateholders of all distributions to which such certificateholders are
entitled. The rating process addresses structural and legal aspects associated
with the Certificates, including the nature of the underlying mortgage loans.
The ratings on the Offered Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Mortgage Loans, the
distribution of the Net WAC Rate Carryover Amount or the possibility that a
holder of an Offered Certificate might realize a lower than anticipated yield.
The ratings do not address the possibility that certificateholders might suffer
a lower than anticipated yield due to non-credit events.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Offered Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Offered Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Offered Certificates as stated above.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA for so long as they are
rated not lower than the second highest rating category by the Rating Agencies,
and as such, will be legal investments for certain entities to the extent
provided in SMMEA. SMMEA, however, provides for state limitation on the
authority of such entities to invest in "mortgage related securities" provided
that such restrictive legislation was enacted prior to October 3, 1991. Certain
states have enacted legislation which
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overrides the preemption provisions of SMMEA. The Class M-2 Certificates, the
Class M-3 Certificates and the Class M-4 Certificates will not constitute
"mortgage related securities" for purposes of SMMEA.
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions. See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any ERISA plan, IRA, Keogh plan or government plan,
collectively referred to here as "benefit plans," or any insurance company,
whether through its general or separate accounts, or any other person investing
benefit plan assets of any benefit plan, should carefully review with its legal
advisors whether the purchase or holding of offered certificates could give rise
to a transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Code. The purchase or holding of the Offered Certificates by or on
behalf of, or with benefit plan assets of, a benefit plan may qualify for
exemptive relief under the Underwriters' Exemption, as described under
"Considerations for Benefit Plan Investors Possible Exemptive Relief' in the
prospectus. The Underwriters' exemption relevant to the offered certificates was
granted by the Department of Labor on April 18, 1991 as Prohibited Transaction
Exemption, or PTE, 91-22 at 56 Fed. Reg. 15933 and was amended by PTE 2000-58 at
65 Fed. Reg. 67765. The Department of Labor issued a final administrative
exemption, PTE 2002-41, at 67 Fed. Reg. 54487 (August 22, 2002), which amended
the Underwriters' exemption and similar exemptions issued to other underwriters.
This amendment allows the trustee to be affiliated with the underwriters despite
the restriction in PTE 2000-58 to the contrary. The purchase of the Offered
Certificates by, on behalf of or with the plan assets of any benefit plan may
qualify for exemptive relief under the Underwriters' Exemption. However, the
Underwriters' Exemption contains a number of conditions which must be met for
the exemption to apply, including the requirements that the investing benefit
plan must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation
D of the Securities and Exchange Commission under the Securities Act that the
Offered Certificates be rated at least "BBB-" (or its equivalent) by the Rating
Agencies at the time of the Plan's purchase.
Each certificate owner of a Mezzanine Certificate or any interest
therein will be deemed to have represented, by virtue of its acquisition or
holding of that certificate or interest therein, that either (i) it is not a
plan investor, (ii) it has acquired and is holding such Mezzanine Certificate in
reliance on the Underwriters' Exemption, and that it understands that there are
certain conditions to the availability of the Underwriters' Exemption, including
that the Mezzanine Certificate must be rated, at the time of purchase, not lower
than "BBB-" (or its equivalent) by the Rating Agencies or (iii) (1) it is an
insurance company, (2) the source of funds used to acquire or hold the
certificate or interest therein is an "insurance company general account," as
such term is defined in PTCE 95-60, and (3) the conditions in Sections I and III
of PTCE 95-60 have been satisfied.
If any Mezzanine Certificate or any interest therein is acquired or
held in violation of the conditions described in the preceding paragraph, the
next preceding permitted certificate owner will be treated as the certificate
owner of that Mezzanine Certificate, retroactive to the date of transfer to the
purported certificate owner. Any purported certificate owner whose acquisition
or holding of any such certificate or interest therein was effected in violation
of the conditions described in the preceding paragraph will indemnify and hold
harmless the Depositor, the Trustee, the Master Servicer, any subservicer, and
the Trust from and against any and all liabilities, claims, costs or expenses
incurred by those parties as a result of that acquisition or holding.
Before purchasing any Offered Certificates, a fiduciary of a benefit
plan should itself confirm that the Offered Certificates constitute "securities"
for purposes of the Underwriters' Exemption and that the specific and general
conditions of the Underwriters' Exemption and the other requirements set forth
in the Underwriters' Exemption would be satisfied. Any benefit plan fiduciary
that proposes to cause a benefit plan to purchase a Certificate should consult
with its counsel with respect to the potential applicability to such investment
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to the proposed investment. For further information regarding the
ERISA considerations of investing in the Certificates, see "Considerations for
Benefit Plan Investors" in the prospectus.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will
be available only in book-entry form. Investors in the Offered Certificates may
hold such Offered Certificates through any of DTC, Clearstream or Euroclear. The
Offered Certificates will be traceable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors through Clearstream and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Clearstream and Euroclear and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositories of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Offered Certificates will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Offered Certificates will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Offered
Certificates will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Offered Certificates through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Offered Certificates through
Clearstream or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Offered Certificates will
be credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-
day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PARTICIPANTS.
When Offered Certificates are to be transferred from the account of a DTC
Participant to the account of a Clearstream Participant or a Euroclear
Participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream Participant or Euroclear Participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the Relevant
Depositary, as the case may be, to receive the Offered Certificates against
payment. Payment will include interest accrued on the Offered Certificates from
and including the last coupon payment date to and excluding the settlement date,
on the basis
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of the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year consisting of twelve 30-day months, as
applicable. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the Relevant Depositary to the DTC Participant's
account against delivery of the Offered Certificates. After settlement has been
completed, the Offered Certificates will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Offered Certificates will accrue from,
the value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (I.E., the
trade fails), the Clearstream or Euroclear cash debt will be valued instead as
of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Offered Certificates are credited to their account one day later. As
an alternative, if Clearstream or Euroclear has extended a line of credit to
them, Clearstream Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Offered Certificates would incur overdraft charges for
one day, assuming they cleared the overdraft when the Offered Certificates were
credited to their accounts. However, interest on the Offered Certificates would
accrue from the value date. Therefore, in many cases the investment income on
the Offered Certificates earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although the result will
depend on each Clearstream Participant's or Euroclear Participant's particular
cost of funds. Since the settlement is taking place during New York business
hours, DTC Participants can employ their usual procedures for crediting Offered
Certificates to the respective European Depositary for the benefit of
Clearstream Participants or Euroclear Participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the DTC
Participants a cross-market transaction will settle no differently than a trade
between two DTC Participants.
TRADING BETWEEN CLEARSTREARN OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Offered Certificates are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to credit the Offered Certificates to the DTC Participant's account
against payment. Payment will include interest accrued on the Offered
Certificates from and including the last coupon payment to and excluding the
settlement date on the basis of the actual number of days in such accrual period
and a year assumed to consist to 360 days or a 360-day year consisting of twelve
30-day months, as applicable. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Offered Certificates from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until
the purchase side of the trade is reflected in their
Clearstream or Euroclear accounts) in accordance with the
clearing system's customary procedures;
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(b) borrowing the Offered Certificates in the U.S. from a DTC
Participant no later than one day prior to settlement, which
would give the Offered Certificates sufficient time to be
reflected in their Clearstream or Euroclear account in order
to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for
the sale to the Clearstream Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Offered Certificates holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form W-8BEN may be filed by the Certificate Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE.
The Certificate Owner of a Global Security or, in the case of a Form
1001 or a Form 4224 filer, his agent, files by submitting the appropriate form
to the person through whom it holds (the clearing agency, in the case of persons
holding directly on the books of the clearing agency). Form W-8, Form 1001 and
Form 4224 are effective until December 31, 2000. Form W-8BEN and Form W-8ECI are
effective until the third succeeding calendar year from the date such form is
signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Offered
Certificates. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Offered
Certificates.
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MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
AMERIQUEST MORTGAGE SECURITIES INC.
DEPOSITOR
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 1 OF THIS
PROSPECTUS AND IN THE PROSPECTUS SUPPLEMENT.
THE PROSPECTUS TOGETHER WITH THE ACCOMPANYING PROSPECTUS SUPPLEMENT
WILL CONSTITUTE THE FULL PROSPECTUS.
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THE SECURITIES:
Ameriquest Mortgage Securities Inc., as depositor, will sell the securities,
which may be in the form of mortgage pass-through certificates or
mortgage-backed notes. Each issue of securities will have its own series
designation and will evidence either:
o the ownership of trust fund assets, or
o debt obligations secured by trust fund assets.
THE TRUST FUND AND ITS ASSETS:
The assets of a trust fund will primarily include any combination of various
types of one- to four-family residential first and junior lien mortgage loans,
multifamily first and junior mortgage loans, commercial first and junior
mortgage loans, mixed-use residential and commercial first and junior mortgage
loans, home equity lines of credit, cooperative apartment loans, manufactured
housing conditional sales contracts and installment loan agreements or home
improvement installment sales contracts and installment loan agreements.
CREDIT ENHANCEMENT
The assets of the trust fund for a series of securities may also include a
financial guaranty insurance policy, pool insurance policies, letters of credit,
reserve funds or currency or interest rate exchange agreements or any
combination of credit support. Credit enhancement may also be provided by means
of subordination of one or more classes of securities, cross-collateralization
or by overcollateralization.
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.
Offers of the securities may be made through one or more different methods,
including through underwriters as described in "Methods of Distribution" in this
prospectus and in the related prospectus supplement.
The date of this Prospectus is November 11, 2002.
TABLE OF CONTENTS
RISK FACTORS....................................................................................................-1-
DESCRIPTION OF THE TRUST FUNDS..................................................................................-7-
Description of the Mortgage Assets to Be Included in a Trust Fund..........................................-8-
Description of the Pre-funding Account for the Purchase of Additional Mortgage Loans......................-13-
THE DEPOSITOR..................................................................................................-13-
USE OF PROCEEDS................................................................................................-14-
YIELD AND MATURITY CONSIDERATIONS..............................................................................-14-
Maturity and Weighted Average Life........................................................................-17-
Foreclosures and Payment Plans............................................................................-19-
THE DEPOSITOR'S MORTGAGE LOAN PURCHASE PROGRAM.................................................................-19-
Underwriting Standards....................................................................................-19-
Qualifications of Originators and Mortgage Loan Sellers...................................................-22-
Representations by or on Behalf of Mortgage Loan Sellers; Remedies for Breach of Representation...........-22-
DESCRIPTION OF THE SECURITIES..................................................................................-24-
Assignment of Trust Fund Assets; Review of Files by Trustee...............................................-25-
Representations and Warranties; Repurchases...............................................................-27-
Establishment of Collection Account; Deposits to Collection Account in Respect of Trust Fund Assets.......-29-
Deposits to Distribution Account..........................................................................-33-
DISTRIBUTIONS ON THE SECURITIES................................................................................-33-
Advances by Master Servicer in Respect of Delinquencies on the Trust Fund Assets..........................-36-
Form of Reports to Securityholders........................................................................-36-
Collection and Other Servicing Procedures Employed by the Master Servicer.................................-38-
Description of Sub-Servicing..............................................................................-39-
Procedures for Realization upon Defaulted Mortgage Assets.................................................-40-
Retained Interest; Servicing or Administration Compensation and Payment of Expenses.......................-42-
Annual Evidence as to the Compliance of the Master Servicer...............................................-43-
Matters Regarding the Master Servicer and the Depositor...................................................-44-
Events of Default under the Governing Agreement and Rights upon Events of Default.........................-45-
Amendment of the Governing Agreements.....................................................................-48-
Termination of the Trust Fund and Disposition of Trust Fund Assets........................................-49-
Optional Purchase by the Master Servicer of Defaulted Mortgage Loans......................................-51-
Duties of the Trustee.....................................................................................-51-
Description of the Trustee................................................................................-51-
DESCRIPTION OF CREDIT SUPPORT..................................................................................-51-
Subordination.............................................................................................-52-
Letter of Credit..........................................................................................-53-
Mortgage Pool Insurance Policy............................................................................-55-
Special Hazard Insurance Policy...........................................................................-57-
Bankruptcy Bond...........................................................................................-58-
Financial Guarantee Insurance.............................................................................-59-
Reserve Fund..............................................................................................-59-
Overcollateralization.....................................................................................-59-
Cross-Support Features....................................................................................-60-
OTHER FINANCIAL OBLIGATIONS RELATED TO THE SECURITIES..........................................................-60-
Swaps and Yield Supplement Agreements.....................................................................-60-
Purchase Obligations......................................................................................-60-
DESCRIPTION OF PRIMARY INSURANCE POLICIES......................................................................-61-
Primary Mortgage Insurance Policies.......................................................................-61-
Primary Hazard Insurance Policies.........................................................................-61-
FHA Insurance.............................................................................................-63-
VA Guarantees.............................................................................................-66-
LEGAL ASPECTS OF MORTGAGE ASSETS...............................................................................-67-
Mortgage Loans............................................................................................-67-
Cooperative Loans.........................................................................................-67-
Manufactured Housing Contracts............................................................................-68-
Home Improvement Contracts................................................................................-70-
Foreclosure on Mortgages..................................................................................-71-
Foreclosure on Mortgaged Properties Located in the Commonwealth of Puerto Rico............................-73-
Foreclosure on Cooperative Shares.........................................................................-73-
Repossession with Respect to Manufactured Housing Contracts...............................................-74-
Rights of Redemption with Respect to Mortgage Loans.......................................................-75-
Notice of Sale; Redemption Rights with Respect to Manufactured Housing Contracts..........................-76-
Anti-Deficiency Legislation and Other Limitations on Lenders..............................................-76-
Junior Mortgages..........................................................................................-78-
Home Equity Line of Credit Loans..........................................................................-78-
Consumer Protection Laws with Respect to Manufactured Housing Contracts and Home Improvement
Contracts........................................................................................-79-
Other Limitations.........................................................................................-80-
Enforceability of Provisions..............................................................................-80-
Leases and Rents..........................................................................................-81-
Subordinate Financing.....................................................................................-81-
Applicability of Usury Laws...............................................................................-81-
Alternative Mortgage Instruments..........................................................................-82-
Formaldehyde Litigation with Respect to Manufactured Homes................................................-83-
Soldiers' and Sailors' Civil Relief Act of 1940...........................................................-84-
Environmental Legislation.................................................................................-84-
Forfeitures in Drug and RICO Proceedings..................................................................-85-
Negative Amortization Loans...............................................................................-85-
Installment Contracts.....................................................................................-85-
FEDERAL INCOME TAX CONSEQUENCES................................................................................-86-
General .................................................................................................-86-
REMICs .................................................................................................-87-
Notes ................................................................................................-105-
Grantor Trust Funds......................................................................................-105-
Partnership Trust Funds..................................................................................-115-
FASIT Securities.........................................................................................-120-
STATE AND OTHER TAX CONSEQUENCES..............................................................................-120-
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS.....................................................................-120-
Investors Affected.......................................................................................-120-
Fiduciary Standards for ERISA Plans and Related Investment Vehicles......................................-121-
Prohibited Transaction Issues for ERISA Plans, Keogh Plans, IRAs and Related Investment Vehicles.........-121-
Possible Exemptive Relief................................................................................-122-
Consultation with Counsel................................................................................-126-
Government Plans.........................................................................................-127-
Required Deemed Representations of Investors.............................................................-127-
LEGAL INVESTMENT..............................................................................................-127-
METHODS OF DISTRIBUTION.......................................................................................-129-
LEGAL MATTERS.................................................................................................-130-
FINANCIAL INFORMATION.........................................................................................-130-
RATING........................................................................................................-130-
AVAILABLE INFORMATION.........................................................................................-131-
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............................................................-131-
RISK FACTORS
The offered securities are not suitable investments for all investors. In
particular, you should not purchase the offered securities unless you understand
and are able to bear the prepayment, credit, liquidity and market risks
associated with the securities.
You should carefully consider the following factors in connection with the
purchase of the securities offered hereby as well as any additional risk factors
that are set forth in the prospectus supplement related to your security:
THE SECURITIES WILL HAVE LIMITED LIQUIDITY SO INVESTORS MAY BE UNABLE TO SELL
THEIR SECURITIES OR MAY BE FORCED TO SELL THEM AT A DISCOUNT FROM THEIR INITIAL
OFFERING PRICE
There can be no assurance that a resale market for the securities of any
series will develop following the issuance and sale of any series of securities.
Even if a resale market does develop, it may not provide securityholders with
liquidity of investment or continue for the life of the securities of any
series. The prospectus supplement for any series of securities may indicate that
an underwriter specified in the prospectus supplement intends to establish a
secondary market in the securities, however no underwriter will be obligated to
do so. As a result, any resale prices that may be available for any offered
security in any market that may develop may be at a discount from the initial
offering price. The securities offered hereby will not be listed on any
securities exchange.
CREDIT SUPPORT MAY BE LIMITED; THE FAILURE OF CREDIT SUPPORT TO COVER LOSSES ON
THE TRUST FUND ASSETS WILL RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
Credit support is intended to reduce the effect of delinquent payments or
losses on the underlying trust fund assets on those classes of securities that
have the benefit of the credit support. With respect to each series of
securities, credit support will be provided in one or more of the forms referred
to in this prospectus and the related prospectus supplement. Regardless of the
form of credit support provided, the amount of coverage will usually be limited
in amount and in most cases will be subject to periodic reduction in accordance
with a schedule or formula. Furthermore, credit support may provide only very
limited coverage as to particular types of losses or risks, and may provide no
coverage as to other types of losses or risks. If losses on the trust fund
assets exceed the amount of coverage provided by any credit support or the
losses are of a type not covered by any credit support, these losses will be
borne by the holders of the related securities or specific classes of the
related securities. SEE "DESCRIPTION OF CREDIT SUPPORT."
THE TYPES OF MORTGAGE LOANS INCLUDED IN THE TRUST FUND RELATED TO YOUR
SECURITIES MAY BE ESPECIALLY PRONE TO DEFAULTS WHICH MAY EXPOSE YOUR SECURITIES
TO GREATER LOSSES
The securities will be directly or indirectly backed by mortgage loans,
manufactured housing conditional sales contracts and installment loan
agreements. The types of mortgage loans included in the trust fund may have a
greater likelihood of delinquency and foreclosure, and a greater likelihood of
loss in the event of delinquency and foreclosure. You should be aware that if
the mortgaged properties fail to provide adequate security for the mortgage
loans included in a trust fund, any resulting losses, to the extent not covered
by credit support, will be allocated to the related securities in the manner
described in the related prospectus supplement and consequently would adversely
affect the yield to maturity on those securities. The depositor cannot assure
you that the values of the mortgaged properties have remained or will remain at
the appraised values on the dates of origination of the related mortgage loans.
The prospectus supplement for each series of securities will describe the
mortgage loans which are to be included in the trust fund related to your
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security and risks associated with those mortgage loans which you should
carefully consider in connection with the purchase of your security.
NONPERFECTION OF SECURITY INTERESTS IN MANUFACTURED HOMES MAY RESULT IN LOSSES
ON THE RELATED MANUFACTURED HOUSING CONTRACTS AND THE SECURITIES BACKED BY THE
MANUFACTURED HOUSING CONTRACTS
Any conditional sales contracts and installment loan agreements with
respect to manufactured homes included in a trust fund will be secured by a
security interest in a manufactured home. Perfection of security interests in
manufactured homes and enforcement of rights to realize upon the value of the
manufactured homes as collateral for the manufactured housing contracts are
subject to a number of federal and state laws, including the Uniform Commercial
Code as adopted in each state and each state's certificate of title statutes.
The steps necessary to perfect the security interest in a manufactured home will
vary from state to state. If the master servicer fails, due to clerical errors
or otherwise, to take the appropriate steps to perfect the security interest,
the trustee may not have a first priority security interest in the manufactured
home securing a manufactured housing contract. Additionally, courts in many
states have held that manufactured homes may become subject to real estate title
and recording laws. As a result, a security interest in a manufactured home
could be rendered subordinate to the interests of other parties claiming an
interest in the home under applicable state real estate law. The failure to
properly perfect a valid, first priority security interest in a manufactured
home securing a manufactured housing contract could lead to losses that, to the
extent not covered by credit support, may adversely affect the yield to maturity
of the related securities.
FORECLOSURE OF MORTGAGE LOANS MAY RESULT IN LIMITATIONS OR DELAYS IN RECOVERY
AND LOSSES ALLOCATED TO THE RELATED SECURITIES
Even assuming that the mortgaged properties provide adequate security for
the mortgage loans, substantial delays can be encountered in connection with the
liquidation of defaulted mortgage loans and corresponding delays in the receipt
of related proceeds by the securityholders could occur. An action to foreclose
on a mortgaged property securing a mortgage loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. In several states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a mortgaged
property. In the event of a default by a mortgagor, these restrictions may
impede the ability of the master servicer to foreclose on or sell the mortgaged
property or to obtain liquidation proceeds sufficient to repay all amounts due
on the related mortgage loan. The master servicer will be entitled to deduct
from liquidation proceeds all expenses incurred in attempting to recover amounts
due on the related liquidated mortgage loan and not yet repaid, including
payments to prior lienholders, accrued servicing fees, ancillary fees, legal
fees and costs of legal action, real estate taxes, maintenance and preservation
expenses, monthly advances and servicing advances. If any mortgaged properties
fail to provide adequate security for the mortgage loans in the trust fund
related to your security and insufficient funds are available from any
applicable credit support, you could experience a loss on your investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
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MORTGAGED PROPERTIES ARE SUBJECT TO ENVIRONMENTAL RISKS AND THE COST OF
ENVIRONMENTAL CLEAN-UP MAY INCREASE LOSSES ON THE RELATED MORTGAGE LOANS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
the property. These laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of the hazardous or toxic
substances. A lender also risks liability on foreclosure of the mortgage on the
property. In addition, the presence of hazardous or toxic substances, or the
failure to properly remediate the property, may adversely affect the owner's or
operator's ability to sell the property. Although the incidence of environmental
contamination of residential properties is less common than that for commercial
properties, mortgage loans contained in a trust fund may be secured by mortgaged
properties in violation of environmental laws, ordinances or regulations. The
master servicer is generally prohibited from foreclosing on a mortgaged property
unless it has taken adequate steps to ensure environmental compliance with
respect to the mortgaged property. However, to the extent the master servicer
errs and forecloses on mortgaged property that is subject to environmental law
violations, and to the extent a mortgage loan seller does not provide adequate
representations and warranties against environmental law violations, or is
unable to honor its obligations, including the obligation to repurchase a
mortgage loan upon the breach of a representation or warranty, a trust fund
could experience losses which, to the extent not covered by credit support,
could adversely affect the yield to maturity on the related securities.
THE RATINGS OF YOUR SECURITIES MAY BE LOWERED OR WITHDRAWN WHICH MAY ADVERSELY
AFFECT THE LIQUIDITY OR MARKET VALUE OF YOUR SECURITY
It is a condition to the issuance of the securities that each series of
securities be rated in one of the four highest rating categories by a nationally
recognized statistical rating agency. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time. No person is obligated to maintain the rating on any security, and
accordingly, there can be no assurance to you that the ratings assigned to any
security on the date on which the security is originally issued will not be
lowered or withdrawn by a rating agency at any time thereafter. The rating(s) of
any series of securities by any applicable rating agency may be lowered
following the initial issuance of the securities as a result of the downgrading
of the obligations of any applicable credit support provider, or as a result of
losses on the related mortgage loans in excess of the levels contemplated by the
rating agency at the time of its initial rating analysis. Neither the depositor,
the master servicer nor any of their respective affiliates will have any
obligation to replace or supplement any credit support, or to take any other
action to maintain any rating(s) of any series of securities. If any rating is
revised or withdrawn, the liquidity or the market value of your security may be
adversely affected.
FAILURE OF THE MORTGAGE LOAN SELLER TO REPURCHASE OR REPLACE A MORTGAGE LOAN MAY
RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
Each mortgage loan seller will have made representations and warranties in
respect of the mortgage loans sold by the mortgage loan seller and evidenced by
a series of securities. In the event of a breach of a mortgage loan seller's
representation or warranty that materially adversely affects the interests of
the securityholders in a mortgage loan, the related mortgage loan seller will be
obligated to cure the breach or repurchase or, if permitted, replace the
mortgage loan as described under "Mortgage Loan Program-Representations as to
Mortgage Loans to be made by or on Behalf of Mortgage Loan Sellers; Remedies for
Breach of Representation." However, there can be no assurance that a mortgage
loan seller will honor its obligation to cure, repurchase or, if permitted,
replace any mortgage loan as to which a breach of a representation or warranty
arises. A mortgage loan seller's failure or refusal to honor its repurchase
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obligation could lead to losses that, to the extent not covered by credit
support, may adversely affect the yield to maturity of the related securities.
In instances where a mortgage loan seller is unable, or disputes its
obligation, to repurchase affected mortgage loans, the master servicer may
negotiate and enter into one or more settlement agreements with the mortgage
loan seller that could provide for the purchase of only a portion of the
affected mortgage loans. Any settlement could lead to losses on the mortgage
loans which would be borne by the related securities. Neither the depositor nor
the master servicer will be obligated to purchase a mortgage loan if a mortgage
loan seller defaults on its obligation to do so, and no assurance can be given
that the mortgage loan sellers will carry out their repurchase obligations. A
default by a mortgage loan seller is not a default by the depositor or by the
master servicer. Any mortgage loan not so repurchased or substituted for shall
remain in the related trust fund and any related losses shall be allocated to
the related credit support, to the extent available, and otherwise to one or
more classes of the related series of securities.
All of the representations and warranties of a mortgage loan seller in
respect of a mortgage loan will have been made as of the date on which the
mortgage loan was purchased from the mortgage loan seller by or on behalf of the
depositor which will be a date prior to the date of initial issuance of the
related series of securities. A substantial period of time may have elapsed
between the date as of which the representations and warranties were made and
the later date of initial issuance of the related series of securities.
Accordingly, the mortgage loan seller's repurchase obligation, or, if specified
in the related prospectus supplement, limited replacement option, will not arise
if, during the period after the date of sale by the mortgage loan seller, an
event occurs that would have given rise to a repurchase obligation had the event
occurred prior to sale of the affected mortgage loan. The occurrence of events
during this period that are not covered by a mortgage loan seller's repurchase
obligation could lead to losses that, to the extent not covered by credit
support, may adversely affect the yield to maturity of the related securities.
THE YIELD TO MATURITY ON YOUR SECURITIES WILL DEPEND ON A VARIETY OF FACTORS
INCLUDING PREPAYMENTS
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 assets in the trust fund
or;
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 fund 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; and
o repurchases of assets in the related trust fund as a result of material
breaches of representations and warranties made by the depositor,
master servicer or mortgage loan seller.
Prepayments on mortgage loans are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. The rate of prepayment of the mortgage loans
included in or underlying the assets in each trust fund may affect the yield to
maturity of the securities. In general, if you purchase a class of offered
securities at a price higher than its outstanding principal balance and
principal distributions on your class occur faster than you anticipate at the
time of purchase, the yield will be lower than you anticipate. Conversely, if
you purchase a class of offered
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securities at a price lower than its outstanding principal balance and principal
distributions on that class occur more slowly than you anticipate at the time of
purchase, the yield will be lower than you anticipate.
To the extent amounts in any pre-funding account have not been used to
purchase additional mortgage loans, holders of the related securities may
receive an additional prepayment.
The yield to maturity on the types of classes of securities, including
securities that are entitled to principal distributions only or interest
distributions only, securities as to which accrued interest or a portion thereof
will not be distributed but rather added to the principal balance of the
security, and securities with an interest rate which fluctuates inversely with
an index, may be relatively more sensitive to the rate of prepayment on the
related mortgage loans than other classes of securities and, if applicable, to
the occurrence of an early retirement of the securities. The prospectus
supplement for a series will set forth the related classes of securities that
may be more sensitive to prepayment rates. See "Yield and Maturity
Considerations" in this Prospectus.
THE EXERCISE OF AN OPTIONAL TERMINATION RIGHT WILL AFFECT THE YIELD TO MATURITY
ON THE RELATED SECURITIES
The prospectus supplement for each series of securities will set forth the
party that may, at its option, purchase the assets of the related trust fund if
the aggregate principal balance of the mortgage loans and other trust fund
assets in the trust fund for that series is less than the percentage specified
in the related prospectus supplement of the aggregate principal balance of the
outstanding mortgage loans and other trust fund assets at the cut-off date for
that series. The percentage will be between 25% and 0%. The exercise of the
termination right will effect the early retirement of the securities of that
series. The prospectus supplement for each series of securities will set forth
the price to be paid by the terminating party and the amounts that the holders
of the securities will be entitled to receive upon early retirement.
In addition to the repurchase of the assets in the related trust fund as
described in the paragraph above, the related prospectus supplement may permit
that, a holder of a non-offered class of securities will have the right, solely
at its discretion, to terminate the related trust fund on any distribution date
after the 12th distribution date following the date of initial issuance of the
related series of securities and until the date as the option to terminate as
described in the paragraph above becomes exercisable and thereby effect early
retirement of the securities of the series. Any call of this type will be of the
entire trust fund at one time; multiple calls with respect to any series of
securities will not be permitted. In this case, the call class must remit to the
trustee for distribution to the holders of the related securities offered hereby
a price equal to 100% of the principal balance of their securities offered
hereby as of the day of the purchase plus accrued interest thereon at the
applicable interest rate during the related period on which interest accrues on
their securities. If funds equal to the call price are not deposited with the
related trustee, the securities will remain outstanding. There will not be any
additional remedies available to securityholders. In addition, in the case of a
trust fund for which a REMIC election or elections have been made, the
termination will constitute a "qualified liquidation" under Section 860F of the
Internal Revenue Code. In connection with a call by the call class, the final
payment to the securityholders will be made upon surrender of the related
securities to the trustee. Once the securities have been surrendered and paid in
full, there will not be any continuing liability from the securityholders or
from the trust fund to securityholders.
A trust fund may also be terminated and the certificates retired upon the
master servicer's determination, if applicable and based upon an opinion of
counsel, that the REMIC status of the trust fund has been lost or that a
substantial risk exists that the REMIC status will be lost for the then current
taxable year.
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The termination of a trust fund and the early retirement of securities by
any party would decrease the average life of the securities and may adversely
affect the yield to holders of some or all classes of the related securities.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND THE SECURITIES BACKED BY THOSE MORTGAGE LOANS
Federal and state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices:
o regulate interest rates and other charges on mortgage loans;
o require specific disclosures to borrowers;
o require licensing of originators; and
o regulate generally the origination, servicing and collection process
for the mortgage loans.
Depending on the specific facts and circumstances involved, violations may
limit the ability of a trust fund to collect all or a part of the principal of
or interest on the mortgage loans, may entitle the borrower to a refund of
amounts previously paid and could result in liability for damages and
administrative enforcement against the originator or an assignee of the
originator, like a trust fund, or the initial servicer or a subsequent servicer,
as the case may be. In particular, it is possible that mortgage loans included
in a trust fund will be subject to the Home Ownership and Equity Protection Act
of 1994. The Homeownership Act adds additional provisions to Regulation Z, the
implementing regulation of the Federal Truth-In-Lending Act. These provisions
impose additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with interest rates or origination costs in
excess of prescribed levels. The provisions of the Homeownership Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of the creditor, like a trust fund,
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including the right to rescind the mortgage loan.
Recently, class action lawsuits under the Homeownership Act have been brought
naming as a defendant securitization trusts like the trust funds described in
this prospectus with respect to the mortgage loans.
In addition, amendments to the federal bankruptcy laws have been proposed
that could result in (1) the treatment of a claim secured by a junior lien in a
borrower's principal residence as protected only to the extent that the claim
was secured when the security interest was made and (2) the disallowance of
claims based on secured debt if the creditor failed to comply with specific
provisions of the Truth in Lending Act (15 U.S.C. ss.1639). These amendments
could apply retroactively to secured debt incurred by the debtor prior to the
date of effectiveness of the amendments.
In addition to federal law, some states have enacted, or may enact, laws or
regulations that prohibit inclusion of some provisions in mortgage loans that
have interest rates or origination costs in excess of prescribed levels, and
require that borrowers be given certain disclosures prior to the consummation of
the mortgage loans. The originator's failure to comply with these laws could
subject the trust (and other assignees of the mortgage loans) to monetary
penalties and could result in the borrowers rescinding the mortgage loans
against the trust.
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The depositor will represent that all applicable federal and state laws
were complied with in connection with the origination of the mortgage loans. If
there is a material and adverse breach of a representation, the depositor will
be obligated to repurchase any affected mortgage loan or to substitute a new
mortgage loan into the related trust fund. If the depositor fails to repurchase
or substitute, a trust fund could experience losses which, to the extent not
covered by credit support, could adversely affect the yield to maturity on the
related securities. See "Legal Aspects of Mortgage Assets."
Several capitalized terms are used in this prospectus to assist you in
understanding the terms of the securities. All of the capitalized terms used in
this prospectus are defined in the glossary beginning on page 152 in this
prospectus.
DESCRIPTION OF THE TRUST FUNDS
The trust fund for each series will be held by the trustee for the benefit
of the related securityholders. Each trust fund will consist of:
o a segregated pool of various types of first and junior lien mortgage
loans, cooperative apartment loans, manufactured housing conditional
sales contracts and installment loan agreements or home improvement
installment sales contracts and installment loan agreements as are
subject to the related agreement governing the trust fund;
o amounts on deposit in the distribution account, pre-funding account, if
applicable, or any other account maintained for the benefit of the
securityholders;
o property acquired on behalf of securityholders by foreclosure, deed in
lieu of foreclosure or repossession and any revenues received on the
property;
o the rights of the depositor under any hazard insurance policies, FHA
insurance policies, VA guarantees and primary mortgage insurance
policies to be included in the trust fund, each as described under
"Description of Primary Insurance Policies";
o the rights of the depositor under the agreement or agreements under
which it acquired the mortgage loans to be included in the trust fund;
o the rights of the trustee in any cash advance reserve fund or surety
bond to be included in the trust fund, each as described under
"Advances by Master Servicer in Respect of Delinquencies on the Trust
Fund Assets"; and
o any letter of credit, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, financial guarantee insurance
policy, reserve fund, currency or interest rate exchange agreement or
guarantee, each as described under "Description of Credit Support."
To the extent specified in the related prospectus supplement, a portion of
the interest received on a mortgage loan may not be included in the trust for
that series. Instead, the retained interest will be retained by or payable to
the originator, servicer or seller (or a designee of one of the foregoing) of
the loan, free and clear of the interest of securityholders under the related
agreement.
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DESCRIPTION OF THE MORTGAGE ASSETS TO BE INCLUDED IN A TRUST FUND
Each mortgage asset will be originated by a person other than the
depositor. Each mortgage asset will be selected by the depositor for inclusion
in a trust fund from among those purchased by the depositor, either directly or
through its affiliates, from Ameriquest Mortgage Company, the indirect parent of
the depositor, and its affiliates or from banks, savings and loan associations,
mortgage bankers, mortgage brokers, investment banking firms, the Federal
Deposit Insurance Corporation and other mortgage loan originators or sellers not
affiliated with the depositor. Each seller of mortgage assets will be referred
to in this prospectus and the related prospectus supplement as a mortgage loan
seller. The mortgage assets acquired by the depositor will have been originated
in accordance with the underlying criteria described in this prospectus under
"The Depositor's Mortgage Loan Purchase Program-Underwriting Standards" and in
the prospectus supplement. All mortgage assets to be included in a trust fund as
of the closing date will have been purchased by the depositor on or before the
date of initial issuance of the related securities.
The mortgage assets included in a trust fund will be evidenced by a
promissory note or contract, referred to in this prospectus as a mortgage note,
and may be secured by any of the following:
o first or junior liens on one- to four-family residential properties
including detached and attached dwellings, townhouses, rowhouses,
individual condominium units, individual units in planned-unit
developments and individual units in DE MINIMIS planned-unit
developments. Loans secured by this type of property are referred to in
this prospectus as single-family loans and may be conventional loans,
FHA-insured loans or VA-guaranteed loans as specified in the related
prospectus supplement;
o first or junior liens secured by shares in a private cooperative
housing corporation that give the owner of the shares the right to
occupy a particular dwelling unit in the cooperative;
o rental apartments or projects, including apartment buildings owned by
cooperative housing corporations, containing five or more dwelling
units. The multifamily properties may include high-rise, mid-rise or
garden apartments. Loans secured by this type of property may be
conventional loans or FHA-insured loans as specified in the related
prospectus supplement;
o commercial properties including office buildings, retail buildings and
a variety of other commercial properties as may be described in the
related prospectus supplement;
o properties consisting of mixed residential and commercial structures;
o leasehold interests in residential properties, the title of which is
held by third party lessors;
o manufactured homes that, in the case of mortgage loans, are permanently
affixed to their site or, in the case of manufactured home conditional
sales contracts and installment loan agreements, may be relocated; or
o real property acquired upon foreclosure or comparable conversion of the
mortgage loans included in a trust fund.
No more than 10% of the assets of a trust fund, by original principal
balance of the pool, will be secured by commercial properties. The term of any
leasehold will exceed the term of the mortgage note by at least five years.
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The manufactured homes securing the mortgage loans or manufactured housing
contracts will consist of manufactured homes within the meaning of 42 United
States Code, Section 5402(6), which defines a manufactured home as "a structure,
transportable in one or more sections, which in the traveling mode, is eight
body feet or more in width or forty body feet or more in length, or, when
erected on site, is three hundred twenty or more square feet, and which is built
on a permanent chassis and designed to be used as a dwelling with or without a
permanent foundation when connected to the required utilities, and includes the
plumbing, heating, air conditioning, and electrical systems contained therein;
except that such term shall include any structure which meets all the
requirements of this paragraph except the size requirements and with respect to
which the manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the standards
established under this chapter."
The home improvement contracts will be secured primarily by mortgages on
single family properties that are generally subordinate to other mortgages on
the same mortgaged property or by purchase money security interests in the home
improvements financed thereby.
The mortgaged properties may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States. The mortgaged properties may include vacation, second and non-owner
occupied homes.
The mortgage assets to be included in a trust fund will be any one of the
following types of mortgage assets:
o Fully amortizing mortgage assets with a fixed rate of interest and
level monthly payments to maturity;
o Fully amortizing mortgage assets with an interest rate that adjusts
periodically, with corresponding adjustments in the amount of monthly
payments, to equal the sum, which may be rounded, of a fixed percentage
amount and an index;
o ARM Loans that provide for an election, at the borrower's option, to
convert the adjustable interest rate to a fixed interest rate, which
will be described in the related prospectus supplement;
o ARM Loans that provide for negative amortization or accelerated
amortization resulting from delays in or limitations on the payment
adjustments necessary to amortize fully the outstanding principal
balance of the loan at its then applicable interest rate over its
remaining term;
o Fully amortizing mortgage assets with a fixed interest rate and level
monthly payments, or payments of interest only, during the early years
of the term, followed by periodically increasing monthly payments of
principal and interest for the duration of the term or for a specified
number of years, which will be described in the related prospectus
supplement;
o Fixed interest rate mortgage assets providing for level payment of
principal and interest on the basis of an assumed amortization schedule
and a balloon payment at the end of a specified term;
o Mortgage assets that provide for a line of credit under which amounts
may be advanced to the borrower from time to time;
o Fixed interest rate mortgage assets that provide that the interest may
increase upon default, which increased rate may be subject to
adjustment and may or may not convert back to the original fixed
interest rate upon cure of the default;
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o Fixed interest rate mortgage assets that provide for reductions in the
interest rate, and corresponding monthly payment due thereon during the
first 36 months of the term thereof; and
o Another type of mortgage loan described in the related prospectus
supplement.
Each single-family loan having a loan-to-value ratio at origination in
excess of 80%, may be required to be covered by a primary mortgage guaranty
insurance policy insuring against default on the mortgage loan as to at least
the principal amount thereof exceeding 75% of the value of the mortgaged
property at origination of the mortgage loan. This type of insurance will remain
in force at least until the mortgage loan amortizes to a level that would
produce a loan-to-value ratio lower than 80%. See "Description of Primary
Insurance Policies--Primary Mortgage Insurance Policies."
A mortgaged property may have been subject to secondary financing at
origination of the mortgage loan, but, unless otherwise specified in the related
prospectus supplement, the total amount of primary and secondary financing at
the time of origination of the mortgage loan did not, to the mortgage loan
seller's knowledge, produce a combined loan-to-value ratio in excess of 150%.
The trust fund may contain mortgage loans secured by junior liens, and the
related senior lien may not be included in the trust fund. The primary risk to
holders of mortgage loans secured by junior liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related senior liens to satisfy fully both the senior liens and the junior
mortgage loan. In addition, some or all of the single family loans secured by
junior liens may be High LTV Loans. See "Legal Aspects of Mortgage
Assets--Foreclosure on Mortgages."
The loan-to-value ratio of a mortgage loan at any given time is the ratio,
expressed as a percentage, of the then outstanding principal balance of the
mortgage loan, or, in the case of a home equity line of credit loan, the maximum
principal amount which may be advanced over the term of the loan, plus, in the
case of a mortgage loan secured by a junior lien, the outstanding principal
balance of the related senior liens, to the value of the related mortgaged
property. The value of a single-family property or cooperative unit, is the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of the loan and (b) if the mortgaged property is being
purchased in conjunction with the origination of the mortgage loan the sales
price for the property. For purposes of calculating the loan-to-value ratio of a
manufactured housing contract relating to a new manufactured home, the value is
no greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer, exclusive of freight to the
dealer site, including accessories identified in the invoice, plus the actual
cost of any accessories purchased from the dealer, a delivery and set-up
allowance, depending on the size of the unit, and the cost of state and local
taxes, filing fees and up to three years prepaid hazard insurance premiums. With
respect to a used manufactured home, the value is generally the least of the
sale price, the appraised value, and the National Automobile Dealer's
Association book value plus prepaid taxes and hazard insurance premiums. The
appraised value of a manufactured home is based upon the age and condition of
the manufactured housing unit and the quality and condition of the mobile home
park in which it is situated, if applicable. Manufactured homes are less likely
than other types of housing to experience appreciation in value and are more
likely to experience depreciation in value.
The underwriting standards of the mortgage loan originator or mortgage loan
seller may require an internal review of the appraisal (a "review appraisal")
used to determine the loan-to-value of a mortgage loan which may be performed by
underwriters rather than a licensed appraiser. Where the review appraisal
results in a valuation of the mortgaged property that is less than a specified
percentage of the original appraisal, the loan-to-value ratio of the related
mortgage loan will be based on the review appraisal. The prospectus supplement
of each series will describe the percentage variance used by the related
mortgage loan originator or mortgage loan seller in determining whether the
review appraisal will apply.
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As of the cut-off date specified in the related prospectus supplement, the
aggregate principal balance of mortgage loans secured by condominium units will
not exceed 30% of the aggregate principal balance of the mortgage loans in the
related mortgage pool. A mortgage loan secured by a condominium unit will not be
included in a mortgage pool unless, at the time of sale of the mortgage loan by
the mortgage loan seller, representations and warranties as to the condominium
project are made by the mortgage loan seller or an affiliate of the mortgage
loan seller or by another person acceptable to the depositor having knowledge
regarding the subject matter of those representations and warranties. The
mortgage loan seller, or another party on its behalf, will have made the
following representations and warranties:
o If a condominium project is subject to developer control or to
incomplete phasing or add-ons, at least 50% of the units have been sold
to bona fide purchasers to be occupied as primary residences or
vacation or second homes.
o If a condominium project has been controlled by the unit owners, other
than the developer, and is not subject to incomplete phasing or
add-ons, at least 50% of the units been are occupied as primary
residences or vacation or second homes.
See "The Depositor's Mortgage Loan Purchase Program--Representations by or
on Behalf of Mortgage Loan Sellers; Remedies for Breach of Representation" in
this Prospectus for a description of other representations made by or on behalf
of mortgage loan sellers at the time mortgage loans are sold.
The trust fund may include mortgage loans subject to temporary buydown
plans which provide that the monthly payments made by the borrower in the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan, the resulting difference to be made up from (a) an amount
contributed by the borrower, the seller of the mortgaged property, or another
source and placed in a custodial account and (b) unless otherwise specified in
the prospectus supplement, investment earnings on the buydown funds. The
borrower under a buydown mortgage loan is usually qualified at the lower monthly
payment taking into account the funds on deposit in the custodial account.
Accordingly, the repayment of a buydown mortgage loan is dependent on the
ability of the borrower to make larger level monthly payments after the funds in
the custodial account have been depleted. See "The Depositor's Mortgage Loan
Purchase Program--Underwriting Standards" for a discussion of loss and
delinquency considerations relating to buydown mortgage loans.
The trust fund may include mortgage loans that provide for a line of credit
under which amounts may be advanced to the borrower from time to time. Interest
on each home equity line of credit loan, excluding introductory rates offered
from time to time during promotional periods, is computed and payable monthly on
the average daily outstanding balance of the mortgage loan. Principal on a home
equity line of credit loan may be drawn down, up to a maximum amount as set
forth in the related prospectus supplement, or repaid under each mortgage loan
from time to time, but may be subject to a minimum periodic payment. Each home
equity line of credit loan included in a trust fund will be secured by a lien on
a one-to-four family property or a manufactured home. A trust fund will not
include any amounts borrowed under a home equity line of credit loan after the
cut-off date specified in the related prospectus supplement.
The trust fund may include mortgage loans with respect to which a portion
of the loan proceeds are held back from the mortgagor until required repairs or
improvements on the mortgaged property are completed, in accordance with the
mortgage loan seller's underwriting standards.
The trust fund may include mortgage loans that are delinquent as of the
date the related series of securities is issued. In that case, the related
prospectus supplement will set forth, as to each mortgage loan, available
information as to the period of delinquency and any other information relevant
for a prospective
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purchaser to make an investment decision. No mortgage loan in a trust fund will
be 90 or more days delinquent and no trust fund will include a concentration of
mortgage loans which are more than 30 and less than 90 days delinquent of
greater than 20%.
If so specified in the related prospectus supplement, a mortgage loan may
contain a prohibition on prepayment or a Lockout Period or require payment of a
prepayment penalty. A multifamily, commercial or mixed-use loan may also contain
a provision that entitles the lender to a share of profits realized from the
operation or disposition of the related mortgaged property. If the holders of
any class or classes of offered securities of a series will be entitled to all
or a portion of this type of equity participation, the related prospectus
supplement will describe the equity participation and the method or methods by
which distributions in respect thereof will be made to such holders.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENT. Each prospectus
supplement will contain specific information with respect to the mortgage assets
contained in the related trust fund, as of the cut-off date specified in the
prospectus supplement, which will usually be close of business on the first day
of the month of formation of the related trust fund, to the extent specifically
known to the depositor as of the date of the prospectus supplement, including
the following:
o the aggregate outstanding principal balance, the largest, smallest and
average outstanding principal balance of the mortgage assets,
o the type of property securing the mortgage assets and the percentage of
mortgage assets in the related mortgage pool which are secured by that
type of property,
o the original terms to maturity of the mortgage assets,
o the earliest origination date and latest maturity date,
o the aggregate principal balance of mortgage loans having loan-to-value
ratios at origination exceeding 80%, or, with respect to mortgage loans
secured by a junior lien, the aggregate principal balance of mortgage
loans having combined loan-to-value ratios exceeding 80%,
o the interest rates or range of interest rates borne by the mortgage
loans,
o the geographical distribution of the mortgaged properties on a
state-by-state basis,
o the number and aggregate principal balance of buydown mortgage loans,
if any,
o a description of the retained interest, if any,
o with respect to ARM Loans, the index, the adjustment dates, the
highest, lowest and weighted average gross margin, and the maximum
interest rate variation at the time of any adjustment and over the life
of the ARM Loan,
o the range of debt service coverage ratios for mortgage loans secured by
multifamily properties or commercial properties, and
o whether the mortgage loans provide for payments of interest only for
any period and the frequency and amount by which, and the term during
which, monthly payments adjust.
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If specific information respecting the trust fund assets is not known to
the depositor at the time securities are initially offered, more general
information of the nature described in the bullet points above will be provided
in the prospectus supplement, and specific information as to the trust fund
assets to be included in the trust fund on the date of issuance of the
securities will be set forth in a report which will be available to purchasers
of the related securities at or before the initial issuance of the securities
and will be filed, together with the related pooling and servicing agreement,
with respect to each series of certificates, or the related servicing agreement,
trust agreement and indenture, with respect to each series of notes, as part of
a report on Form 8-K with the Securities and Exchange Commission within fifteen
days after the initial issuance. If mortgage loans are added to or deleted from
the trust fund after the date of the related prospectus supplement, the addition
or deletion will be noted on the Current Report or Form 8-K. In no event,
however, will more than 5%, by principal balance at the cut-off date, of the
mortgage loans deviate from the characteristics of the mortgage loans set forth
in the related prospectus supplement. In addition, a report on Form 8-K will be
filed within 15 days after the end of any pre-funding period containing
information respecting the trust fund assets transferred to a trust fund after
the date of issuance of the related securities as described in the following
paragraph.
DESCRIPTION OF THE PRE-FUNDING ACCOUNT FOR THE PURCHASE OF ADDITIONAL MORTGAGE
LOANS
The agreement governing the trust fund may provide for the transfer by the
mortgage loan seller of additional mortgage assets to the related trust fund
after the date of initial issuance of the securities. In that case, the trust
fund will include a pre-funding account, into which all or a portion of the
proceeds of the sale of one or more classes of securities of the related series
will be deposited to be released as additional mortgage assets are transferred.
Additional mortgage assets will be required to conform to the requirements set
forth in the related agreement or other agreement providing for the transfer,
and will be underwritten to the same standards as the mortgage assets initially
included in the trust fund. A pre-funding account will be required to be
maintained as an eligible account under the related agreement and the amount
held in the pre-funding account shall at no time exceed 50% of the aggregate
outstanding principal balance of the securities. The related agreement providing
for the transfer of additional mortgage assets will provide that all transfers
must be made within 3 months, if a REMIC election has been made with respect to
the trust, or within 6 months after the date on which the related securities
were issued, and that amounts set aside to fund the transfers, whether in a
pre-funding account or otherwise, and not so applied within the required period
of time will be deemed to be principal prepayments and applied in the manner set
forth in the related prospectus supplement.
The depositor will be required to provide data regarding the additional
mortgage assets to the rating agencies and the security insurer, if any,
sufficiently in advance of the scheduled transfer to permit review by the rating
agencies and the security insurer. Transfer of the additional mortgage assets
will be further conditioned upon confirmation by the rating agencies that the
addition of mortgage assets to the trust fund will not result in the downgrading
of the securities or, in the case of a series guaranteed or supported by a
security insurer, will not adversely affect the capital requirements of the
security insurer. Finally, a legal opinion to the effect that the conditions to
the transfer of the additional mortgage assets have been satisfied will be
required.
THE DEPOSITOR
Ameriquest Mortgage Securities Inc., the depositor, is a Delaware
corporation incorporated on December 23, 1999 as an indirect wholly-owned
subsidiary of Ameriquest Mortgage Company. The depositor was organized for the
purpose of serving as a private secondary mortgage market conduit. The depositor
maintains its principal office at 1100 Town & Country Road, Orange, California
92868. Its telephone number is (714) 541-9960.
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The depositor does not have, nor is it expected in the future to have, any
significant assets. The prospectus supplement for each series of securities will
disclose if the depositor is a party to any legal proceedings that could have a
material impact on the related trust fund and the interests of the potential
investors.
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the depositor to the purchase of trust fund assets or will be used by
the depositor for general corporate purposes. The depositor expects that it will
make additional sales of securities similar to the securities from time to time,
but the timing and amount of offerings of securities will depend on a number of
factors, including the volume of mortgage assets acquired by the depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD AND MATURITY CONSIDERATIONS
The yield on any offered security will depend on the following:
o the price paid by the securityholder,
o the rate at which interest accrued on the security,
o the receipt and timing of receipt of distributions on the security,
o the weighted average life of the mortgage assets in the related trust
fund,
o liquidations of mortgage assets following mortgagor defaults,
o purchases of mortgage assets in the event of optional termination of
the trust fund or breaches of representations made in respect of such
mortgage assets by the depositor, the master servicer and others, and
o in the case of securities evidencing interests in ARM Loans, by changes
in the interest rates or the conversions of ARM Loans to a fixed
interest rate.
SECURITY INTEREST RATE. Securities of any class within a series may have
fixed, variable or adjustable security interest rates, which may or may not be
based upon the interest rates borne by the mortgage assets in the related trust
fund. The prospectus supplement with respect to any series of securities will
specify the security interest rate for each class of securities or, in the case
of a variable or adjustable security interest rate, the method of determining
the security interest rate. Holders of Stripped Interest Securities or a class
of securities having a security interest rate that varies based on the weighted
average interest rate of the underlying mortgage assets will be affected by
disproportionate prepayments and repurchases of mortgage assets having higher
interest rates than the average interest rate.
TIMING OF PAYMENT OF INTEREST AND PRINCIPAL. The effective yield to
securityholders entitled to payments of interest will be slightly lower than the
yield otherwise produced by the applicable security interest rate because, while
interest on the mortgage assets may accrue from the first day of each month, the
distributions of such interest will not be made until the distribution date
which may be as late as the 25th day of the month following the month in which
interest accrues on the mortgage assets. On each distribution date, a payment of
interest on the securities, or addition to the principal balance of a class of
Accrual Securities, will include
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interest accrued during the interest accrual period described in the related
prospectus supplement for that remittance date. If the interest accrual period
ends on a date other than a remittance date for the related series, the yield
realized by the holders of the securities may be lower than the yield that would
result if the interest accrual period ended on the remittance date. In addition,
if so specified in the related prospectus supplement, interest accrued for an
interest accrual period for one or more classes of securities may be calculated
on the assumption that distributions of principal, and additions to the
principal balance of Accrual Securities, and allocations of losses on the
mortgage assets may be made on the first day of the interest accrual period for
a remittance date and not on the remittance date. This method would produce a
lower effective yield than if interest were calculated on the basis of the
actual principal amount outstanding during an interest accrual period.
When a principal prepayment in full is made on a mortgage loan, the
borrower is charged interest only for the period from the due date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial prepayment is made on a mortgage loan, the mortgagor
is not charged interest on the amount of the prepayment for the month in which
the prepayment is made. Accordingly, the effect of principal prepayments in full
during any month will be to reduce the aggregate amount of interest collected
that is available for distribution to securityholders. The mortgage loans in a
trust fund may contain provisions limiting prepayments or requiring the payment
of a prepayment penalty upon prepayment in full or in part. If so specified in
the related prospectus supplement, a prepayment penalty collected may be applied
to offset the above-described shortfalls in interest collections on the related
distribution date. Otherwise, prepayment penalties collected may be available
for distribution only to a specific class of securities or may not be a part of
the related trust at all, and, therefore not available for distribution to any
class of securities. Full and partial principal prepayments collected during the
prepayment period set forth in a prospectus supplement will be available for
distribution to securityholders on the related distribution date. Neither the
trustee nor the depositor will be obligated to fund shortfalls in interest
collections resulting from prepayments. The prospectus supplement for a series
of securities may specify that the master servicer will be obligated to pay from
its own funds, without reimbursement, those interest shortfalls attributable to
full and partial prepayments by mortgagors but only up to an amount equal to its
servicing fee for the related due period. See "Description of the Securities."
In addition, if so specified in the related prospectus supplement, a holder
of a non-offered class of securities will have the right, solely at its
discretion, to terminate the related trust fund on any distribution date after
the 12th distribution date following the date of initial issuance of the related
series of securities and until the date as the Clean-up Call becomes exercisable
and thereby effect early retirement of the securities of the series. Any call of
this type will be of the entire trust fund at one time; multiple calls with
respect to any series of securities will not be permitted. Early termination
would result in the concurrent retirement of all outstanding securities of the
related series and would decrease the average lives of the terminated
securities, perhaps significantly. The earlier after the date of the initial
issuance of the securities that the termination occurs, the greater would be the
effect.
PRINCIPAL PREPAYMENTS. The yield to maturity on the securities will be
affected by the rate of principal payments on the mortgage assets, including
principal prepayments, curtailments, defaults and liquidations. The rate at
which principal prepayments occur on the mortgage assets will be affected by a
variety of factors, including, without limitation, the following:
o the terms of the mortgage assets,
o the level of prevailing interest rates,
o the availability of mortgage credit,
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o in the case of multifamily loans and commercial loans, the quality of
management of the mortgaged properties, and
o economic, demographic, geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly below
the interest rates on the mortgage assets included in a particular trust fund,
those mortgage assets are likely to be the subject of higher principal
prepayments than if prevailing rates remain at the rates borne by those mortgage
assets. Conversely, if prevailing interest rates rise significantly above the
interest rates on the mortgage assets included in a particular trust fund, those
mortgage assets are likely to be the subject of lower principal prepayments than
if prevailing rates remain at the rates borne by those mortgage assets. The rate
of principal payments on some or all of the classes of securities of a series
will correspond to the rate of principal payments on the mortgage assets
included in the related trust fund and is likely to be affected by the existence
of prepayment premium provisions of the mortgage assets in a mortgage pool, and
by the extent to which the servicer of any such mortgage asset is able to
enforce such provisions. There can be no certainty as to the rate of prepayments
on the mortgage assets during any period or over the life of the related
securities.
If the purchaser of a security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the mortgage assets,
the actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the mortgage assets, the actual yield
to maturity will be lower than that so calculated. In either case, the effect on
yield of prepayments on one or more classes of securities of a series may be
mitigated or exacerbated by the priority of distributions of principal to those
classes as provided in the related prospectus supplement.
The timing of changes in the rate of principal payments on the mortgage
assets may significantly affect an investor's actual yield to maturity, even if
the average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
mortgage assets and distributed in respect of a security, the greater the effect
on such investor's yield to maturity. The effect on an investor's yield of
principal payments occurring at a rate higher or lower than the rate anticipated
by the investor during a given period may not be offset by a subsequent like
decrease or increase in the rate of principal payments.
DEFAULTS. The rate of defaults on the mortgage assets will also affect the
rate and timing of principal payments on the mortgage assets and thus the yield
on the securities. In general, defaults on single family loans are expected to
occur with greater frequency in their early years. However, mortgage assets that
require balloon payments, including multifamily loans, risk default at maturity,
or that the maturity of the balloon loan may be extended in connection with a
workout. The rate of default on mortgage loans which are refinance or limited
documentation mortgage loans, mortgage assets with high loan-to-value ratios,
and ARM Loans may be higher than for other types of mortgage assets.
Furthermore, the rate and timing of defaults and liquidations on the mortgage
assets will be affected by the general economic condition of the region of the
country in which the related mortgaged properties are located. The risk of
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
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MATURITY AND WEIGHTED AVERAGE LIFE
PREPAYMENTS. The rates at which principal payments are received on the
mortgage assets included in a trust fund and the rate at which payments are made
from any credit support for the related series of securities may affect the
ultimate maturity and the weighted average life of each class of the series.
Weighted average life refers to the average amount of time that will elapse from
the date of issue of a security until each dollar of principal of that security
will be repaid to the investor. The weighted average life of a class of
securities of a series will be influenced by, among other factors, the rate at
which principal on the related mortgage assets is paid to that class, which may
be in the form of scheduled amortization or prepayments. For this purpose, the
term prepayment includes prepayments, in whole or in part, and liquidations due
to default. Prepayments on the mortgage assets in a trust fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the securities of the related series.
If so provided in the prospectus supplement for a series of securities, one
or more classes of securities may have a final scheduled remittance date, which
is the date on or prior to which the principal balance thereof is scheduled to
be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
In addition, the weighted average life of the securities may be affected by
the varying maturities of the related mortgage assets. If any mortgage assets in
a trust fund have actual terms to maturity of less than those assumed in
calculating the final scheduled remittance dates for the classes of securities
of the related series, one or more classes of the securities may be fully paid
prior to their respective final scheduled remittance dates, even in the absence
of prepayments. Accordingly, the prepayment experience of the mortgage pool
will, to some extent, be a function of the mix of interest rates and maturities
of the mortgage assets in that mortgage pool. See "Description of the Trust
Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate prepayment model or the
Standard Prepayment Assumption prepayment model, each as described below. CPR
represents a constant assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of loans for the life of those loans.
SPA represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of loans. A prepayment assumption of
100% of SPA assumes prepayment rates of 0.2% per annum of the then outstanding
principal balance of the loans in the first month of the life of the loans and
an additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the loans, 100% of SPA assumes a constant prepayment rate of 6% per annum each
month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans. Moreover, CPR and SPA were
developed based upon historical prepayment experience for single family loans.
Thus, it is likely that prepayment of any mortgage assets will not conform to
any particular level of CPR or SPA.
The prospectus supplement with respect to each series of securities may
contain tables, if applicable, setting forth the projected weighted average life
of one or more classes of offered securities of the series and the percentage of
the initial principal balance of each class that would be outstanding on
specified remittance dates based on the assumptions stated in that prospectus
supplement, including assumptions that prepayments on the related mortgage
assets are made at rates corresponding to various percentages of CPR, SPA or at
other rates specified in the prospectus supplement. Tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
securities to various prepayment rates and are not intended to
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predict or to provide information that will enable investors to predict the
actual weighted average life of the securities. It is unlikely that prepayment
of any mortgage assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the related prospectus supplement.
There can be no assurance as to the rate of prepayment of the mortgage
loans underlying or comprising the trust fund assets in any trust fund. The
depositor is not aware of any publicly available statistics relating to the
principal prepayment experience of diverse portfolios of mortgage loans over an
extended period of time. All statistics known to the depositor that have been
compiled with respect to prepayment experience on mortgage loans indicates that
while some mortgage loans may remain outstanding until their stated maturities,
a substantial number will be paid prior to their respective stated maturities.
The depositor is not aware of any historical prepayment experience with respect
to mortgage loans secured by properties located in Puerto Rico or Guam and,
accordingly, prepayments on loans secured by properties in Puerto Rico or Guam
may not occur at the same rate or be affected by the same factors as other
mortgage loans.
TYPE OF MORTGAGE ASSET. The type of mortgage assets included in a trust
fund may affect the weighted average life of the related securities. A number of
mortgage assets may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon its
ability either to refinance the loan or to sell the related mortgaged property,
there is a risk that mortgage assets having balloon payments may default at
maturity, or that the servicer may extend the maturity of the mortgage asset in
connection with a workout. In addition, a number of mortgage assets may be
junior mortgage loans. The rate of default on junior mortgage loans may be
greater than that of mortgage loans secured by first liens on comparable
properties. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the mortgagor or adverse conditions in the
market where the property is located. In order to minimize losses on defaulted
mortgage assets, the servicer may, to the extent and under the circumstances set
forth in this prospectus and in the related servicing agreement, be permitted to
modify mortgage assets that are in default or as to which a payment default
appears imminent. Any defaulted balloon payment or modification that extends the
maturity of a mortgage asset will tend to extend the weighted average life of
the securities, thereby lengthening the period of time elapsed from the date of
issuance of a security until it is retired.
Although the interest rates on ARM Loans will be subject to periodic
adjustments, adjustments generally will, unless otherwise specified in the
related prospectus supplement, (1) not increase or decrease the interest rate by
more than a fixed percentage amount on each adjustment date, (2) not increase
the interest rate over a fixed percentage amount during the life of any ARM Loan
and (3) be based on an index, which may not rise and fall consistently with the
mortgage interest rate, plus the related fixed percentage set forth in the
related mortgage note, which may be different from margins being used at the
time for newly originated adjustable rate mortgage loans. As a result, the
interest rates on the ARM Loans in a mortgage pool at any time may not equal the
prevailing rates for similar, newly originated adjustable rate mortgage loans.
In certain rate environments, the prevailing rates on fixed rate mortgage loans
may be sufficiently low in relation to the then-current mortgage rates on ARM
Loans with the result that the rate of prepayments may increase as a result of
refinancings. There can be no certainty as to the rate of prepayments on the
mortgage assets during any period or over the life of any series of securities.
The interest rates on ARM Loans subject to negative amortization generally
adjust monthly and their amortization schedules adjust less frequently. During a
period of rising interest rates, as well as immediately after origination when
initial interest rates are generally lower than the sum of the indices
applicable at origination and the related margins, the amount of interest
accruing on the principal balance of these types of mortgage assets may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing mortgage assets may
become deferred interest which will be added to the principal balance thereof
and will bear interest at the applicable interest rate. The
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addition of any deferred interest to the principal balance of any related class
or classes of securities of a series will lengthen the weighted average life
thereof and may adversely affect yield to holders thereof, depending upon the
price at which the securities were purchased. In addition, with respect to
certain ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on the ARM Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of securities,
the weighted average life of the securities will be reduced which may adversely
affect yield to holders thereof, depending upon the price at which such
securities were purchased.
FORECLOSURES AND PAYMENT PLANS
The number of foreclosures and the principal amount of the mortgage assets
that are foreclosed in relation to the number of mortgage assets that are repaid
in accordance with their terms will affect the weighted average life of those
mortgage assets and that of the related series of securities. Servicing
decisions made with respect to the mortgage assets, including the use of payment
plans prior to a demand for acceleration and the restructuring of mortgage
assets in bankruptcy proceedings, may also have an effect upon the payment
patterns of particular mortgage assets and thus the weighted average life of the
securities.
DUE-ON-SALE CLAUSES. Acceleration of mortgage payments as a result of
certain transfers of or the creation of encumbrances upon underlying mortgaged
property is another factor affecting prepayment rates that may not be reflected
in the prepayment standards or models used in the relevant prospectus
supplement. In most cases the mortgage assets will include "due-on-sale" clauses
that permit the lender in certain instances to accelerate the maturity of the
loan if the borrower sells, transfers or conveys the property. The master
servicer, on behalf of the trust fund, will employ its usual practices in
determining whether to exercise any right that the trustee may have as mortgagee
to accelerate payment of the mortgage asset. An ARM Loan may be assumable under
some conditions if the proposed transferee of the related mortgaged property
establishes its ability to repay the mortgage asset and, in the reasonable
judgment of the servicer or the related sub-servicer, the security for the ARM
Loan would not be impaired by the assumption. The extent to which ARM Loans are
assumed by purchasers of the mortgaged properties rather than prepaid by the
related mortgagors in connection with the sales of the mortgaged properties will
affect the weighted average life of the related series of securities. See "Legal
Aspects of Mortgage Assets--Enforceability of Certain Provisions."
THE DEPOSITOR'S MORTGAGE LOAN PURCHASE PROGRAM
The mortgage loans to be included in a trust fund will be purchased by the
depositor, either directly or indirectly, from the mortgage loan sellers.
UNDERWRITING STANDARDS
All mortgage loans to be included in a trust fund will have been subject to
underwriting standards acceptable to the depositor and applied as described in
the following paragraph. Each mortgage loan seller, or another party on its
behalf, will represent and warrant that mortgage loans purchased by or on behalf
of the depositor from it have been originated by the related originators in
accordance with these underwriting guidelines.
The underwriting standards are applied by the originators to evaluate the
value of the mortgaged property and to evaluate the adequacy of the mortgaged
property as collateral for the mortgage loan. While the
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originator's primary consideration in underwriting a mortgage loan is the value
of the mortgaged property, the originator also considers the borrower's credit
history and repayment ability as well as the type and use of the mortgaged
property. As a result of this underwriting criteria, changes in the values of
mortgage properties may have a greater effect on the delinquency, foreclosure
and loss experience on the mortgage loans in a trust fund than these changes
would be expected to have on mortgage loans that are originated in a more
traditional manner. No assurance can be given by the depositor that the values
of the related mortgaged properties have remained or will remain at the levels
in effect on the dates of origination of the related mortgage loans.
High LTV Loans are underwritten with an emphasis on the creditworthiness of
the related mortgagor. High LTV are underwritten with a limited expectation of
recovering any amounts from the foreclosure of the related property.
In the case of the multifamily loans, commercial loans or mixed-use loans,
lenders typically look to the debt service coverage ratio of a loan as an
important measure of the risk of default on that loan. Unless otherwise defined
in the related prospectus supplement, the debt service coverage ratio of a
multifamily loan or commercial loan at any given time is the ratio of (1) the
net operating income of the related mortgaged property for a twelve-month period
to (2) the annualized scheduled payments on the mortgage loan and on any other
loan that is secured by a lien on the mortgaged property prior to the lien of
the related mortgage. Net operating incomes is: the total operating revenues
derived from a multifamily, commercial or mixed-use property, as applicable,
during that period, minus the total operating expenses incurred in respect of
that property during that period other than (a) non-cash items such as
depreciation and amortization, (b) capital expenditures and (c) debt service on
loans (including the related mortgage loan) secured by liens on that property.
The net operating income of a multifamily, commercial or mixed-use property, as
applicable, will fluctuate over time and may or may not be sufficient to cover
debt service on the related mortgage loan at any given time. As the primary
source of the operating revenues of a multifamily, commercial or mixed- use
property, as applicable, rental income (and maintenance payments from
tenant-stockholders of a cooperatively owned multifamily property) may be
affected by the condition of the applicable real estate market and/or area
economy. Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a multifamily,
commercial or mixed-use loan. Lenders also look to the loan-to-value ratio of a
multifamily, commercial or mixed-use loan as a measure of risk of loss if a
property must be liquidated following a default.
Typically, the underwriting process used by an originator is as described
in this and the next two following paragraphs. The prospectus supplement for a
series will describe any variations to this process as it applies to the related
mortgage assets. Initially, a prospective borrower is required to complete an
application with respect to the applicant's liabilities, income and credit
history and personal information, as well as an authorization to apply for a
credit report that summarizes the borrower's reported credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment. If a prospective borrower is
self- employed, the borrower is required to submit copies of signed tax returns
or other proof of business income. The borrower may also be required to
authorize verification of deposits at financial institutions where the borrower
has demand or savings accounts. In the case of a multifamily loan, commercial
loan or mixed-use loan, the mortgagor will also be required to provide certain
information regarding the related mortgaged property, including a current rent
roll and operating income statements which may be pro forma and unaudited. In
addition, the originator will generally also consider the location of the
mortgaged property, the availability of competitive lease space and rental
income of comparable properties in the relevant market area, the overall economy
and demographic features of the
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geographic area and the mortgagor's prior experience in owning and operating
properties similar to the multifamily properties or commercial properties, as
the case may be.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
manufactured homes whose appraised value is determined using the list price of
the unit and accessories as described above under "Description of the Trust
Funds." Each appraiser is selected in accordance with predetermined guidelines
established for appraisers. The appraiser is required to inspect the property
and verify that it is in good condition and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income, if considered applicable by the appraiser, and, when
deemed appropriate, the cost of replacing the home. With respect to multifamily
properties, commercial properties and mixed-use properties, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis was
used. An appraisal employing the income approach to value analyzes a property's
projected net cash flow, capitalization and other operational information in
determining the property's value. The market approach to value analyzes the
prices paid for the purchase of similar properties in the property's area, with
adjustments made for variations between those other properties and the property
being appraised. The cost approach to value requires the appraiser to make an
estimate of land value and then determine the current cost of reproducing the
improvements less any accrued depreciation. The value of the property being
financed, as indicated by the appraisal, must be high enough so that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance.
In the case of single family loans and contracts, once all applicable
employment, credit and property information is received, the originator reviews
the applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type of
property being financed and reviews the property. In evaluating the credit
quality of borrowers, the originator may utilize the FICO score supplied by the
credit bureau with the credit report (a statistical ranking of likely future
credit performance developed by Fair, Isaac & Company and three national credit
data repositories - Equifax, TransUnion and Experian).
In the case of a mortgage loan secured by a leasehold interest in a
residential property, the title to which is held by a third party lessor, the
mortgage loan seller, or another party on its behalf, will be required to
warrant, among other things, that the remaining term of the lease and any
sublease be at least five years longer than the remaining term of the mortgage
loan.
With respect to any loan insured by the FHA, the mortgage loan seller is
required to represent that the FHA loan complies with the applicable
underwriting policies of the FHA. See "Description of Primary Insurance
Policies--FHA Insurance."
With respect to any loan guaranteed by the VA, the mortgage loan seller
will be required to represent that the VA loan complies with the applicable
underwriting policies of the VA. See "Description of Primary Insurance
Policies--VA Guarantees."
The recent foreclosure or repossession and delinquency experience with
respect to loans serviced by the master servicer or, if applicable, a
significant sub-servicer will be provided in the related prospectus supplement.
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QUALIFICATIONS OF ORIGINATORS AND MORTGAGE LOAN SELLERS
Each originator will be required to satisfy the qualifications set forth in
this paragraph. Each originator must be an institution experienced in
originating conventional mortgage loans in accordance with customary and
reasonable practices and the mortgage loan seller's or the depositor's
guidelines, and must maintain satisfactory facilities to originate those loans.
Each originator must be a HUD-approved mortgagee or an institution the deposit
accounts in which are insured by the Bank Insurance Fund or Savings Association
Insurance Fund of the FDIC. In addition, with respect to FHA loans or VA loans,
each originator must be approved to originate the mortgage loans by the FHA or
VA, as applicable. Each originator and mortgage loan seller must also satisfy
criteria as to financial stability evaluated on a case by case basis by the
depositor.
REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REMEDIES FOR BREACH OF
REPRESENTATION
Each mortgage loan seller, or a party on its behalf, will have made
representations and warranties in respect of the mortgage loans sold by that
mortgage loan seller. The following material representations and warranties as
to the mortgage loans will be made by or on behalf of each mortgage loan seller:
o that any required hazard insurance was effective at the origination of
each mortgage loan, and that each required policy remained in effect on
the date of purchase of the mortgage loan from the mortgage loan seller
by or on behalf of the depositor;
o that either (A) title insurance insuring, subject only to permissible
title insurance exceptions, the lien status of the Mortgage was
effective at the origination of each mortgage loan and the policy
remained in effect on the date of purchase of the mortgage loan from
the mortgage loan seller by or on behalf of the depositor or (B) if the
mortgaged property securing any mortgage loan is located in an area
where title insurance policies are generally not available, there is in
the related mortgage file an attorney's certificate of title
indicating, subject to permissible exceptions set forth therein, the
lien status of the mortgage;
o that the mortgage loan seller had good title to each mortgage loan and
each mortgage loan was subject to no valid offsets, defenses,
counterclaims or rights of rescission except to the extent that any
buydown agreement described herein may forgive some indebtedness of a
borrower;
o that each Mortgage constituted a valid lien on, or security interest
in, the mortgaged property, subject only to permissible title insurance
exceptions and senior liens, if any, and that the mortgaged property
was free from material damage and was in good repair;
o that there were no delinquent tax or assessment liens against the
mortgaged property;
o that each mortgage loan was not currently more than 90 days delinquent
as to required monthly payments of principal and interest; and
o that each mortgage loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and regulations in
all material respects.
If a person other than a mortgage loan seller makes any of the foregoing
representations and warranties on behalf of the mortgage loan seller, the
identity of the person will be specified in the related prospectus supplement.
Any person making representations and warranties on behalf of a mortgage loan
seller shall be an affiliate of the mortgage loan seller or a person acceptable
to the depositor having knowledge regarding the subject matter of those
representations and warranties.
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All of the representations and warranties made by or on behalf of a
mortgage loan seller in respect of a mortgage loan will have been made as of the
date on which the mortgage loan seller sold the mortgage loan to or on behalf of
the depositor. A substantial period of time may have elapsed between the date
the representation or warranty was made to or on behalf of the depositor and the
date of initial issuance of the series of securities evidencing an interest in
the related mortgage loan. In the event of a breach of any representation or
warranty made by a mortgage loan seller, the mortgage loan seller will be
obligated to cure the breach or repurchase or replace the affected mortgage loan
as described in the second following paragraph. Since the representations and
warranties made by or on behalf of a mortgage loan seller do not address events
that may occur following the sale of a mortgage loan by that mortgage loan
seller, it will have a cure, repurchase or substitution obligation in connection
with a breach of a representation and warranty only if the relevant event that
causes the breach occurs prior to the date of the sale to or on behalf of the
depositor. A mortgage loan seller would have no repurchase or substitution
obligations if the relevant event that causes the breach occurs after the date
of the sale to or on behalf of the depositor. However, the depositor will not
include any mortgage loan in the trust fund for any series of securities if
anything has come to the depositor's attention that would cause it to believe
that the representations and warranties made in respect of a mortgage loan will
not be accurate and complete in all material respects as of the date of initial
issuance of the related series of securities.
The only representations and warranties to be made for the benefit of
holders of securities in respect of any mortgage loan relating to the period
commencing on the date of sale of a mortgage loan by the mortgage loan seller to
or on behalf of the depositor will be the limited representations of the
depositor and of the master servicer described below under "Description of the
Securities--Assignment of Trust Fund Assets; Review of Files by Trustee." If the
master servicer is also a mortgage loan seller with respect to a particular
series, the representations will be in addition to the representations and
warranties made by the master servicer in its capacity as a mortgage loan
seller.
The master servicer and the trustee, or the trustee, will promptly notify
the relevant mortgage loan seller of any breach of any representation or
warranty made by or on behalf of it in respect of a mortgage loan that
materially and adversely affects the value of that mortgage loan or the
interests in the mortgage loan of the securityholders. If the mortgage loan
seller cannot cure a breach within a specified time period from the date on
which the mortgage loan seller was notified of the breach, then the mortgage
loan seller will be obligated to repurchase the affected mortgage loan from the
trustee within a specified time period from the date on which the mortgage loan
seller was notified of the breach, at the purchase price therefor. A mortgage
loan seller, rather than repurchase a mortgage loan as to which a breach has
occurred, may have the option, within a specified period after initial issuance
of the related series of securities, to cause the removal of the mortgage loan
from the trust fund and substitute in its place one or more other mortgage
loans, in accordance with the standards described below under "Description of
the Securities--Assignment of the Mortgage Loans." The master servicer will be
required under the applicable servicing agreement to use its best efforts to
enforce the repurchase or substitution obligations of the mortgage loan seller
for the benefit of the trustee and the holders of the securities, following the
practices it would employ in its good faith business judgment were it the owner
of the mortgage loan. This repurchase or substitution obligation will constitute
the sole remedy available to holders of securities or the trustee for a breach
of representation by a mortgage loan seller. See "Description of the
Securities."
Neither the depositor nor the master servicer will be obligated to purchase
or substitute for a mortgage loan if a mortgage loan seller defaults on its
obligation to do so, and no assurance can be given that mortgage loan sellers
will carry out their repurchase or substitution obligations with respect to
mortgage loans. To the extent that a breach of the representations and
warranties of a mortgage loan seller may also constitute a breach of a
representation made by the depositor, the depositor may have a repurchase or
substitution
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obligation as described below under "Description of the Securities--Assignment
of Trust Fund Assets; Review of Files by Trustee."
DESCRIPTION OF THE SECURITIES
The securities will be issued in series. Each series of certificates
evidencing interests in a trust fund consisting of mortgage loans will be issued
in accordance with a pooling and servicing agreement among the depositor, the
master servicer and the trustee named in the prospectus supplement. Each series
of notes evidencing indebtedness of a trust fund consisting of mortgage loans
will be issued in accordance with an indenture between the related issuer and
the trustee named in the prospectus supplement. The issuer of notes will be the
depositor or an owner trust established under an owner trust agreement between
the depositor and the owner trustee for the purpose of issuing a series of
notes. Where the issuer is an owner trust, the ownership of the trust fund will
be evidenced by equity certificates issued under the owner trust agreement. The
provisions of each agreement will vary depending upon the nature of the
securities to be issued thereunder and the nature of the related trust fund.
Various forms of pooling and servicing agreement, servicing agreement, owner
trust agreement, trust agreement and indenture have been filed as exhibits to
the registration statement of which this prospectus is a part. The following
summaries describe specific provisions which will appear in each agreement. The
prospectus supplement for a series of securities will describe additional
provisions of the agreement relating to a series. This prospectus together with
the prospectus supplement will describe the material terms of the agreement
governing the trust fund related to a series of securities. As used in this
prospectus supplement with respect to any series, the term certificate or the
term note refers to all of the certificates or notes of that series, whether or
not offered by this prospectus and by the related prospectus supplement, unless
the context otherwise requires.
The certificates of each series, including any class of certificates not
offered hereby, will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the trust fund created by the
related pooling and servicing agreement. The notes of each series, including any
class of notes not offered hereby, will be issued in fully registered form only
and will represent indebtedness of the trust fund created by the related
indenture. If so provided in the prospectus supplement, any class of securities
of any series may be represented by a certificate or note registered in the name
of a nominee of The Depository Trust Company. The interests of beneficial owners
of securities registered in the name of DTC will be represented by entries on
the records of participating members of DTC. Definitive certificates or notes
will be available for securities registered in the name of DTC only under the
limited circumstances provided in the related prospectus supplement. The
securities will be transferable and exchangeable for like securities of the same
class and series in authorized denominations at the corporate trust office of
the trustee as specified in the related prospectus supplement. The prospectus
supplement for each series of securities will describe any limitations on
transferability. No service charge will be made for any registration of exchange
or transfer of securities, but the depositor or the trustee or any agent of the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
Each series of securities may consist of either:
o a single class of securities evidencing the entire beneficial ownership
of or indebtedness of the related trust fund;
o two or more classes of securities evidencing the entire beneficial
ownership of or indebtedness of the related trust fund, one or more
classes of which will be senior in right of payment to one or more of
the other classes;
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o two or more classes of securities, one or more classes of which are
entitled to (a) principal distributions, with disproportionate, nominal
or no interest distributions or (b) interest distributions, with
disproportionate, nominal or no principal distributions;
o two or more classes of securities which differ as to timing, sequential
order, priority of payment, security interest rate or amount of
distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any class may be made
upon the occurrence of specified events, in accordance with a schedule
or formula, or on the basis of collections from designated portions of
the mortgage pool, which series may include one or more classes of
securities, as to which accrued interest or a portion thereof will not
be distributed but rather will be added to the principal balance of the
security on each distribution date in the manner described in the
related prospectus supplement; and
o other types of classes of securities, as described in the related
prospectus supplement.
With respect to any series of notes, the equity certificates, insofar as
they represent the beneficial ownership interest in the issuer, will be
subordinate to the related notes.
Each class of securities, other than interest only Strip Securities, will
have a stated principal amount and, unless otherwise provided in the related
prospectus supplement, will be entitled to payments of interest on the stated
principal amount based on a fixed, variable or adjustable interest rate. The
security interest rate of each security offered hereby will be stated in the
related prospectus supplement as the pass-through rate with respect to a
certificate and the note interest rate with respect to a note. See
"--Distribution of Interest on the Securities" and "--Distribution of Principal
of the Securities" below.
The specific percentage ownership interest of each class of securities and
the minimum denomination for each security will be set forth in the related
prospectus supplement.
As to each series of certificates with respect to which a REMIC election is
to be made, the master servicer or the trustee will be obligated to take all
actions required in order to comply with applicable laws and regulations, and
will be obligated to pay any Prohibited Transaction Taxes or Contribution Taxes
arising out of a breach of its obligations with respect to its compliance
without any right of reimbursement therefor from the trust fund or from any
securityholder. A Prohibited Transaction Tax or Contribution Tax resulting from
any other cause will be charged against the related trust fund, resulting in a
reduction in amounts otherwise distributable to securityholders. See "Federal
Income Tax Consequences."
ASSIGNMENT OF TRUST FUND ASSETS; REVIEW OF FILES BY TRUSTEE
At the time of issuance of any series of securities, the depositor will
cause the pool of mortgage assets to be included in the related trust fund to be
assigned to the trustee, together with all principal and interest received by or
on behalf of the depositor on or with respect to the mortgage assets after the
related cut-off date, other than principal and interest due on or before the
cut-off date and other than any retained interest. The trustee will,
concurrently with the assignment of mortgage assets, deliver the securities to
the depositor in exchange for the trust fund assets. Each mortgage asset will be
identified in a schedule appearing as an exhibit to the related agreement. The
schedule of mortgage assets will include detailed information as to the mortgage
asset included in the related trust fund, including the outstanding principal
balance of each mortgage asset after application of payments due on the cut-off
date, information regarding the interest rate on the mortgage asset, the
interest rate net of the sum of the rates at which the servicing fees and the
retained interest, if any, are calculated, the retained interest, if any, the
current scheduled monthly payment of
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principal and interest, the maturity of the mortgage note, the value of the
mortgaged property, the loan-to-value ratio at origination and other information
with respect to the mortgage assets.
If so specified in the related prospectus supplement, and in accordance
with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc. or, MERS, assignments of the mortgages for the
mortgage loans in the related trust will be registered electronically through
Mortgage Electronic Registration Systems, Inc., or MERS(R) System. With respect
to mortgage loans registered through the MERS(R) System, MERS shall serve as
mortgagee of record solely as a nominee in an administrative capacity on behalf
of the trustee and shall not have any interest in any of those mortgage loans.
The depositor will, with respect to each mortgage asset, deliver or cause
to be delivered to the trustee, or to the custodian hereinafter referred to:
o With respect to each mortgage loan, (1) the mortgage note endorsed,
without recourse, to the order of the trustee or in blank, (2) the
original Mortgage with evidence of recording indicated thereon and an
assignment of the Mortgage to the trustee or in blank, in recordable
form. If, however, a mortgage loan has not yet been returned from the
public recording office, the depositor will deliver or cause to be
delivered a copy of the Mortgage together with its certificate that the
original of the Mortgage was delivered to the recording office. The
depositor will promptly cause the assignment of each related mortgage
loan to be recorded in the appropriate public office for real property
records, except for Mortgages held under the MERS(R) System and except
in the State of California or in other states where, in the opinion of
counsel acceptable to the trustee, recording of the assignment is not
required to protect the trustee's interest in the mortgage loan against
the claim of any subsequent transferee or any successor to or creditor
of the depositor, the master servicer, the relevant mortgage loan
seller or any other prior holder of the mortgage loan. If the depositor
uses the MERS(R) System, it will deliver evidence that the Mortgage is
held for the trustee through the MERS(R) System instead of an
assignment of the Mortgage in recordable form.
o With respect to each cooperative loan, (1) the cooperative note, (2)
the original security agreement, (3) the proprietary lease or occupancy
agreement, (4) the related stock certificate and related stock powers
endorsed in blank, and (5) a copy of the original filed financing
statement together with an assignment thereof to the trustee in a form
sufficient for filing. The depositor will promptly cause the assignment
and financing statement of each related cooperative loan to be filed in
the appropriate public office, except in states where in the opinion of
counsel acceptable to the trustee, filing of the assignment and
financing statement is not required to protect the trustee's interest
in the cooperative loan against the claim of any subsequent transferee
or any successor to or creditor of the depositor, the master servicer,
the relevant mortgage loan seller or any prior holder of the
cooperative loan.
o With respect to each manufactured housing contract or home improvement
contract, (1) the original contract endorsed, without recourse, to the
order of the trustee and copies of documents and (2) instruments
related to the contract and the security interest in the property
securing the contract, and (3) a blanket assignment to the trustee of
all contracts in the related trust fund and the documents and
instruments. In order to give notice of the right, title and interest
of the securityholders to the contracts, the depositor will cause to be
executed and delivered to the trustee a UCC-1 financing statement
identifying the trustee as the secured party and identifying all
contracts as collateral.
With respect to any mortgage loan secured by a mortgaged property located
in Puerto Rico, the Mortgages with respect to these mortgage loans either (a)
secure a specific obligation for the benefit of a specified person or (b) secure
an instrument transferable by endorsement. Endorsable Puerto Rico Mortgages do
not require an assignment to transfer the related lien. Rather, transfer of
endorsable mortgages follows
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an effective endorsement of the related mortgage note and, therefore, delivery
of the assignment referred to in the first bullet point above would be
inapplicable. Puerto Rico Mortgages that secure a specific obligation for the
benefit of a specified person, however, require an assignment to be recorded
with respect to any transfer of the related lien and the assignment for that
purpose would be delivered to the trustee.
The trustee, or the custodian, will review the mortgage loan documents
within a specified period after receipt, and the trustee, or the custodian, will
hold the mortgage loan documents in trust for the benefit of the
securityholders. If any mortgage loan document is found to be missing or
defective in any material respect, the trustee, or the custodian, shall notify
the master servicer and the depositor, and the master servicer shall immediately
notify the relevant mortgage loan seller. If the mortgage loan seller cannot
cure the omission or defect within a specified number of days after receipt of
notice, the mortgage loan seller will be obligated to repurchase the related
mortgage asset from the trustee at the repurchase price or substitute for the
mortgage asset. There can be no assurance that a mortgage loan seller will
fulfill this repurchase or substitution obligation. Although the master servicer
is obligated to use its best efforts to enforce the repurchase or substitution
obligation to the extent described above under "The Depositor's Mortgage Loan
Purchase Program-Representations by or on behalf of Mortgage Loan Sellers;
Remedies for Breach of Representation", neither the master servicer nor the
depositor will be obligated to repurchase or substitute for that mortgage asset
if the mortgage loan seller defaults on its obligation. The assignment of the
mortgage assets to the trustee will be without recourse to the depositor and
this repurchase or substitution obligation constitutes the sole remedy available
to the securityholders or the trustee for omission of, or a material defect in,
a constituent document.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
With respect to the mortgage assets included in a trust fund, the depositor
will make representations and warranties as of a specified date, covering by way
of example, the following matters:
o the type of mortgaged property;
o the geographical concentration of the mortgage assets;
o the original loan-to-value ratio;
o the principal balance as of the cut-off date;
o the interest rate and maturity; and
o the payment status of the mortgage asset; and the accuracy of the
information set forth for each mortgage asset on the related mortgage
loan schedule.
Upon a breach of any representation of the depositor that materially and
adversely affects the value of a mortgage asset or the interests of the
securityholders in the mortgage asset, the depositor will be obligated either to
cure the breach in all material respects, repurchase the mortgage asset at the
repurchase price or substitute for that mortgage asset as described in the
paragraph below.
If the depositor discovers or receives notice of any breach of its
representations or warranties with respect to a mortgage asset, the depositor
may be permitted under the agreement governing the trust fund to remove the
mortgage asset from the trust fund, rather than repurchase the mortgage asset,
and substitute in its place one or more mortgage assets, but only if (a) with
respect to a trust fund for which a REMIC election is to be made, the
substitution is effected within two years of the date of initial issuance of the
certificates,
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plus permissible extensions, or (b) with respect to a trust fund for which no
REMIC election is to be made, the substitution is effected within 180 days of
the date of initial issuance of the securities. Each substitute mortgage asset
will, on the date of substitution, comply with the following requirements:
(1) have an outstanding principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of, and not
more than $10,000 less than, the outstanding principal balance, after
deduction of all unpaid scheduled payments due as of the date of
substitution, of the deleted mortgage asset,
(2) have an interest rate not less than, and not more than 1% greater than,
the interest rate of the deleted mortgage asset,
(3) have a remaining term to maturity not greater than, and not more than
one year less than, that of the deleted mortgage asset,
(4) have a Lockout Date, if applicable, not earlier than the Lockout Date
on the deleted mortgage loan, and
(5) comply with all of the representations and warranties set forth in the
pooling and servicing agreement or indenture as of the date of
substitution.
In connection with any substitution, an amount equal to the difference
between the purchase price of the deleted mortgage asset and the outstanding
principal balance of the substitute mortgage asset, after deduction of all
scheduled payments due in the month of substitution, together with one month's
interest at the applicable rate at which interest accrued on the deleted
mortgage loan, less the servicing fee rate and the retained interest, if any, on
the difference, will be deposited in the distribution account and distributed to
securityholders on the first distribution date following the prepayment period
in which the substitution occurred. In the event that one mortgage asset is
substituted for more than one deleted mortgage asset, or more than one mortgage
asset is substituted for one or more deleted mortgage assets, then the amount
described in (1) above will be determined on the basis of aggregate principal
balances, the rate described in (2) above with respect to deleted mortgage
assets will be determined on the basis of weighted average interest rates, and
the terms described in (3) above will be determined on the basis of weighted
average remaining terms to maturity and the Lockout Dates described in (4) above
will be determined on the basis of weighted average Lockout Dates.
With respect to any series as to which credit support is provided by means
of a mortgage pool insurance policy, in addition to making the representations
and warranties described above, the depositor or the related mortgage loan
seller, or another party on behalf of the related mortgage loan seller, as
specified in the related prospectus supplement, will represent and warrant to
the trustee that no action has been taken or failed to be taken, no event has
occurred and no state of facts exists or has existed on or prior to the date of
the initial issuance of the securities which has resulted or will result in the
exclusion from, denial of or defense to coverage under any applicable primary
mortgage insurance policy, FHA insurance policy, mortgage pool insurance policy,
special hazard insurance policy or bankruptcy bond, irrespective of the cause of
the failure of coverage but excluding any failure of an insurer to pay by reason
of the insurer's own breach of its insurance policy or its financial inability
to pay. This representation is referred to in this prospectus and the related
prospectus supplement as the insurability representation. Upon a breach of the
insurability representation which materially and adversely affects the interests
of the securityholders in a mortgage loan, the depositor or the mortgage loan
seller, as the case may be, will be obligated either to cure the breach in all
material respects or to purchase the affected mortgage asset at the purchase
price. The related prospectus supplement may provide that the performance of an
obligation to repurchase mortgage assets following a
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breach of an insurability representation will be ensured in the manner specified
in the prospectus supplement. See "Description of Primary Insurance Policies"
and "Description of Credit Support" in this Prospectus and in the related
prospectus supplement for information regarding the extent of coverage under the
aforementioned insurance policies.
The obligation to repurchase or, other than with respect to the
insurability representation if applicable, to substitute mortgage loans
constitutes the sole remedy available to the securityholders or the trustee for
any breach of the representations.
The master servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
servicing agreement. Upon a breach of any representation of the master servicer
which materially and adversely affects the interests of the securityholders, the
master servicer will be obligated to cure the breach in all material respects.
ESTABLISHMENT OF COLLECTION ACCOUNT; DEPOSITS TO COLLECTION ACCOUNT IN RESPECT
OF TRUST FUND ASSETS
The master servicer or the trustee will, as to each trust fund, establish
and maintain or cause to be established and maintained one or more separate
accounts for the collection of payments on the related trust fund assets. These
accounts are collectively referred to in this prospectus and the related
prospectus supplement as the collection account. The collection account must be
either
o maintained with a bank or trust company, and in a manner, satisfactory
to the rating agency or agencies rating any class of securities of the
series or
o an account or accounts the deposits in which are insured by the BIF or
the SAIF, to the limits established by the FDIC, and the uninsured
deposits in which are otherwise secured so that the securityholders
have a claim with respect to the funds in the collection account or a
perfected first priority security interest against any collateral
securing the funds that is superior to the claims of any other
depositors or general creditors of the institution with which the
collection account is maintained.
The collateral eligible to secure amounts in the collection account is
limited to United States government securities and other high-quality
investments specified in the related servicing agreement as permitted
investments. A collection account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held in the collection account may be
invested pending each succeeding distribution date in permitted investments. Any
interest or other income earned on funds in the collection account will be paid
to the master servicer or the trustee or their designee as additional
compensation. The collection account may be maintained with an institution that
is an affiliate of the master servicer or the trustee, provided that the
institution meets the standards set forth in the bullet points above. If
permitted by the rating agency or agencies and so specified in the related
prospectus supplement, a collection account may contain funds relating to more
than one series of pass-through certificates and may, if applicable, contain
other funds respecting payments on mortgage loans belonging to the master
servicer or serviced or master serviced by it on behalf of others.
Each sub-servicer servicing a trust fund asset under a sub-servicing
agreement will establish and maintain one or more separate accounts which may be
interest bearing and which will comply with the standards with respect to
collection accounts or other standards as may be acceptable to the master
servicer. The sub-servicer is required to credit to the related sub-servicing
account on a daily basis the amount of all proceeds of mortgage assets received
by the sub-servicer, less its servicing compensation. The sub-servicer will
remit to the master servicer by wire transfer of immediately available funds all
funds held in the
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sub-servicing account with respect to each mortgage asset on the monthly
remittance date or dates specified in the related servicing agreement.
The master servicer will deposit or cause to be deposited in the collection
account for each trust fund including mortgage loans, the following payments and
collections received, or advances made, by the master servicer or on its behalf
subsequent to the cut-off date, other than payments due on or before the cut-off
date and exclusive of any retained interest, unless otherwise specified in the
related prospectus supplement:
(1) all payments on account of principal, including principal
prepayments, on the mortgage assets;
(2) all payments on account of interest on the mortgage assets, net of
any portion retained by the master servicer or by a sub-servicer
as its servicing compensation and net of any retained interest;
(3) all proceeds of the hazard insurance policies and any special
hazard insurance policy, other than amounts to be not applied to
the restoration or repair of the property or released to the
mortgagor in accordance with the normal servicing procedures of
the master servicer or the related sub-servicer, subject to the
terms and conditions of the related Mortgage and mortgage note,
any primary mortgage insurance policy, any FHA insurance policy,
any VA guarantee, any bankruptcy bond and any mortgage pool
insurance policy and all other amounts received and retained in
connection with the liquidation of defaulted mortgage loans, by
foreclosure or otherwise, together with the net proceeds on a
monthly basis with respect to any mortgaged properties acquired
for the benefit of securityholders by foreclosure or by deed in
lieu of foreclosure or otherwise;
(4) any amounts required to be paid under any letter of credit, as
described below under "Description of Credit Support--Letter of
Credit";
(5) any advances made as described below under "Advances by the Master
Servicer in respect of Delinquencies on the Trust Funds Assets";
(6) if applicable, all amounts required to be transferred to the
collection account from a reserve fund, as described below under
"Description of Credit Support--Reserve Funds";
(7) any buydown funds, and, if applicable, investment earnings
thereon, required to be deposited in the collection account as
described in the first paragraph below;
(8) all proceeds of any mortgage loan or property in respect of the
mortgage asset purchased by the master servicer, the depositor,
any sub-servicer or any mortgage loan seller as described under
"The Depositor's Mortgage Loan Purchase Program-Representations by
or on behalf of Mortgage Loan Sellers; Remedies for Breach of
Representations" or "--Assignment of Trust Fund Assets; Review of
Files by Trustee" above, exclusive of the retained interest, if
any, in respect of the mortgage asset;
(9) all proceeds of any mortgage loan repurchased as described under
"--Termination" below;
(10) all payments required to be deposited in the collection account
with respect to any deductible clause in any blanket insurance
policy described under "Description of Primary Insurance
Policies--Primary Hazard Insurance Policies"; and
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(11) any amount required to be deposited by the master servicer in
connection with net losses realized on investments for the benefit
of the master servicer of funds held in the collection account.
With respect to each buydown mortgage loan, the master servicer, or a
sub-servicer, will deposit related buydown funds in a custodial account, which
may be interest bearing, and that otherwise meets the standards for collection
accounts. This account is referred to in this prospectus and the related
prospectus supplement as a buydown account. The terms of all buydown mortgage
loans provide for the contribution of buydown funds in an amount not less than
either (a) the total payments to be made from the buydown funds under the
related buydown plan or (b) if the buydown funds are present valued, that amount
that, together with investment earnings thereon at a specified rate, compounded
monthly, will support the scheduled level of payments due under the buydown
mortgage loan. Neither the master servicer, the sub-servicer nor the depositor
will be obligated to add to the buydown funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any insufficiency in buydown funds is not
recoverable from the borrower, distributions to securityholders will be
affected. With respect to each buydown mortgage loan, the master servicer will
deposit in the collection account the amount, if any, of the buydown funds, and,
if applicable, investment earnings thereon, for each buydown mortgage loan that,
when added to the amount due from the borrower on the buydown mortgage loan,
equals the full monthly payment which would be due on the buydown mortgage loan
if it were not subject to the buydown plan.
If a buydown mortgage loan is prepaid in full or liquidated, the related
buydown funds will be applied as follows. If the mortgagor on a buydown mortgage
loan prepays the loan in its entirety during the buydown period, the master
servicer will withdraw from the buydown account and remit to the mortgagor in
accordance with the related buydown plan any buydown funds remaining in the
buydown account. If a prepayment by a mortgagor during the buydown period
together with buydown funds will result in a prepayment in full, the master
servicer will withdraw from the buydown account for deposit in the collection
account the buydown funds and investment earnings thereon, if any, which
together with the prepayment will result in a prepayment in full. If the
mortgagor defaults during the buydown period with respect to a buydown mortgage
loan and the mortgaged property is sold in liquidation, either by the master
servicer or the insurer under any related insurance policy, the master servicer
will withdraw from the buydown account the buydown funds and all investment
earnings thereon, if any, for deposit in the collection account or remit the
same to the insurer if the mortgaged property is transferred to the insurer and
the insurer pays all of the loss incurred in respect of the default. In the case
of any prepaid or defaulted buydown mortgage loan the buydown funds in respect
of which were supplemented by investment earnings, the master servicer will
withdraw from the buydown account and either deposit in the collection account
or remit to the borrower, depending upon the terms of the buydown plan, any
investment earnings remaining in the related buydown account.
Any buydown funds, and any investment earnings thereon, deposited in the
collection account in connection with a full prepayment of the related buydown
mortgage loan will be deemed to reduce the amount that would be required to be
paid by the borrower to repay fully the related mortgage loan if the mortgage
loan were not subject to the buydown plan.
WITHDRAWALS. With respect to each series of securities, the master
servicer, trustee or special servicer may make withdrawals from the collection
account for the related trust fund for any of the following purposes, unless
otherwise provided in the related agreement and described in the related
prospectus supplement:
(1) to make distributions to the related securityholders on each
distribution date;
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(2) to reimburse the master servicer or any other specified person for
unreimbursed amounts advanced by it in respect of mortgage loans
in the trust fund as described under "Advances by Master Servicer
in Respect of Delinquencies on the Trust Fund Assets" above, these
reimbursement to be made out of amounts received which were
identified and applied by the master servicer as late collections
of interest (net of related servicing fees) on and principal of
the particular mortgage assets with respect to which the advances
were made or out of amounts drawn under any form of credit
enhancement with respect to the mortgage assets;
(3) to reimburse the master servicer or a special servicer for unpaid
servicing fees earned by it and some unreimbursed servicing
expenses incurred by it with respect to mortgage assets in the
trust fund and properties acquired in respect thereof, these
reimbursement to be made out of amounts that represent Liquidation
Proceeds and Insurance Proceeds collected on the particular
mortgage assets and properties, and net income collected on the
particular properties, with respect to which the fees were earned
or the expenses were incurred or out of amounts drawn under any
form of credit enhancement with respect to the mortgage assets and
properties;
(4) to reimburse the master servicer or any other specified person for
any advances described in clause (2) above made by it and any
servicing expenses referred to in clause (3) above incurred by it
which, in the good faith judgment of the master servicer or the
other person, will not be recoverable from the amounts described
in clauses (2) and (3), respectively, the reimbursement to be made
from amounts collected on other mortgage assets in the trust fund
or, if and to the extent so provided by the related servicing
agreement or indenture and described in the related prospectus
supplement, only from that portion of amounts collected on the
other mortgage assets that is otherwise distributable on one or
more classes of subordinate securities of the related series;
(5) if and to the extent described in the related prospectus
supplement, to pay the master servicer, a special servicer or
another specified entity (including a provider of credit
enhancement) interest accrued on the advances described in clause
(2) above made by it and the servicing expenses described in
clause (3) above incurred by it while these remain outstanding and
unreimbursed;
(6) to reimburse the master servicer, the company, or any of their
respective directors, officers, employees and agents, as the case
may be, for expenses, costs and liabilities incurred thereby, as
and to the extent described under "Matters Regarding the Master
Servicer and the Depositor";
(7) if and to the extent described in the related prospectus
supplement, to pay the fees of the trustee;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses, costs and
liabilities incurred thereby, as and to the extent described under
"Description of the Trustee";
(9) to pay the master servicer or the trustee, as additional
compensation, interest and investment income earned in respect of
amounts held in the collection account;
(10) to pay, generally from related income, the master servicer or a
special servicer for costs incurred in connection with the
operation, management and maintenance of any mortgaged property
acquired by the trust fund by foreclosure or by deed in lieu of
foreclosure;
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(11) if one or more elections have been made to treat the trust fund or
designated portions thereof as a REMIC, to pay any federal, state
or local taxes imposed on the trust fund or its assets or
transactions, as and to the extent described under "Federal Income
Tax Consequences--REMICS--Prohibited Transactions and Other
Possible REMIC Taxes";
(12) to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a
defaulted mortgage loan or a property acquired in respect thereof
in connection with the liquidation of the mortgage loan or
property;
(13) to pay for the cost of various opinions of counsel obtained
pursuant to the related servicing agreement or indenture for the
benefit of the related securityholders;
(14) to pay to itself, the depositor, a mortgage loan seller or any
other appropriate person all amounts received with respect to each
mortgage loan purchased, repurchased or removed from the trust
fund pursuant to the terms of the related servicing agreement and
not required to be distributed as of the date on which the related
purchase price is determined;
(15) to make any other withdrawals permitted by the related pooling and
servicing agreement or the related servicing agreement and
indenture and described in the related prospectus supplement;
(16) to pay for costs and expenses incurred by the trust fund for
environmental site assessments performed with respect to
multifamily or commercial properties that constitute security for
defaulted mortgage loans, and for any containment, clean-up or
remediation of hazardous wastes and materials present on that
mortgaged properties, as described under "Procedures for
Realization Upon Defaulted Mortgage Loans"; and
(17) to clear and terminate the collection account upon the termination
of the trust fund.
DEPOSITS TO DISTRIBUTION ACCOUNT
The trustee will, as to each trust fund, establish and maintain a
distribution account which must be an eligible account. The trustee will deposit
or cause to be deposited in the distribution account for each trust fund amounts
received from the master servicer or otherwise in respect of the related
securities.
DISTRIBUTIONS ON THE SECURITIES
Distributions allocable to principal and interest on the securities of each
series will be made by or on behalf of the trustee each month on each date as
specified in the related prospectus supplement and referred to as a distribution
date, commencing with the month following the month in which the applicable
cut-off date occurs. Distributions will be made to the persons in whose names
the securities are registered at the close of business on the Record Date, and
the amount of each distribution will be determined as of the close of business
on the date specified in the related prospectus supplement and referred to as
the determination date. All distributions with respect to each class of
securities on each distribution date will be allocated PRO RATA among the
outstanding securities in that class. Payments to the holders of securities of
any class on each distribution date will be made to the securityholders of the
respective class of record on the next preceding Record Date, other than in
respect of the final distribution, based on the aggregate fractional undivided
interests in that class represented by their respective securities. Payments
will be made by wire transfer in immediately available funds to the account of a
securityholder, if the securityholder holds securities in the requisite amount
specified in the related prospectus supplement and if the securityholder has so
notified the depositor or its designee no later than the date specified in the
related prospectus supplement. Otherwise,
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payments will be made by check mailed to the address of the person entitled to
payment as it appears on the security register maintained by the depositor or
its agent. The final distribution in retirement of the securities will be made
only upon presentation and surrender of the securities at the office or agency
of the depositor or its agent specified in the notice to securityholders of the
final distribution. With respect to each series of certificates or notes, the
security register will be referred to as the certificate register or note
register, respectively.
All distributions on the securities of each series on each distribution
date will be made from the available distribution amount described in the next
sentence, in accordance with the terms described in the related prospectus
supplement. The available distribution amount for each series of securities will
be described in the related prospectus supplement and will generally include the
following amounts for each distribution date:
(1) the total amount of all cash on deposit in the related distribution
account as of the corresponding determination date, exclusive of:
(a) all scheduled payments of principal and interest collected but due
on a date subsequent to the related Due Period,
(b) all prepayments, together with related payments of the interest
thereon, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related
Prepayment Period, and
(c) all amounts in the distribution account that are due or
reimbursable to the depositor, the trustee, a mortgage loan
seller, a sub-servicer or the master servicer or that are payable
in respect of specified expenses of the related trust fund;
(2) if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the distribution account;
(3) all advances with respect to the distribution date;
(4) if the related prospectus supplement so provides, amounts paid with
respect to interest shortfalls resulting from prepayments during the
related Prepayment Period;
(5) to the extent not on deposit in the related distribution account as of
the corresponding determination date, any amounts collected under, from
or in respect of any credit support with respect to the distribution
date; and
(6) any other amounts described in the related prospectus supplement.
The entire available distribution amount will be distributed among the
related securities, including any securities not offered hereby, on each
distribution date, and accordingly will be released from the trust fund and will
not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES. Each class of securities may
earn interest at a different rate, which may be a fixed, variable or adjustable
security interest rate. The related prospectus supplement will specify the
security interest rate for each class, or, in the case of a variable or
adjustable security interest rate, the method for determining the security
interest rate. Unless otherwise specified in the related prospectus
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supplement, interest on the securities will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
With respect to each series of securities and each distribution date, the
distribution in respect of interest on each security, other than principal only
Strip Securities, will be equal to one month's interest on the outstanding
principal balance of the security immediately prior to the distribution date, at
the applicable security interest rate, subject to the following. As to each
Strip Security with no or a nominal principal balance, the distributions in
respect of interest on any distribution date will be on the basis of a notional
amount and equal one month's Stripped Interest. Prior to the time interest is
distributable on any class of Accrual Securities, interest accrued on that class
will be added to the principal balance thereof on each distribution date.
Interest distributions on each security of a series will be reduced in the event
of shortfalls in collections of interest resulting from prepayments on mortgage
loans, with that shortfall allocated among all of the securities of that series
if specified in the related prospectus supplement unless the master servicer is
obligated to cover the shortfalls from its own funds up to its servicing fee for
the related due period. With respect to each series of certificates or notes,
the interest distributions payable will be referred to in the applicable
prospectus supplement as the accrued certificate interest or accrued note
interest, respectively. See "Yield and Maturity Considerations" in this
prospectus.
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES. The principal balance of a
security, at any time, will equal the maximum amount that the holder will be
entitled to receive in respect of principal out of the future cash flow on the
mortgage assets and other assets included in the related trust fund. The
principal balance of each security offered hereby will be stated in the related
prospectus supplement as the certificate principal balance with respect to a
certificate and the note balance with respect to a note. With respect to each
security, distributions generally will be applied to undistributed accrued
interest thereon, and thereafter to principal. The outstanding principal balance
of a security will be reduced to the extent of distributions of principal on
that security, and, if and to the extent so provided on the related prospectus
supplement, by the amount of any realized losses, allocated to that security.
The outstanding principal balance of a security may be increased by any deferred
interest if so specified in the related prospectus supplement. The initial
aggregate principal balance of a series and each class of securities related to
a series will be specified in the related prospectus supplement. Distributions
of principal will be made on each distribution date to the class or classes of
securities entitled to principal until the principal balance of that class has
been reduced to zero. With respect to a Senior/Subordinate Series, distributions
allocable to principal of a class of securities will be based on the percentage
interest in the related trust fund evidenced by the class, which in turn will be
based on the principal balance of that class as compared to the principal
balance of all classes of securities of the series. Distributions of principal
of any class of securities will be made on a PRO RATA basis among all of the
securities of the class. Strip Securities with no principal balance will not
receive distributions of principal.
ALLOCATION TO SECURITYHOLDERS OF LOSSES ON THE TRUST FUND ASSETS. With
respect to any defaulted mortgage loan that is finally liquidated, through
foreclosure sale or otherwise, the amount of the realized loss incurred in
connection with liquidation will equal the excess, if any, of the unpaid
principal balance of the liquidated loan immediately prior to liquidation, over
the aggregate amount of Liquidation Proceeds derived from liquidation remaining
after application of the proceeds to unpaid accrued interest on the liquidated
loan and to reimburse the master servicer or any sub- servicer for related
unreimbursed servicing expenses. With respect to mortgage loans the principal
balances of which have been reduced in connection with bankruptcy proceedings,
the amount of that reduction also will be treated as a realized loss. As to any
series of securities, other than a Senior/Subordinate Series, any realized loss
not covered as described under "Description of Credit Support" will be allocated
among all of the securities on a PRO RATA basis. As to any Senior/Subordinate
Series, realizes losses will be allocated first to the most subordinate class of
securities as described below under "Description of Credit
Support--Subordination."
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ADVANCES BY MASTER SERVICER IN RESPECT OF DELINQUENCIES ON THE TRUST FUND ASSETS
With respect to any series of securities, the master servicer will advance
on or before each distribution date its own funds or funds held in the
distribution account that are not included in the available distribution amount
for that distribution date unless the master servicer, in good faith, determines
that any advances made will not be reimbursable from proceeds subsequently
recovered on the mortgage asset related to the advance. The amount of each
advance will be equal to the aggregate of payments of interest, net of related
servicing fees and retained interest, that were due during the related Due
Period and were delinquent on the related determination date. The prospectus
supplement for a series may also provide that the master servicer will advance,
together with delinquent interest, the aggregate amount of principal payments
that were due during the related Due Period and delinquent as of the
determination date, subject to the same reimbursement determination, except
that, with respect to balloon loans, the master servicer will not have to
advance a delinquent balloon payment.
Advances are intended to maintain a regular flow of scheduled interest
payments to holders of the class or classes of securities entitled to payments,
rather than to guarantee or insure against losses. Advances of the master
servicer's funds will be reimbursable only out of related recoveries on the
mortgage assets respecting which advances were made, including amounts received
under any form of credit support; provided, however, that any advance will be
reimbursable from any amounts in the distribution account to the extent that the
master servicer shall determine that the advance is not ultimately recoverable
from Related Proceeds. If advances have been made by the master servicer from
excess funds in the distribution account, the master servicer will replace those
funds in the distribution account on any future distribution date to the extent
that funds in the distribution account on that distribution date are less than
payments required to be made to securityholders on that date. If so specified in
the related prospectus supplement, the obligations of the master servicer to
make advances may be secured by a cash advance reserve fund or a surety bond. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any surety bond, will be set forth in the related prospectus
supplement.
FORM OF REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of securities of a series,
the master servicer or the trustee, will forward or cause to be forwarded to
each securityholder, to the depositor and to those other parties as may be
specified in the related servicing agreement, a statement setting forth the
following as of the distribution date:
(1) the amount of the distribution to holders of securities of that
class applied to reduce the principal balance of the securities;
(2) the amount of the distribution to holders of securities of that
class allocable to interest;
(3) the amount of related administration or servicing compensation
received by the trustee or the master servicer and any
sub-servicer and any other customary information as the master
servicer deems necessary or desirable, or that a securityholder
reasonably requests, to enable securityholders to prepare their
tax returns;
(4) if applicable, the aggregate amount of advances included in the
distribution, and the aggregate amount of unreimbursed advances at
the close of business on that distribution date;
(5) the aggregate principal balance of the mortgage loans at the close
of business on that distribution date;
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(6) the number and aggregate principal balance of mortgage loans (a)
delinquent one month, (b) delinquent two or more months, and (c)
as to which foreclosure proceedings have been commenced;
(7) with respect to any mortgaged property acquired on behalf of
securityholders through foreclosure or deed in lieu of foreclosure
during the preceding calendar month, the principal balance of the
related mortgage loan as of the close of business on the
distribution date in that month;
(8) the aggregate principal balance of each class of securities
(including any class of securities not offered hereby) at the
close of business on that distribution date, separately
identifying any reduction in the principal balance due to the
allocation of any realized loss;
(9) the amount of any special hazard realized losses allocated to the
subordinate securities, if any, at the close of business on that
distribution date;
(10) the aggregate amount of principal prepayments made and realized
losses incurred during the related Prepayment Period;
(11) the amount deposited in the reserve fund, if any, on that
distribution date;
(12) the amount remaining in the reserve fund, if any, as of the close
of business on that distribution date;
(13) the aggregate unpaid accrued interest, if any, on each class of
securities at the close of business on that distribution date;
(14) in the case of securities that accrue interest at the variable
rate, the security interest rate applicable to that distribution
date, as calculated in accordance with the method specified in the
related prospectus supplement; and
(15) as to any series which includes credit support, the amount of
coverage of each instrument of credit support included in the
trust fund as of the close of business on that distribution date.
In the case of information furnished under subclauses (1) through (3)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of securities or for other specified portion thereof. With respect
to each series of certificates or notes, securityholders will be referred to as
the certificateholders or the noteholders, respectively.
Within a reasonable period of time after the end of each calendar year, the
master servicer or the trustee, as provided in the related prospectus
supplement, shall furnish to each person who at any time during the calendar
year was a holder of a security a statement containing the information set forth
in subclauses (1) through (3) above, aggregated for that calendar year or the
applicable portion thereof during which that person was a securityholder. The
obligation of the master servicer or the trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the master servicer or the trustee in accordance with any
requirements of the Code as are from time to time in force.
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COLLECTION AND OTHER SERVICING PROCEDURES EMPLOYED BY THE MASTER SERVICER
The master servicer, directly or through sub-servicers, will make
reasonable efforts to collect all scheduled payments under the mortgage loans
and will follow or cause to be followed the collection procedures as it would
follow with respect to mortgage assets that are comparable to the mortgage
assets and held for its own account, provided these procedures are consistent
with the related servicing agreement and any related insurance policy,
bankruptcy bond, letter of credit or other insurance instrument described under
"Description of Primary Insurance Policies" or "Description of Credit Support."
Consistent with this servicing standard, the master servicer may, in its
discretion, waive any late payment charge in respect of a late mortgage loan
payment and, only upon determining that the coverage under any related insurance
instrument will not be affected, extend or cause to be extended the due dates
for payments due on a mortgage note for a period not greater than 180 days.
In instances in which a mortgage asset is in default, or if default is
reasonably foreseeable, and if determined by the master servicer to be in the
best interests of the related securityholders, the master servicer may permit
modifications of the mortgage asset rather than proceeding with foreclosure. In
making that determination, the estimated realized loss that might result if the
mortgage asset were liquidated would be taken into account. Modifications may
have the effect of reducing the interest rate on the mortgage asset, forgiving
the payment of principal or interest or extending the final maturity date of the
mortgage asset. Any modified mortgage asset may remain in the related trust
fund, and the reduction in collections resulting from the modification may
result in reduced distributions of interest, or other amounts, on, or may extend
the final maturity of, one or more classes of the related securities.
In connection with any significant partial prepayment of a mortgage asset,
the master servicer, to the extent not inconsistent with the terms of the
mortgage note and local law and practice, may permit the mortgage asset to be
reamortized so that the monthly payment is recalculated as an amount that will
fully amortize the remaining principal amount of the mortgage asset by the
original maturity date based on the original interest rate. Reamortization will
not be permitted if it would constitute a modification of the mortgage asset for
federal income tax purposes.
In any case in which property securing a mortgage asset, other than an ARM
Loan, multifamily loan or commercial loan, has been, or is about to be, conveyed
by the borrower, or in any case in which property securing a multifamily loan or
commercial loan has been, or is about to be, encumbered by the borrower, the
master servicer will exercise or cause to be exercised on behalf of the related
trust fund the lender's rights to accelerate the maturity of the mortgage asset
under any due-on-sale or due-on-encumbrance clause applicable to that mortgage
asset. The master servicer will only exercise these rights only if the exercise
of any these rights is permitted by applicable law and will not impair or
threaten to impair any recovery under any related insurance instrument. If these
conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce a due-on-sale or due-on-encumbrance
clause, the master servicer will enter into or cause to be entered into an
assumption and modification agreement with the person to whom the property has
been or is about to be conveyed or encumbered, under which that person becomes
liable under the mortgage note, cooperative note, manufactured housing contract
or home improvement contract and, to the extent permitted by applicable law, the
borrower remains liable thereon. The original mortgagor may be released from
liability on a mortgage asset if the master servicer shall have determined in
good faith that a release will not adversely affect the collectability of the
mortgage asset. An ARM Loan may be assumed if the ARM Loan is by its terms
assumable and if, in the reasonable judgment of the master servicer, the
proposed transferee of the related mortgaged property establishes its ability to
repay the loan and the security for the ARM Loan would not be impaired by the
assumption. If a mortgagor transfers the mortgaged property subject to an ARM
Loan without consent, that ARM Loan may be declared due and payable. Any fee
collected by or on behalf of the master servicer for entering into an assumption
agreement
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will be retained by or on behalf of the master servicer as additional servicing
compensation. In connection with any assumption, the terms of the related
mortgage asset may not be changed except in the instance where an assumption is
related to a defaulted cure. See "Legal Aspects of Assets--Enforceability of
Provisions."
In the case of multifamily loans, commercial loans or mixed-use loans, a
mortgagor's failure to make scheduled payments may mean that operating income is
insufficient to service the mortgage debt, or may reflect the diversion of that
income from the servicing of the mortgage debt. In addition, a mortgagor under a
multifamily loan, commercial loan or mixed-use loan that is unable to make
scheduled payments may also be unable to make timely payment of all required
taxes and otherwise to maintain and insure the related mortgaged property. In
general, the master servicer will be required to monitor any multifamily loan,
commercial loan or mixed-use loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related mortgaged property, initiate
corrective action in cooperation with the mortgagor if cure is likely, inspect
the related mortgaged property and take such other actions as are consistent
with the related servicing agreement. A significant period of time may elapse
before the servicer is able to assess the success of any such corrective action
or the need for additional initiatives. The time within which the master
servicer can make the initial determination of appropriate action, evaluate the
success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose (or accept a deed to a mortgaged
property in lieu of foreclosure) on behalf of the securityholders of the related
series may vary considerably depending on the particular multifamily loan,
commercial loan or mixed-use loan, the mortgaged property, the mortgagor, the
presence of an acceptable party to assume the multifamily loan, commercial loan
or mixed-use loan and the laws of the jurisdiction in which the mortgaged
property is located.
If a mortgagor files a bankruptcy petition, the servicer may not be
permitted to accelerate the maturity of the related mortgage asset or to
foreclose on the mortgaged property for a considerable period of time. See
"Legal Aspects of Mortgage Assets."
DESCRIPTION OF SUB-SERVICING
Any master servicer may delegate its servicing obligations in respect of
the mortgage assets to third-party servicers, but the master servicer will
remain obligated under the related servicing agreement. Each sub-servicer will
be required to perform the customary functions of a servicer of comparable
assets, including:
o collecting payments from borrowers and remitting the collections to the
master servicer,
o maintaining primary hazard insurance as described in this prospectus
and in any related prospectus supplement,
o filing and settling claims under primary hazard insurance policies,
which may be subject to the right of the master servicer to approve in
advance any settlement,
o maintaining escrow or impoundment accounts of borrowers for payment of
taxes, insurance and other items required to be paid by any borrower in
accordance with the mortgage asset,
o processing assumptions or substitutions where a due-on-sale clause is
not exercised,
o attempting to cure delinquencies,
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o supervising foreclosures or repossessions,
o inspecting and managing mortgaged properties, if applicable, and
o maintaining accounting records relating to the mortgage assets.
The master servicer will be responsible for filing and settling claims in
respect of mortgage assets in a particular mortgage pool under any applicable
mortgage pool insurance policy, bankruptcy bond, special hazard insurance policy
or letter of credit. See "Description of Credit Support."
The sub-servicing agreement between any master servicer and a sub-servicer
will be consistent with the terms of the related servicing agreement and will
not result in a withdrawal or downgrading of any class of securities issued in
accordance with the related agreement. With respect to those mortgage assets
serviced by the master servicer through a sub-servicer, the master servicer will
remain liable for its servicing obligations under the related policy and
servicing agreement or servicing agreement as if the master servicer alone were
servicing those mortgage assets. Although each sub-servicing agreement will be a
contract solely between the master servicer and the sub- servicer, the agreement
under which a series of securities is issued will provide that, if for any
reason the master servicer for the series of securities is no longer acting in a
servicing capacity, the trustee or any successor master servicer must recognize
the sub-servicer's rights and obligations under the sub-servicing agreement.
The master servicer will be solely liable for all fees owed by it to any
sub-servicer, irrespective of whether the master servicer's compensation under
the related agreement is sufficient to pay the fees. However, a sub-servicer may
be entitled to a retained interest in mortgage assets. Each sub- servicer will
be reimbursed by the master servicer for expenditures which it makes, generally
to the same extent the master servicer would be reimbursed under the related
servicing agreement. See "Description of the Securities--Retained Interest,
Servicing or Administration Compensation and Payment of Expenses."
The master servicer may require any sub-servicer to agree to indemnify the
master servicer for any liability or obligation sustained by the master servicer
in connection with any act or failure to act by the sub-servicer in its
servicing capacity. Each sub-servicer is required to maintain a fidelity bond
and an errors and omissions policy with respect to its officers, employees and
other persons acting on its behalf or on behalf of the master servicer.
PROCEDURES FOR REALIZATION UPON DEFAULTED MORTGAGE ASSETS
The master servicer will be required to foreclose upon or otherwise take
title in the name of the trustee, on behalf of the securityholders, of mortgaged
properties relating to defaulted mortgage assets to which no satisfactory
arrangements can be made for collection of delinquent payments, but the master
servicer will not be required to foreclose if it determines that foreclosure
would not be in the best interests of the securityholders or the provider of
credit support, if any.
In addition, unless otherwise specified in the related prospectus
supplement, the master servicer may not acquire title to any multifamily
property or commercial property securing a mortgage loan or take any other
action that would cause the related trustee, for the benefit of securityholders
of the related series, or any other specified person to be considered to hold
title to, to be a "mortgagee-in- possession" of, or to be an "owner" or an
"operator" of such mortgaged property within the meaning of federal
environmental laws, unless the master servicer has previously determined, based
on a report prepared by a person who regularly conducts environmental audits
(which report will be an expense of the trust fund), that either:
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(1) the mortgaged property is in compliance with applicable
environmental laws and regulations or, if not, that taking actions
as are necessary to bring the mortgaged property into compliance
with these laws is reasonably likely to produce a greater recovery
on a present value basis than not taking those actions; and
(2) there are no circumstances or conditions present at the mortgaged
property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental
laws and regulations or, if those circumstances or conditions are
present for which any such action could be required, taking those
actions with respect to the mortgaged property is reasonably
likely to produce a greater recovery on a present value basis than
not taking those actions. See "Legal Aspects of Mortgage
Assets--Environmental Legislation."
As servicer of the mortgage loans, the master servicer, on behalf of
itself, the trustee and the securityholders, will present claims to the insurer
under each insurance instrument, and will take reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
mortgage assets. As set forth above under "-Collection and Other Servicing
Procedures Employed by the Master Servicer", all collections by or on behalf of
the master servicer under any insurance instrument, other than amounts to be
applied to the restoration of a mortgaged property or released to the mortgagor,
are to be deposited in the distribution account for the related trust fund,
subject to withdrawal as previously described. The master servicer or its
designee will not receive payment under any letter of credit included as an
insurance instrument with respect to a defaulted mortgage asset unless all
Liquidation Proceeds and Insurance Proceeds which it deems to be finally
recoverable have been realized; however, the master servicer will be entitled to
reimbursement for any unreimbursed advances and reimbursable expenses
thereunder.
If any property securing a defaulted mortgage asset is damaged and
proceeds, if any, from the related hazard insurance policy or special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the related credit insurance instrument, if
any, the master servicer is not required to expend its own funds to restore the
damaged property unless it determines (a) that the restoration will increase the
proceeds to securityholders on liquidation of the mortgage loan after
reimbursement of the master servicer for its expenses and (b) that its expenses
will be recoverable by it from related Insurance Proceeds or Liquidation
Proceeds.
If recovery on a defaulted mortgage asset under any related credit
insurance instrument is not available for the reasons set forth in the preceding
paragraph, the master servicer nevertheless will be obligated to follow or cause
to be followed the normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted mortgage asset. If the proceeds of any
liquidation of the property securing the defaulted mortgage loan are less than
the outstanding principal balance of the defaulted mortgage loan plus interest
accrued thereon at the interest rate plus the aggregate amount of expenses
incurred by the master servicer in connection with those proceedings and which
are reimbursable under the servicing agreement, the trust fund will realize a
loss in the amount of the difference. The master servicer will be entitled to
withdraw or cause to be withdrawn from the collection or distribution account
out of the Liquidation Proceeds recovered on any defaulted mortgage asset, prior
to the distribution of any Liquidation Proceeds to securityholders, amounts
representing its normal servicing compensation on the mortgage loan,
unreimbursed servicing expenses incurred with respect to the mortgage asset and
any unreimbursed advances of delinquent monthly payments made with respect to
the mortgage loan.
If the master servicer or its designee recovers Insurance Proceeds with
respect to any defaulted mortgage loan, the master servicer will be entitled to
withdraw or cause to be withdrawn from the collection account or distribution
account out of Insurance Proceeds, prior to distribution of that amount to
securityholders,
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amounts representing its normal servicing compensation on that mortgage loan,
unreimbursed servicing expenses incurred with respect to the mortgage loan and
any unreimbursed advances of delinquent monthly payments made with respect to
the mortgage loan. In the event that the master servicer has expended its own
funds to restore damaged property and those funds have not been reimbursed under
any insurance instrument, it will be entitled to withdraw from the collection
account out of related Liquidation Proceeds or Insurance Proceeds an amount
equal to the expenses incurred by it, in which event the trust fund may realize
a loss up to the amount so charged. Because Insurance Proceeds cannot exceed
deficiency claims and expenses incurred by the master servicer, no payment or
recovery will result in a recovery to the trust fund which exceeds the principal
balance of the defaulted mortgage asset together with accrued interest thereon
at the interest rate net of servicing fees and the retained interest, if any. In
addition, when property securing a defaulted mortgage asset can be resold for an
amount exceeding the outstanding principal balance of the related mortgage asset
together with accrued interest and expenses, it may be expected that, if
retention of any amount is legally permissible, the insurer will exercise its
right under any related mortgage pool insurance policy to purchase the property
and realize for itself any excess proceeds. See "Description of Primary
Insurance Policies" and "Description of Credit Support."
With respect to collateral securing a cooperative loan, any prospective
purchaser will generally have to obtain the approval of the board of directors
of the relevant cooperative before purchasing the shares and acquiring rights
under the proprietary lease or occupancy agreement securing the cooperative
loan. This approval is usually based on the purchaser's income and net worth and
numerous other factors. The necessity of acquiring board approval could limit
the number of potential purchasers for those shares and otherwise limit the
master servicer's ability to sell, and realize the value of, those shares. See
"Legal Aspects of Mortgage Assets--foreclosure on Cooperatives."
Realization on defaulted contracts may be accomplished through repossession
and subsequent resale of the underlying manufactured home or home improvement.
With respect to a defaulted home improvement contract, the master servicer will
decide whether to foreclose upon the mortgaged property or write off the
principal balance of such home improvement contract as a bad debt or take an
unsecured note. In doing so, the master servicer will estimate the expected
proceeds and expenses to determine whether a foreclosure proceeding or a
repossession and resale is appropriate. If a home improvement contract secured
by a lien on a mortgaged property is junior to another lien on the related
mortgaged property, following any default thereon, unless foreclosure proceeds
for such home improvement contract are expected to at least satisfy the related
senior mortgage loan in full and to pay foreclosure costs, it is likely that
such home improvement contract will be written off as bad debt with no
foreclosure proceeding.
RETAINED INTEREST; SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF
EXPENSES
The prospectus supplement for a series of securities will specify whether
there will be any retained interest from the trust fund assets, and, if so, the
owner of the retained interest. If so, the retained interest will be established
on a loan-by-loan basis and will be specified on an exhibit to the related
agreement. A retained interest in a trust fund asset represents a specified
portion of the interest payable thereon. The retained interest will be deducted
from borrower payments as received and will not be part of the related trust
fund. Any partial recovery of interest on a mortgage asset, after deduction of
all applicable servicing fees, will be allocated between retained interest, if
any, and interest at the interest rate on the mortgage loan, net of the rates at
which the servicing fees and the retained interest are calculated, on a pari
passu basis.
The master servicer's primary compensation with respect to a series of
securities will come from the monthly payment to it, with respect to each
interest payment on a trust fund asset, of an amount equal to one-twelfth of the
servicing fee rate specified in the related prospectus supplement times the
scheduled principal balance of the trust fund asset. Since any retained interest
and the master servicer's primary
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compensation are percentages of the scheduled principal balance of each trust
fund asset, these amounts will decrease in accordance with the amortization
schedule of the trust fund assets. As additional compensation in connection with
a series of securities relating to mortgage loans, the master servicer or the
sub-servicers will retain all assumption fees, late payment charges and , unless
otherwise stated in the prospectus supplement, prepayment penalties, to the
extent collected from mortgagors. Any interest or other income which may be
earned on funds held in the collection account, distribution account,
sub-servicing account or any other account created under the related servicing
agreement may be paid as additional compensation to the master servicer or the
sub-servicers, as the case may be. Any sub-servicer will receive a portion of
the master servicer's primary compensation as its sub-servicing compensation.
In addition to amounts payable to any sub-servicer, the master servicer may
pay from its servicing compensation expenses incurred in connection with its
servicing of the mortgage loans, including, without limitation, payment of the
fees and disbursements of the trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
securityholders, and other expenses, as described in the related prospectus
supplement.
The master servicer is entitled to reimbursement for expenses incurred by
it in connection with the liquidation of defaulted mortgage assets, including
expenditures incurred by it in connection with the restoration of mortgaged
properties, the right of reimbursement being prior to the rights of
securityholders to receive any related Liquidation Proceeds. The master servicer
is also entitled to reimbursement from the collection account for advances.
ANNUAL EVIDENCE AS TO THE COMPLIANCE OF THE MASTER SERVICER
Each servicing agreement with respect to a series of securities will
provide that, on or before a specified date in each year, the first date being
at least six months after the related cut-off date, a firm of independent public
accountants will furnish a statement to the trustee to the effect that, on the
basis of the examination by the firm conducted substantially in compliance with
either the Uniform Single Attestation Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for Freddie Mac, the servicing by or on behalf of
the master servicer of mortgage assets under servicing agreements substantially
similar to each other, including the related servicing agreement, was conducted
in compliance with the terms of those agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for Freddie Mac, or paragraph 4 of the
Uniform Single Attestation Program for Mortgage Bankers, requires it to report.
In rendering its statement the accounting firm may rely, as to matters relating
to the direct servicing of mortgage assets by sub-servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac, rendered within one year of the statement,
of firms of independent public accountants with respect to the related
sub-servicer.
Each 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 an
officer of the master servicer to the effect that the master servicer has
fulfilled its obligations under the related agreement throughout the preceding
year.
Copies of the annual accountants' statement and the officer's statement of
the master servicer may be obtained by securityholders without charge upon
written request to the master servicer at the address set forth in the related
prospectus supplement.
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MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The master servicer under each servicing agreement will be named in the
related prospectus supplement. The entity serving as master servicer may be an
affiliate of the depositor and may have other normal business relationships with
the depositor or the depositor's affiliates.
Each servicing agreement will provide that the master servicer may resign
from its obligations and duties under the related agreement only if its
resignation, and the appointment of a successor, will not result in a
downgrading of any class of securities or upon a determination that its duties
under the related agreement are no longer permissible under applicable law. No
resignation will become effective until the trustee or a successor servicer has
assumed the master servicer's obligations and duties under the related
agreement.
Each servicing agreement will further provide that neither the master
servicer, the depositor nor any director, officer, employee, or agent of the
master servicer or the depositor will be under any liability to the related
trust fund or securityholders for any action taken, or for refraining from the
taking of any action, in good faith under the related agreement, or for errors
in judgment; provided, however, that neither the master servicer, the depositor
nor any such person will be protected against 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. Each servicing agreement will
further provide that the master servicer, the depositor and any director,
officer, employee or agent of the master servicer or the depositor will be
entitled to indemnification by the related trust fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the related agreement or the securities, other than any loss,
liability or expense that is related to any specific mortgage loan or mortgage
loans, unless that loss, liability or expense is otherwise reimbursable under
the related agreement, and other than any loss, liability or expense incurred 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, each servicing agreement will provide that
neither the master servicer nor the depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the related agreement and which in its opinion
may involve it in any expense or liability. The master servicer or the depositor
may, however, in its discretion undertake any action which it may deem necessary
or desirable with respect to the related agreement and the rights and duties of
the parties and the interests of the securityholders. In that event, the legal
expenses and costs of the action and any resulting liability will be expenses,
costs and liabilities of the securityholders, and the master servicer or the
depositor, as the case may be, will be entitled to be reimbursed and to charge
the trust fund for the reimbursement. Distributions to securityholders will be
reduced to pay for the reimbursement as set forth in the related prospectus
supplement and servicing agreement.
Any person into which the master servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the master
servicer is a party, or any person succeeding to the business of the master
servicer, will be the successor of the master servicer under each agreement, so
long as that person is qualified to sell mortgage loans to, and service mortgage
loans on behalf of, Fannie Mae or Freddie Mac.
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EVENTS OF DEFAULT UNDER THE GOVERNING AGREEMENT AND RIGHTS UPON EVENTS OF
DEFAULT
POOLING AND SERVICING AGREEMENT
Events of default under each pooling and servicing agreement will include
each of the following unless otherwise stated in the related prospectus
supplement:
o any failure by the master servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for
distribution to securityholders, any required payment that continues
unremedied for a specified number of business days after the giving of
written notice of the failure to the master servicer by the trustee or
the depositor, or to the master servicer, the depositor and the trustee
by the holders of certificates evidencing not less than 25% of the
voting rights;
o any failure by the master servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the
agreement which continues unremedied for a specified number of days
after the giving of written notice of the failure to the master
servicer by the trustee or the depositor, or to the master servicer,
the depositor and the trustee by the holders of certificates evidencing
not less than 25% of the voting rights; and
o events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and actions by or on behalf of the
master servicer indicating its insolvency or inability to pay its
obligations.
So long as an event of default under a pooling and servicing agreement
remains unremedied, the depositor or the trustee may, unless otherwise provided
in the related prospectus supplement, and at the direction of holders of
certificates evidencing not less than 51% of the voting rights, the trustee
shall, terminate all of the rights and obligations of the master servicer under
the pooling and servicing agreement relating to the trust fund and in and to the
mortgage assets, other than any retained interest of the master servicer,
whereupon the trustee will succeed to all of the responsibilities, duties and
liabilities of the master servicer under the agreement and will be entitled to
similar compensation arrangements. If the trustee is prohibited by law from
obligating itself to make advances regarding delinquent mortgage assets, then
the trustee will not be so obligated.
If the trustee is unwilling or unable so to act, it may or, at the written
request of the holders of certificates entitled to at least 51% of the voting
rights, it shall appoint, or petition a court of competent jurisdiction for the
appointment of, a loan servicing institution acceptable to the rating agency
with a net worth at the time of the appointment of at least $1,000,000 to act as
successor to the master servicer under the agreement. Pending the appointment of
a successor, the trustee is obligated to act in the capacity of master servicer.
The trustee and any successor master servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the master servicer under the related agreement.
No certificateholder will have the right under any pooling and servicing
agreement to institute any proceeding under the agreement unless:
o the certificateholder previously has given to the trustee written
notice of default,
o the holders of certificates evidencing not less than 25% of the voting
rights have made written request upon the trustee to institute the
proceeding in its own name as trustee thereunder,
o have offered to the trustee reasonable indemnity, and
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o the trustee for fifteen days has neglected or refused to institute a
proceeding. The trustee, however, is under no obligation to exercise
any of the trusts or powers vested in it by any pooling and servicing
agreement or to make any investigation of matters arising thereunder or
to institute, conduct or defend any litigation at the request, order or
direction of any of the holders of certificates covered by the
agreement, unless the certificateholders have offered to the trustee
reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred.
SERVICING AGREEMENT
A servicing default under the related servicing agreement will include each
of the following unless otherwise provided in the related prospectus supplement:
o any failure by the master servicer to make a required deposit to the
collection account or, if the master servicer is so required, to
distribute to the holders of any class of notes or equity certificates
of the series any required payment which continues unremedied for a
specified number of business days after the giving of written notice of
the failure to the master servicer by the trustee or the issuer;
o any failure by the master servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
servicing agreement with respect to the series of notes which continues
unremedied for a specified number of days after the giving of written
notice of the failure to the master servicer by the trustee or the
issuer;
o events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the master servicer and
actions by the master servicer indicating its insolvency or inability
to pay its obligations and
o any other servicing default as set forth in the servicing agreement.
So long as a servicing default remains unremedied, either the depositor or
the trustee may, by written notification to the master servicer and to the
issuer or the trustee or trust fund, as applicable, terminate all of the rights
and obligations of the master servicer under the servicing agreement, other than
any right of the master servicer as noteholder or as holder of the equity
certificates and other than the right to receive servicing compensation and
expenses for servicing the mortgage loans during any period prior to the date of
the termination. Upon termination of the master servicer the trustee will
succeed to all responsibilities, duties and liabilities of the master servicer
under the servicing agreement, other than the obligation to repurchase mortgage
loans, and will be entitled to similar compensation arrangements. If the trustee
would be obligated to succeed the master servicer but is unwilling to so act, it
may appoint, or if it is unable to so act, it shall appoint, or petition a court
of competent jurisdiction for the appointment of an approved mortgage servicing
institution with a net worth of at least $1,000,000 to act as successor to the
master servicer under the servicing agreement. Pending the appointment of a
successor, the trustee is obligated to act in the capacity of master servicer.
The trustee and the successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation to the initial
master servicer under the servicing agreement.
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INDENTURE
An event of default under the indenture will include each of the following
unless otherwise provided in the related prospectus supplement:
o a default for a specified number of 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 which continues for a specified number of days
after notice of failure 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 related certificate or other writing having
been incorrect in a material respect as of the time made, and the
breach is not cured within a specified number of days after notice of
breach is given in accordance with the procedures described in the
related prospectus supplement;
o events of bankruptcy, insolvency, receivership or liquidation of the
depositor or the issuer; or
o any other event of default provided with respect to notes of that
series.
If an event of default with respect to the notes of any series occurs and
is continuing, the trustee or the holders of a majority of the then aggregate
outstanding amount of the notes of the series may declare the principal amount,
or, if the notes of that series are Accrual Securities, the portion of the
principal amount as may be specified in the terms of that series, as provided in
the related prospectus supplement, of all the notes of the series to be due and
payable immediately. That declaration may, under the circumstances set forth in
the indenture, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related notes.
If following an event of default with respect to any series of notes, the
notes of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue to
apply payments on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the notes of a
series following an event of default, unless
o the holders of 100% of the then aggregate outstanding amount of the
notes of the series consent to the sale,
o accrued interest, due and unpaid, on the outstanding notes of the
series at the date of the sale, or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on the notes as the payments
would have become due if the notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 66 2/3%
of the then aggregate outstanding amount of the notes of the series.
If the trustee liquidates the collateral in connection with an event of
default, the indenture may provide that the trustee will have a prior lien on
the proceeds of any liquidation for unpaid fees and expenses. As a result, upon
the occurrence of an event of default, the amount available for payments to the
noteholders
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would be less than would otherwise be the case. However, the trustee may not
institute a proceeding for the enforcement of its lien except in connection with
a proceeding for the enforcement of the lien of the indenture for the benefit of
the noteholders after the occurrence of an event of default.
If the principal of the notes of a series is declared due and payable, the
holders of those notes issued at a discount from par may be entitled to receive
no more than an amount equal to the unpaid principal amount of the note less the
amount of the discount that is unamortized.
No noteholder or holder of an equity certificate generally will have any
right under an owner trust agreement or indenture to institute any proceeding
with respect to the agreement unless:
o the holder previously has given to the trustee written notice of
default and the default is continuing,
o the holders of notes or equity certificates of any class evidencing not
less than 25% of the aggregate percentage interests constituting the
class (1) have made written request upon the trustee to institute a
proceeding in its own name as trustee thereunder and (2) have offered
to the trustee reasonable indemnity,
o the trustee has neglected or refused to institute a proceeding for 60
days after receipt of the request and indemnity, and
o no direction inconsistent with the written request has been given to
the trustee during the 60 day period by the holders of a majority of
the note balances of the class. However, the trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
applicable agreement or to institute, conduct or defend any litigation
at the request, order or direction of any of the holders of notes or
equity certificates covered by the agreement, unless the holders have
offered to the trustee reasonable security or indemnity against the
costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT OF THE GOVERNING AGREEMENTS
With respect to each series of certificates, each related pooling and
servicing agreement or trust agreement may be amended by the depositor, the
master servicer, and the trustee, upon consent of any credit support provider,
without the consent of any of the holders of certificates covered by the
agreement, to cure any ambiguity, to correct, modify or supplement any provision
in the agreement, or to make any other provisions with respect to matters or
questions arising under the agreement which are not inconsistent with the
provisions of the agreement, provided that the action will not adversely affect
in any material respect the interests of any holder of certificates covered by
the agreement, as evidenced by either an opinion of counsel or a confirmation by
the rating agencies that such amendment will not result in the downgrading of
the securities. Each agreement may also be amended by the depositor, the master
servicer, if any, and the trustee, with the consent of the holders of
certificates evidencing not less than 66% of the voting rights, for any purpose,
but that no amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on trust fund assets which are required to be distributed on
any certificate without the consent of the holder of the certificate,
o adversely affect in any material respect the interests of the holders
of any class of certificates in a manner other than as described in the
preceding bullet point (as evidenced by either an opinion of
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counsel or a confirmation by the rating agencies that such amendment
will not result in the downgrading of the securities), or
o reduce the percentage of voting rights required by the preceding bullet
point for the consent to any amendment without the consent of the
holders of all certificates covered by the agreement then outstanding.
However, with respect to any series of certificates as to which a REMIC
election is to be made, the trustee will not consent to any amendment of the
agreement unless it shall first have received an opinion of counsel to the
effect that the amendment will not cause the trust fund to fail to qualify as a
REMIC at any time that the related certificates are outstanding. The voting
rights evidenced by any certificate will be the portion of the voting rights of
all of the certificates in the related series allocated in the manner described
in the related prospectus supplement.
With respect to each series of notes, each related servicing agreement or
indenture may be amended by the parties to the agreement without the consent of
any of the holders of the notes covered by the agreement, to cure any ambiguity,
to correct, modify or supplement any provision in the agreement, or to make any
other provisions with respect to matters or questions arising under the
agreement which are not inconsistent with the provisions of the agreement,
provided that the action will not adversely affect in any material respect the
interests of any holder of notes covered by the agreement as evidenced by either
an opinion of counsel or a confirmation by the rating agencies that such
amendment will not result in the downgrading of the notes. Each agreement may
also be amended by the parties to the agreement with the consent of the holders
of notes evidencing not less than 66% of the voting rights, for any purpose, but
that no amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on trust fund assets which are required to be distributed on
any note without the consent of the holder of that note,
o adversely affect in any material respect the interests of the holders
of any class of notes in a manner other than as described in the
preceding bullet point (as evidenced by either an opinion of counsel or
a confirmation by the rating agencies that such amendment will not
result in the downgrading of the notes), without the consent of the
holders of notes of that class evidencing not less than 66% of the
aggregate voting rights of that class, or
o reduce the percentage of voting rights required by the preceding bullet
point for the consent to any amendment without the consent of the
holders of all notes covered by the agreement then outstanding. The
voting rights evidenced by any note will be the portion of the voting
rights of all of the notes in the related series allocated in the
manner described in the related prospectus supplement.
TERMINATION OF THE TRUST FUND AND DISPOSITION OF TRUST FUND ASSETS
The obligations created by the related agreements for each series of
securities will terminate upon the payment to securityholders of that series of
all amounts held in the distribution account or by the master servicer and
required to be paid to them under the agreements following the earlier of
o the final payment or other liquidation of the last asset included in
the related trust fund or the disposition of all underlying property
subject to the trust fund assets acquired upon foreclosure of the trust
fund assets, and
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o the purchase of all of the assets of the trust fund by the party
entitled to effect the termination, under the circumstances and in the
manner set forth in the related prospectus supplement.
In no event, however, will the trust created by the related agreements
continue beyond the date specified in the related agreement. Written notice of
termination of the related agreements will be given to each securityholder, and
the final distribution will be made only upon surrender and cancellation of the
securities at an office or agency appointed by the trustee which will be
specified in the notice of termination.
Any purchase of assets of the trust fund in connection with a termination,
shall be made at the price set forth in the related prospectus supplement which
in most cases will be equal to the greater of:
o the sum of (a) 100% of the stated principal balance of each mortgage
asset as of the day of the purchase plus accrued interest thereon at
the applicable interest rate net of the rates at which the servicing
fees and the retained interest, if any, are calculated to the first day
of the month following the purchase plus (b) the appraised value of any
underlying property subject to the mortgage assets acquired for the
benefit of securityholders, and
o the aggregate fair market value of all of the assets in the trust fund,
as determined by the trustee, the master servicer, and, if different
than both such persons, the person entitled to effect the termination,
in each case taking into account accrued interest at the applicable
interest rate net of the rates at which the servicing fees and the
retained interest, if any, are calculated to the first day of the month
following the purchase.
The exercise of an optimal termination right will effect early retirement
of the securities of that series, but the right of the person entitled to effect
the termination is subject to the aggregate principal balance of the outstanding
trust fund assets for the series at the time of purchase being less than the
percentage of the aggregate principal balance of the trust fund assets at the
cut-off date for that series specified in the related prospectus supplement,
which percentage will be between 25% and 0%.
In addition to the repurchase of the assets in the related trust fund at
the Clean-up Call, if so specified in the related prospectus supplement, a
holder of a non-offered class of securities described in the preceding paragraph
will have the right, solely at its discretion, to terminate the related trust
fund on any distribution date after the 12th distribution date following the
date of initial issuance of the related series of securities and until the date
as the Clean-up Call becomes exercisable and thereby effect early retirement of
the securities of the series. Any call of this type will be of the entire trust
fund at one time; multiple calls with respect to any series of securities will
not be permitted. If the call option is exercised, the Call Class must remit to
the trustee a price equal to 100% of the principal balance of the securities
offered hereby as of the day of the purchase plus accrued interest thereon at
the applicable security interest rate during the related period on which
interest accrues on the securities which the trustee will distribute to
securityholders. If funds to terminate are not deposited with the related
trustee, the securities will remain outstanding. There will not be any
additional remedies available to securityholders. In addition, in the case of a
trust fund for which a REMIC election or elections have been made, an early
termination will constitute a "qualified liquidation" under Section 860F of the
Code. In connection with a call by the Call Class, the final payment to the
securityholders will be made upon surrender of the related securities to the
trustee. Once the securities have been surrendered and paid in full, there will
not be any continuing liability from the securityholders or from the trust fund
to securityholders.
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OPTIONAL PURCHASE BY THE MASTER SERVICER OF DEFAULTED MORTGAGE LOANS
The master servicer under the related servicing agreement will have the
option to purchase from the trust fund any mortgage asset 90 days or more
delinquent at a purchase price generally equal to the outstanding principal
balance of the delinquent mortgage asset as of the date of purchase, plus all
accrued and unpaid interest on that principal balance.
DUTIES OF THE TRUSTEE
The trustee makes no representations as to the validity or sufficiency of
any agreement, the securities or any mortgage loan or related document and is
not accountable for the use or application by or on behalf of the master
servicer of any funds paid to the master servicer or its designee in respect of
the securities or the mortgage loans, or deposited into or withdrawn from the
collection account or any other account by or on behalf of the master servicer.
If no event of default has occurred and is continuing, the trustee is required
to perform only those duties specifically required under the related agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the trustee is required to examine the documents
and to determine whether they conform to the requirements of the related
agreement.
DESCRIPTION OF THE TRUSTEE
The trustee or indenture trustee, each referred to as the trustee, under
each pooling and servicing agreement, trust agreement or indenture will be named
in the related prospectus supplement. The owner trustee for each series of notes
will be named in the related prospectus supplement. The commercial bank,
national banking association or trust company serving as trustee or owner
trustee may have normal banking relationships with the depositor and its
affiliates and with the master servicer and its affiliates.
DESCRIPTION OF CREDIT SUPPORT
For any series of securities, credit support may be provided with respect
to one or more classes thereof or the related mortgage assets. Credit support
may be in the form of the subordination of one or more classes to other classes
in a series of securities, letters of credit, insurance policies, surety bonds,
guarantees, the establishment of one or more reserve funds,
cross-collateralization, overcollateralization or another method of credit
support described in the related prospectus supplement, or any combination of
the foregoing. If so provided in the related prospectus supplement, any form of
credit support may be structured so as to be drawn upon by more than one series
of securities.
The credit support provided for a series of securities will in most cases
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the securities and interest
thereon. If losses or shortfalls occur that exceed the amount covered by credit
support or that are not covered by credit support, securityholders will bear
their allocable share of deficiencies. Also, if a form of credit support covers
more than one pool of mortgage assets in a trust fund or more than one series of
securities, holders of securities evidencing interests in any of the covered
pools or covered trusts will be subject to the risk that the credit support will
be exhausted by the claims of other covered pools or covered trusts prior to
that covered pool or covered trust receiving any of its intended share of the
coverage.
If credit support is provided with respect to one or more classes of
securities of a series, or the related mortgage assets, the related prospectus
supplement will include a description of:
o the nature and amount of coverage under such credit support,
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o any conditions to payment thereunder not otherwise described in this
prospectus,
o the conditions under which the amount of coverage under the credit
support may be reduced, terminated or replaced, and
o the material provisions relating to the credit support.
Additionally, the related prospectus supplement will set forth certain
information with respect to the credit support provider, including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
o if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business, and
o its total assets and its stockholders' or policyholders' surplus, if
applicable, as of the date specified in the prospectus supplement.
A copy of the policy or agreement, as applicable, governing the applicable
credit support will be filed with the Commission as an exhibit to a Current
Report on Form 8-K to be filed within 15 days of issuance of the related series.
SUBORDINATION
One or more classes of securities may be subordinate securities. In the
event of any realized losses on mortgage assets not in excess of the limitations
described in the following paragraph, the rights of the subordinate
securityholders to receive distributions with respect to the mortgage loans will
be subordinate to the rights of the senior securityholders to the extent
described in the related prospectus supplement.
All realized losses will be allocated to the subordinate securities of the
related series, or, if the series includes more than one class of subordinate
securities, to the outstanding class of subordinate securities having the first
priority for allocation of realized losses and then to additional outstanding
classes of subordinate securities, if any, until the principal balance of the
applicable subordinate securities has been reduced to zero. Any additional
realized losses will be allocated to the senior securities or, if the series
includes more than one class of senior securities, either on a PRO RATA basis
among all of the senior securities in proportion to their respective outstanding
principal balances or as otherwise provided in the related prospectus
supplement. However, with respect to realized losses that are attributable to
physical damage to mortgaged properties of a type that is not covered by
standard hazard insurance policies, the amount thereof that may be allocated to
the subordinate securities of the related series may be limited to an amount
specified in the related prospectus supplement. If so, any realized losses of
this type in excess of the amount allocable to the subordinate securities will
be allocated among all outstanding classes of securities of the related series,
on a PRO RATA basis in proportion to their respective outstanding principal
balances, regardless of whether any subordinate securities remain outstanding,
or as otherwise provided in the related prospectus supplement. Any allocation of
a realized loss to a security will be made by reducing the principal balance
thereof as of the distribution date following the Prepayment Period in which the
realized loss was incurred.
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As set forth under "Description of the Securities--Distributions of
Principal of the Securities", the rights of holders of the various classes of
securities of any series to receive distributions of principal and interest is
determined by the aggregate principal balance of each class. The principal
balance of any security will be reduced by all amounts previously distributed on
that security in respect of principal, and by any realized losses allocated to
that security. If there were no realized losses or prepayments of principal on
any of the mortgage loans, the respective rights of the holders of securities of
any series to future distributions would not change. However, to the extent so
provided in the related prospectus supplement, holders of senior securities may
be entitled to receive a disproportionately larger amount of prepayments
received, which will have the effect of accelerating the amortization of the
senior securities and increasing the respective percentage interest in future
distributions evidenced by the subordinate securities in the related trust fund,
with a corresponding decrease in the senior percentage, as well as preserving
the availability of the subordination provided by the subordinate securities. In
addition, as set forth in the paragraph above, realized losses will be first
allocated to subordinate securities by reduction of the principal balance
thereof, which will have the effect of increasing the respective interest in
future distributions evidenced by the senior securities in the related trust
fund.
If so provided in the related prospectus supplement, amounts otherwise
payable on any distribution date to holders of subordinate securities may be
deposited into a reserve fund. Amounts held in any reserve fund may be applied
as described below under "--Reserve Funds" and in the related prospectus
supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described in the preceding paragraphs and
any variation will be described in the related prospectus supplement.
If so provided in the related prospectus supplement, the credit support for
the senior securities of a Senior/Subordinate Series may include, in addition to
the subordination of the subordinate securities of the series and the
establishment of a reserve fund, any of the other forms of credit support
described in this prospectus supplement. If any of the other forms of credit
support described below is maintained solely for the benefit of the senior
securities of a Senior/Subordinate Series, then that coverage described may be
limited to the extent necessary to make required distributions on the senior
securities or as otherwise specified in the related prospectus supplement. If so
provided in the related prospectus supplement, the obligor on any other forms of
credit support maintained for the benefit of the senior securities of a
Senior/Subordinate Series may be reimbursed for amounts paid thereunder out of
amounts otherwise payable on the subordinate securities.
LETTER OF CREDIT
As to any series of securities to be covered by a letter of credit, a bank
will deliver to the trustee an irrevocable letter of credit. The master servicer
or trustee will exercise its best reasonable efforts to keep or cause to be kept
the letter of credit in full force and effect, unless coverage thereunder has
been exhausted through payment of claims. The master servicer will agree to pay
the fees for the letter of credit on a timely basis unless, as described in the
related prospectus supplement, the payment of those fees is otherwise provided
for.
The master servicer or the trustee will make or cause to be made draws on
the letter of credit bank under each letter of credit. Subject to any
differences as will be described in the related prospectus supplement, letters
of credit may cover all or any of the following amounts, in each case up to a
maximum amount set forth in the letter of credit:
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(1) For any mortgage asset that became a liquidated asset during the
related Prepayment Period, other than mortgage assets as to which
amounts paid or payable under any related hazard insurance
instrument, including the letter of credit as described in (2)
below, are not sufficient either to restore the mortgaged property
or to pay the outstanding principal balance of the mortgage asset
plus accrued interest, an amount which, together with all
Liquidation Proceeds, Insurance Proceeds, and other collections on
the liquidated loan, net of amounts payable or reimbursable
therefrom to the master servicer for related unpaid servicing fees
and unreimbursed servicing expenses, will equal the sum of (A) the
unpaid principal balance of the liquidated asset, plus accrued
interest at the applicable interest rate net of the rates at which
the servicing fee and retained interest are calculated, plus (B)
the amount of related servicing expenses, if any, not reimbursed
to the master servicer from Liquidation Proceeds, Insurance
Proceeds and other collections on the liquidation asset, which
shall be paid to the master servicer;
(2) For each mortgage asset that is delinquent and as to which the
mortgaged property has suffered damage, other than physical damage
caused by hostile or warlike action in time of war or peace, by
any weapons of war, by any insurrection or rebellion, or by any
nuclear reaction or nuclear radiation or nuclear contamination
whether controlled or uncontrolled, or by any action taken by any
governmental authority in response to any of the foregoing, and
for which any amounts paid or payable under the related primary
hazard insurance policy or any special hazard insurance policy are
not sufficient to pay either of the following amounts, an amount
which, together with all Insurance Proceeds paid or payable under
the related primary hazard insurance policy or any special hazard
insurance policy, net, if the proceeds are not to be applied to
restore the mortgaged property, of all amounts payable or
reimbursable therefrom to the master servicer for related unpaid
servicing fees and unreimbursed servicing expenses, will be equal
to the lesser of (A) the amount required to restore the mortgaged
property and (B) the sum of (1) the unpaid principal balance of
the mortgage asset plus accrued interest at the applicable
interest rate net of the rates at which the servicing fees and
retained interest, if any, are calculated, plus (2) the amount of
related servicing expenses, if any, not reimbursed to the master
servicer from Insurance Proceeds paid under the related primary
hazard insurance policy or any special hazard insurance policy;
and
(3) For any mortgage asset that has been subject to bankruptcy
proceedings as described above, the amount of any debt service
reduction or the amount by which the principal balance of the
mortgage asset has been reduced by the bankruptcy court.
If the related prospectus supplement so provides, upon payment by the
letter of credit bank with respect to a liquidated asset, or a payment of the
full amount owing on a mortgage asset as to which the mortgaged property has
been damaged, as described in (2)(B) above, the liquidated asset will be removed
from the related trust fund in accordance with the terms set forth in the
related prospectus supplement and will no longer be subject to the agreement.
Unless otherwise provided in the related prospectus supplement, mortgage assets
that have been subject to bankruptcy proceedings, or as to which payment under
the letter of credit has been made for the purpose of restoring the related
mortgaged property, as described in (2)(A) above, will remain part of the
related trust fund. The maximum dollar coverages provided under any letter of
credit will each be reduced to the extent of related unreimbursed draws
thereunder.
In the event that the bank that has issued a letter of credit ceases to
be a duly organized commercial bank, or its debt obligations are rated lower
than the highest rating on any class of the securities on the date of issuance
by the rating agency or agencies, the master servicer or trustee will use its
best reasonable efforts to obtain or cause to be obtained, as to each letter of
credit, a substitute letter of credit issued by a commercial bank that meets
these requirements and providing the same coverage; provided, however, that,
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if the fees charged or collateral required by the successor bank shall be more
than the fees charged or collateral required by the predecessor bank, each
component of coverage thereunder may be reduced proportionately to a level as
results in the fees and collateral being not more than the fees then charged and
collateral then required by the predecessor bank.
MORTGAGE POOL INSURANCE POLICY
As to any series of securities to be covered by a mortgage pool insurance
policy with respect to any realized losses on liquidated loans, the master
servicer will exercise its best reasonable efforts to maintain or cause to be
maintained the mortgage pool insurance policy in full force and effect, unless
coverage thereunder has been exhausted through payment of claims. The master
servicer will agree to pay the premiums for each mortgage pool insurance policy
on a timely basis unless, as described in the related prospectus supplement, the
payment of those fees is otherwise provided.
The master servicer will present or cause to be presented claims to the
insurer under each mortgage pool insurance policy. Mortgage pool insurance
policies, however, are not blanket policies against loss, since claims
thereunder may be made only upon satisfaction of certain conditions, as
described in the next paragraph and, if applicable, in the related prospectus
supplement.
Mortgage pool insurance policies do not cover losses arising out of the
matters excluded from coverage under the primary mortgage insurance policy, or
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy, irrespective of the reason therefor.
Mortgage pool insurance policies in general provide that no claim may
validly be presented thereunder with respect to a mortgage loan unless:
o an acceptable primary mortgage insurance policy, if the initial
loan-to-value ratio of the mortgage loan exceeded 80%, has been kept in
force until the loan-to-value ratio is reduced to 80%;
o premiums on the primary hazard insurance policy have been paid by the
insured and real estate taxes and foreclosure, protection and
preservation expenses have been advanced by or on behalf of the
insured, as approved by the insurer;
o if there has been physical loss or damage to the mortgaged property, it
has been restored to its physical condition at the time the mortgage
loan became insured under the mortgage pool insurance policy, subject
to reasonable wear and tear; and
o the insured has acquired good and merchantable title to the mortgaged
property, free and clear of all liens and encumbrances, except
permitted encumbrances, including any right of redemption by or on
behalf of the mortgagor, and if required by the insurer, has sold the
property with the approval of the insurer.
Assuming the satisfaction of these conditions, the insurer has the option
to either (a) acquire the property securing the defaulted mortgage loan for a
payment equal to the principal balance of the defaulted mortgage loan plus
accrued and unpaid interest at the interest rate on the mortgage loan to the
date of acquisition and expenses described above advanced by or on behalf of the
insured, on condition that the insurer must be provided with good and
merchantable title to the mortgaged property, unless the property has been
conveyed under the terms of the applicable primary mortgage insurance policy, or
(b) pay the amount by which the sum of the principal balance of the defaulted
mortgage loan and accrued and unpaid interest at the interest rate to the date
of the payment of the claim and the expenses exceed the proceeds received from a
sale of the
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mortgaged property which the insurer has approved. In both (a) and (b), the
amount of payment under a mortgage pool insurance policy will be reduced by the
amount of the loss paid under the primary mortgage insurance policy.
Unless earlier directed by the insurer, a claim under a mortgage pool
insurance policy must be filed (a) in the case when a primary mortgage insurance
policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the insurer, whichever is
later, or (b) in the case when a primary mortgage insurance policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the insurer. A claim must
be paid within a specified period (typically, 30 days) after the claim is made
by the insured.
The amount of coverage under each mortgage pool insurance policy will
generally be reduced over the life of the securities of any series by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the insurer upon disposition of all acquired properties. The amount
of claims paid includes certain expenses incurred by the master servicer as well
as accrued interest on delinquent mortgage loans to the date of payment of the
claim. Accordingly, if aggregate net claims paid under a mortgage pool insurance
policy reach the applicable policy limit, coverage thereunder will be exhausted
and any further losses will be borne by securityholders of the related series.
See "Legal Aspects of Mortgage Assets--Foreclosure on Mortgages" and
"--Repossession with Respect to Manufactured Housing Contracts."
If an insurer under a mortgage pool insurance policy ceases to be a private
mortgage guaranty insurance company duly qualified as such under applicable laws
and approved as an insurer by Freddie Mac or Fannie Mae and having a
claims-paying ability acceptable to the rating agency or agencies, the master
servicer will use its best reasonable efforts to obtain or cause to be obtained
from another qualified insurer a replacement insurance policy comparable to the
mortgage pool insurance policy with a total coverage equal to the then
outstanding coverage of the mortgage pool insurance policy; provided, however,
that if the cost of the replacement policy is greater than the cost of the
original mortgage pool insurance policy, the coverage of the replacement policy
may be reduced to the level that its premium rate does not exceed the premium
rate on the original mortgage pool insurance policy. However, if the insurer
ceases to be a qualified insurer solely because it ceases to be approved as an
insurer by Freddie Mac or Fannie Mae, the master servicer will review, or cause
to be reviewed, the financial condition of the insurer with a view towards
determining whether recoveries under the mortgage pool insurance policy are
jeopardized for reasons related to the financial condition of the insurer. If
the master servicer determines that recoveries are so jeopardized, it will
exercise its best reasonable efforts to obtain from another qualified insurer a
replacement policy, subject to the same cost limitation.
Because each mortgage pool insurance policy will require that the property
subject to a defaulted mortgage loan be restored to its original condition prior
to claiming against the insurer, the policy will not provide coverage against
hazard losses. As set forth in the immediately following paragraph, the primary
hazard insurance policies covering the mortgage loans typically exclude from
coverage physical damage resulting from a number of causes and, even when the
damage is covered, may afford recoveries that are significantly less than the
full replacement cost of the losses. Further, a special hazard insurance policy,
or a letter of credit that covers special hazard realized losses, will not cover
all risks, and the coverage thereunder will be limited in amount. These hazard
risks will, as a result, be uninsured and will therefore be borne by
securityholders.
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SPECIAL HAZARD INSURANCE POLICY
As to any series of securities to be covered by an insurance instrument
that does not cover losses that are attributable to physical damage to the
mortgaged properties of a type that is not covered by standard hazard insurance
policies, in other words, special hazard realized losses, the related prospectus
supplement may provide that the master servicer will exercise its best
reasonable efforts to maintain or cause to be maintained a special hazard
insurance policy in full force and effect covering the special hazard amount,
unless coverage thereunder has been exhausted through payment of claims;
provided, however, that the master servicer will be under no obligation to
maintain the policy if any insurance instrument covering the series as to any
realized losses on liquidated loans is no longer in effect. The master servicer
will agree to pay the premiums on each special hazard insurance policy on a
timely basis unless, as described in the related prospectus supplement, payment
of those premiums is otherwise provided for.
Each special hazard insurance policy will, subject to the limitations
described in the next paragraph, protect holders of securities of the related
series from
o loss by reason of damage to mortgaged properties caused by certain
hazards, including earthquakes and mudflows, not insured against under
the primary hazard insurance policies or a flood insurance policy if
the property is in a designated flood area, and
o loss from partial damage caused by reason of the application of the
co-insurance clause contained in the primary hazard insurance policies.
Special hazard insurance policies usually will not cover losses occasioned
by normal wear and tear, war, civil insurrection, governmental actions, errors
in design, nuclear or chemical reaction or contamination, faulty workmanship or
materials, flood, if the property is located in a designated flood area, and
other risks.
Subject to the foregoing limitations, each special hazard insurance policy
will provide that, when there has been damage to property securing a defaulted
mortgage asset acquired by the insured and to the extent the damage is not
covered by the related primary hazard insurance policy or flood insurance
policy, the insurer will pay the lesser of:
(1) the cost of repair to the property and
(2) upon transfer of the property to the insurer, the unpaid principal
balance of the mortgage asset at the time of acquisition of the
property by foreclosure, deed in lieu of foreclosure or
repossession, plus accrued interest to the date of claim
settlement and expenses incurred by or on behalf of the master
servicer with respect to the property.
The amount of coverage under the special hazard insurance policy will be
reduced by the sum of (a) the unpaid principal balance plus accrued interest and
certain expenses paid by the insurer, less any net proceeds realized by the
insurer from the sale of the property, plus (b) any amount paid as the cost of
repair of the property.
Restoration of the property with the proceeds described under clause (1) of
the immediately preceding paragraph will satisfy the condition under an
insurance instrument providing coverage as to credit, or other non-hazard risks,
that the property be restored before a claim thereunder may be validly presented
with respect to the defaulted mortgage asset secured by the property. The
payment described under clause (2) of the immediately preceding paragraph will
render unnecessary presentation of a claim in respect of the mortgage loan under
an insurance instrument providing coverage as to credit, or other non-hazard
risks, as
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to any realized losses on a liquidated loan. Therefore, so long as the insurance
instrument providing coverage as to credit, or other non-hazard risks, remains
in effect, the payment by the insurer of either of the above alternative amounts
will not affect the total insurance proceeds paid to securityholders, but will
affect the relative amounts of coverage remaining under any special hazard
insurance policy and any credit insurance instrument.
The sale of a mortgaged property must be approved by the insurer under any
special hazard insurance policy and funds received by the insured in excess of
the unpaid principal balance of the mortgage asset plus interest thereon to the
date of sale plus expenses incurred by or on behalf of the master servicer with
respect to the property, not to exceed the amount actually paid by the insurer,
must be refunded to the insurer and, to that extent, coverage under the special
hazard insurance policy will be restored. If aggregate claim payments under a
special hazard insurance policy reach the policy limit, coverage thereunder will
be exhausted and any further losses will be borne by securityholders.
A claim under a special hazard insurance policy generally must be filed
within a specified number of days, typically 60 days, after the insured has
acquired good and merchantable title to the property, and a claim payment is
payable within a specified number of days, typically 30 days, after a claim is
accepted by the insurer. Special hazard insurance policies provide that no claim
may be paid unless primary hazard insurance policy premiums, flood insurance
premiums, if the property is located in a federally designated flood area, and,
as approved by the insurer, real estate property taxes, property protection and
preservation expenses and foreclosure or repossession costs have been paid by or
on behalf of the insured, and unless the insured has maintained the primary
hazard insurance policy and, if the property is located in a federally
designated flood area, flood insurance, as required by the special hazard
insurance policy.
If a special hazard insurance policy is canceled or terminated for any
reason, other than the exhaustion of total policy coverage, the master servicer
will use its best reasonable efforts to obtain or cause to be obtained from
another insurer a replacement policy comparable to that special hazard insurance
policy with a total coverage that is equal to the then existing coverage of the
replaced special hazard insurance policy; provided, however, that if the cost of
the replacement policy is greater than the cost of that special hazard insurance
policy, the coverage of the replacement policy may be reduced to a level so that
its premium rate does not exceed the premium rate on that special hazard
insurance policy.
Since each special hazard insurance policy is designed to permit full
recoveries as to any realized losses on liquidated loans under a credit
insurance instrument in circumstances in which recoveries would otherwise be
unavailable because property has been damaged by a cause not insured against by
a primary hazard insurance policy and thus would not be restored, each agreement
governing the trust fund will provide that, if the related credit insurance
instrument shall have lapsed or terminated or been exhausted through payment of
claims, the master servicer will be under no further obligation to maintain the
special hazard insurance policy.
BANKRUPTCY BOND
As to any series of securities to be covered by a bankruptcy bond with
respect to actions that may be taken by a bankruptcy court in connection with a
mortgage asset, the master servicer will exercise its best reasonable efforts to
maintain or cause to be maintained the bankruptcy bond in full force and effect,
unless coverage thereunder has been exhausted through payment of claims. The
master servicer will pay or cause to be paid the premiums for each bankruptcy
bond on a timely basis, unless, as described in the related prospectus
supplement, payment of those premiums is otherwise provided for. Subject to the
limit of the dollar amount of coverage provided, each bankruptcy bond will cover
certain losses resulting from an extension of the maturity of a mortgage asset,
or a reduction by the bankruptcy court of the principal balance
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of or the interest rate on a mortgage asset, and the unpaid interest on the
amount of a principal reduction during the pendency of a proceeding under the
Bankruptcy Code. See "Legal Aspects of Mortgage Assets--Foreclosure on
Mortgages" and "--Repossession with Respect to Manufactured Housing Contracts."
FINANCIAL GUARANTEE INSURANCE
Financial guarantee insurance, if any, with respect to a series of
securities will be provided by one or more insurance companies. The financial
guarantee insurance will guarantee, with respect to one or more classes of
securities of a series, timely distributions of interest only, timely
distributions of interest and ultimate distribution of principal or timely
distributions of interest and 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. If so specified in the related
prospectus supplement, the financial guarantee insurance will also guarantee
against any payment made to a securityholder that is subsequently recovered as a
voidable preference payment under federal bankruptcy law. A copy of the
financial guarantee insurance policy for a series, if any, will be filed with
the Commission as an exhibit to a Current Report on Form 8-K to be filed with
the Commission within 15 days of issuance of the securities of the related
series.
RESERVE FUND
If so provided in the related prospectus supplement, the depositor will
deposit or cause to be deposited in an account, a reserve fund, any combination
of cash, one or more irrevocable letters of credit or one or more permitted
investments in specified amounts, or any other instrument satisfactory to the
rating agency or agencies, which will be applied and maintained in the manner
and under the conditions specified in the prospectus supplement. In the
alternative or in addition to a deposit, the prospectus supplement for a
Senior/Subordinate Series may provide that, a reserve fund be funded through
application of all or a portion of amounts otherwise payable on the subordinate
securities. Amounts in a reserve fund may be distributed to securityholders, or
applied to reimburse the master servicer for outstanding advances, or may be
used for other purposes, in the manner specified in the related prospectus
supplement. A reserve fund will typically not be deemed to be part of the
related trust fund.
Amounts deposited in any reserve fund for a series will be invested in
permitted investments by, or at the direction of, the master servicer or any
other person named in the related prospectus supplement.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest collections
on the mortgage assets may exceed interest payments on the securities for the
related distribution date. The excess interest may be deposited into a reserve
fund or applied as an additional payment of principal on one or more classes of
the securities of the related series. If excess interest is applied as principal
payments on the securities, the effect will be to reduce the principal balance
of the securities relative to the outstanding balance of the mortgage loans,
thereby creating overcollateralization and additional protection to the
securityholders, as specified in the related prospectus supplement. If so
provided in the related prospectus supplement, overcollateralization may also be
provided on the date of issuance of the securities by the issuance of securities
in an initial aggregate principal amount which is less than the aggregate
principal amount of the mortgage assets in the related trust fund.
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CROSS-SUPPORT FEATURES
If the trust fund assets for a series are divided into separate asset
groups, the beneficial ownership of which is evidenced by a separate class or
classes of a series, credit support may be provided by a cross-support feature
which requires that distributions be made on senior securities evidencing the
beneficial ownership of one asset group prior to distributions on subordinate
securities evidencing the beneficial ownership interest in another asset group
within the trust fund. The related prospectus supplement for a series which
includes a cross-support feature will describe the manner and conditions for
applying that cross-support feature. As to any trust fund that includes a
cross-support feature, only assets of the trust fund will be used to provide
cross-support, and cross- support will be provided only to securities issued by
the trust fund. A trust fund will not provide a cross-support feature that
benefits securities issued by any other trust fund, and a trust fund will not
receive cross-support from any other trust fund.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE SECURITIES
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of a trust fund may enter into interest rate swaps
and related caps, floors and collars to minimize the risk of securityholders
from adverse changes in interest rates, which are collectively referred to as
swaps, and other yield supplement agreements or similar yield maintenance
arrangements that do not involve swap agreements or other notional principal
contracts, which are collectively referred to as yield supplement agreements.
An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or "notional" principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In the typical swap, one party agrees to pay a fixed rate on
a notional principal amount, while the counterparty pays a floating rate based
on one or more reference interest rates including the London Interbank Offered
Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based upon one reference interest rate, such as LIBOR, for a floating
rate obligation based upon another referenced interest rate, such as U.S.
Treasury Bill rates.
Yield supplement agreements may be entered into to supplement the interest
rate or other rates on one or more classes of the securities of any series.
Additionally, agreements relating to other types of derivative products that are
designed to provide credit enhancement to the related series may be entered into
by a trustee and one or more counterparties. The terms of any derivative product
agreement and any counterparties will be described in the accompanying
prospectus supplement.
There can be no assurance that the trustee will be able to enter into or
offset swaps or enter into yield supplement agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the swaps and yield supplement
agreements may provide for termination under various circumstances, there can be
no assurance that the trustee will be able to terminate a swap or yield
supplement agreement when it would be economically advantageous to the trust
fund to do so.
PURCHASE OBLIGATIONS
Some types of trust assets and some classes of securities of any series, as
specified in the accompanying prospectus supplement, may be subject to a
purchase obligation that would become applicable on one or more specified dates,
or upon the occurrence of one or more specified events, or on demand made by or
on
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behalf of the applicable securityholders. A purchase obligation may be in the
form of a conditional or unconditional purchase commitment, liquidity facility,
remarketing agreement, maturity guaranty, put option or demand feature. The
terms and conditions of each purchase obligation, including the purchase price,
timing and payment procedure, will be described in the accompanying prospectus
supplement. A purchase obligation relating to trust assets may apply to those
trust assets or to the related securities. Each purchase obligation may be a
secured or unsecured obligation of the provider thereof, which may include a
bank or other financial institution or an insurance company. Each purchase
obligation will be evidenced by an instrument delivered to the trustee for the
benefit of the applicable securityholders of the related series. As specified in
the accompanying prospectus supplement, each purchase obligation relating to
trust assets will be payable solely to the trustee for the benefit of the
securityholders of the related series. Other purchase obligations may be payable
to the trustee or directly to the holders of the securities to which that
obligation relate.
DESCRIPTION OF PRIMARY INSURANCE POLICIES
Each mortgage loan will be covered by a primary hazard insurance policy
and, if so specified in the prospectus supplement, a primary mortgage insurance
policy.
PRIMARY MORTGAGE INSURANCE POLICIES
Although the terms and conditions of primary mortgage insurance policies
differ, each primary mortgage insurance policy will generally cover losses up to
an amount equal to the excess of the unpaid principal amount of a defaulted
mortgage loan, plus accrued and unpaid interest thereon and approved expenses,
over a specified percentage of the value of the related mortgaged property.
As conditions to the filing or payment of a claim under a primary mortgage
insurance policy, the insured will typically be required, in the event of
default by the borrower, to:
o advance or discharge (1) hazard insurance premiums and (2) as necessary
and approved in advance by the insurer, real estate taxes, property
protection and preservation expenses and foreclosure and related costs,
o in the event of any physical loss or damage to the mortgaged property,
have the mortgaged property restored to at least its condition at the
effective date of the primary mortgage insurance policy, ordinary wear
and tear excepted, and
o tender to the insurer good and merchantable title to, and possession
of, the mortgaged property.
Multifamily loans, commercial loans and mixed-use loans will not be covered
by primary mortgage insurance policies, regardless of the related loan-to-value
ratio.
PRIMARY HAZARD INSURANCE POLICIES
Each servicing agreement will require the master servicer to cause the
borrower on each mortgage loan to maintain a primary hazard insurance policy
providing for coverage of the standard form of fire insurance policy with
extended coverage customary in the state in which the mortgaged property is
located. The primary hazard coverage will be in general in an amount equal to
the lesser of the principal balance owing on the mortgage loan and the amount
necessary to fully compensate for any damage or loss to the improvements on the
mortgaged property on a replacement cost basis, but in either case not less than
the amount necessary to avoid the application of any co-insurance clause
contained in the hazard insurance
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policy. The ability of the master servicer to assure that hazard insurance
proceeds are appropriately applied may be dependent upon its being named as an
additional insured under any primary hazard insurance policy and under any flood
insurance policy referred to in the paragraph below, and upon the borrower
furnishing information to the master servicer in respect of a claim. All amounts
collected by the master servicer under any primary hazard insurance policy,
except for amounts to be applied to the restoration or repair of the mortgaged
property or released to the borrower in accordance with the master servicer's
normal servicing procedures, and subject to the terms and conditions of the
related Mortgage and mortgage note, will be deposited in the collection account.
The agreement will provide that the master servicer may satisfy its obligation
to cause each borrower to maintain a hazard insurance policy by the master
servicer's maintaining a blanket policy insuring against hazard losses on the
mortgage loans. If the blanket policy contains a deductible clause, the master
servicer will deposit in the collection account all sums that would have been
deposited in the collection account but for that clause. The master servicer
also is required to maintain a fidelity bond and errors and omissions policy
with respect to its officers and employees that provides coverage against losses
that may be sustained as a result of an officer's or employee's misappropriation
of funds or errors and omissions in failing to maintain insurance, subject to
limitations as to amount of coverage, deductible amounts, conditions, exclusions
and exceptions.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the mortgage loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most hazard insurance policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement, including earthquakes, landslides
and mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in some cases, vandalism. This list is merely
indicative of the kinds of uninsured risks and is not intended to be
all-inclusive. When a mortgaged property is located at origination in a
federally designated flood area and flood insurance is available, each agreement
will require the master servicer to cause the borrower to acquire and maintain
flood insurance in an amount equal in general to the lesser of (1) the amount
necessary to fully compensate for any damage or loss to the improvements which
are part of the mortgaged property on a replacement cost basis and (2) the
maximum amount of insurance available under the federal flood insurance program,
whether or not the area is participating in the program.
The hazard insurance policies covering the mortgaged properties typically
contain a co- insurance clause that in effect requires the insured at all times
to carry insurance of a specified percentage, generally 80% to 90%, of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, the co-insurance clause generally provides that the
insurer's liability in the event of partial loss does not exceed the lesser of
(1) the replacement cost of the improvements less physical depreciation and (2)
the proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of the improvements.
The master servicer will not require that a hazard or flood insurance
policy be maintained for any cooperative loan. Generally, the cooperative is
responsible for maintenance of hazard insurance for the property owned by the
cooperative, and the tenant-stockholders of that cooperative do not maintain
individual hazard insurance policies. However, if a cooperative and the related
borrower on a cooperative note do not maintain hazard insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to the related borrower's
cooperative
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apartment or the cooperative's building could significantly reduce the value of
the collateral securing the cooperative note.
Since the amount of hazard insurance the master servicer will cause to be
maintained on the improvements securing the mortgage loans declines as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds collected
in connection with a partial loss may be insufficient to restore fully the
damaged property. The terms of the mortgage loans provide that borrowers are
required to present claims to insurers under hazard insurance policies
maintained on the mortgaged properties. The master servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
mortgaged properties. However, the ability of the master servicer to present or
cause to be presented these claims is dependent upon the extent to which
information in this regard is furnished to the master servicer by borrowers.
FHA INSURANCE
The Federal Housing Administration is responsible for administering various
federal programs, including mortgage insurance, authorized under The Housing Act
and the United States Housing Act of 1937, as amended. If so provided in the
related prospectus supplement, a number of the mortgage loans will be insured by
the FHA.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under Sections
221 (d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a mortgage loan may be up to 40 years and the ratio of the loan
amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The master servicer will be obligated to purchase any
debenture issued in satisfaction of a defaulted FHA insured mortgage loan
serviced by it for an amount equal to the principal amount of that debenture.
The master servicer will be required to take steps as are reasonably
necessary to keep FHA insurance in full force and effect.
Some of the mortgage loans contained in a trust fund may be Title I loans
as described below and in the related prospectus supplement. The regulations,
rules and procedures promulgated by the FHA under Title I contain the
requirements under which lenders approved for participation in the Title I
Program may obtain insurance against a portion of losses incurred with respect
to eligible loans that have been originated and
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serviced in accordance with FHA regulations, subject to the amount of insurance
coverage available in such Title I lender's FHA reserve, as described below and
in the related prospectus supplement. In general, an insurance claim against the
FHA may be denied or surcharged if the Title I loan to which it relates does not
strictly satisfy the requirements of the National Housing Act and FHA
regulations but FHA regulations permit the Secretary of the Department of
Housing and Urban Development, subject to statutory limitations, to waive a
Title I Lender's noncompliance with FHA regulations if enforcement would impose
an injustice on the lender.
Unless otherwise specified in the related prospectus supplement, the master
servicer will either serve as or contract with the person specified in the
prospectus supplement to serve as the administrator for FHA claims pursuant to
an FHA claims administration agreement. The FHA claims administrator will be
responsible for administering, processing and submitting FHA claims with respect
to the Title I loans. The securityholders will be dependent on the FHA claims
administrator to (1) make claims on the Title I loans in accordance with FHA
regulations and (2) remit all FHA insurance proceeds received from the FHA in
accordance with the related agreement. The securityholders' rights relating to
the receipt of payment from and the administration, processing and submission of
FHA claims by any FHA claims administrator is limited and governed by the
related agreement and the FHA claims administration agreement and these
functions are obligations of the FHA claims administrator, but not the FHA.
Under Title I, the FHA maintains an FHA insurance coverage reserve account
for each Title I lender. The amount in each Title I lender's FHA reserve is a
maximum of 10% of the amounts disbursed, advanced or expended by a Title I
lender in originating or purchasing eligible loans registered with the FHA for
Title I insurance, with certain adjustments permitted or required by FHA
regulations. The balance of such FHA reserve is the maximum amount of insurance
claims the FHA is required to pay to the related Title I lender. Mortgage loans
to be insured under Title I will be registered for insurance by the FHA.
Following either the origination or transfer of loans eligible under Title I,
the Title I lender will submit such loans for FHA insurance coverage within its
FHA reserve by delivering a transfer of note report or by an electronic
submission to the FHA in the form prescribed under the FHA regulations. The
increase in the FHA insurance coverage for such loans in the Title I lender's
FHA reserve will occur on the date following the receipt and acknowledgment by
the FHA of the transfer of note report for such loans. The insurance available
to any trust fund will be subject to the availability, from time to time, of
amounts in each Title I lender's FHA reserve, which will initially be limited to
the amount specified in the related prospectus supplement.
If so provided in the related prospectus supplement the trustee or FHA
claims administrator may accept an assignment of the FHA reserve for the related
Title I loans, notify FHA of such assignment and request that the portion of the
depositor's FHA reserves allocable to the Title I loans be transferred to the
trustee or the FHA claims administrator on the closing date. Alternatively, in
the absence of such provision, the FHA reserves may be retained by the depositor
and, upon an insolvency and receivership of the depositor, the related trustee
will notify FHA and request that the portion of the depositor's FHA reserves
allocable to the Title I loans be transferred to the trustee or the FHA claims
administrator. Although each trustee will request such a transfer of reserves,
FHA is not obligated to comply with such a request, and may determine that it is
not in FHA's interest to permit a transfer of reserves. In addition, FHA has not
specified how insurance reserves would be allocated in a transfer, and there can
be no assurance that any reserve amount, if transferred to the trustee or the
FHA claims administrator, as the case may be, would not be substantially less
than 10% of the outstanding principal amount of the related Title I loans. It is
likely that the depositor, the trustee or the FHA claims administrator would be
the lender of record on other Title I loans, so that any FHA reserves that are
retained, or permitted to be transferred, would become commingled with FHA
reserves available for other Title I loans. FHA also reserves the right to
transfer reserves with "earmarking" (segregating reserves so that they will not
be commingled with the reserves of the transferee) if it is in FHA's interest to
do so.
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Under Title I, the FHA will reduce the insurance coverage available in a
Title I lender's FHA reserve with respect to loans insured under that Title I
lender's contract of insurance by (1) the amount of FHA insurance claims
approved for payment related to those loans and (2) the amount of reduction of
the Title I lender's FHA reserve by reason of the sale, assignment or transfer
of loans registered under the Title I lender's contract of insurance. The FHA
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I lender that are subsequently rejected by the FHA.
Unlike certain other government loan insurance programs, loans under Title
I (other than loans in excess of $25,000) are not subject to prior review by the
FHA. The FHA disburses insurance proceeds with respect to defaulted loans for
which insurance claims have been filed by a Title I lender prior to any review
of those loans. A Title I lender is required to repurchase a Title I loan from
the FHA that is determined to be ineligible for insurance after insurance claim
payments for such loan have been paid to the lender. Under the FHA regulations,
if the Title I lender's obligation to repurchase the Title I loan is
unsatisfied, the FHA is permitted to offset the unsatisfied obligation against
future insurance claim payments owed by the FHA to such lender. FHA regulations
permit the FHA to disallow an insurance claim with respect to any loan that does
not qualify for insurance for a period of up to two years after the claim is
made and to require the Title I lender that has submitted the insurance claim to
repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including the alteration, repair or improvement of
residential property, the purchase of a manufactured home or lot (or cooperative
interest therein) on which to place the home or the purchase of both a
manufactured home and the lot (or cooperative interest therein) on which the
home is placed.
Subject to certain limitations described below, eligible Title I loans are
generally insured by the FHA for 90% of an amount equal to the sum of
o the net unpaid principal amount and the uncollected interest earned to
the date of default,
o interest on the unpaid loan obligation from the date of default to the
date of the initial submission of the insurance claim, plus 15 calendar
days (the total period not to exceed nine months) at a rate of 7% per
annum,
o uncollected court costs,
o title examination costs,
o fees for required inspections by the lenders or its agents, up to $75,
and
o origination fees up to a maximum of 5% of the loan amount.
Accordingly if sufficient insurance coverage is available in such FHA
reserve, then the Title I lender bears the risk of losses on a Title I loan for
which a claim for reimbursement is paid by the FHA of at least 10% of the unpaid
principal, uncollected interest earned to the date of default, interest from the
date of default to the date of the initial claim submission and certain
expenses.
In general, the FHA will insure home improvement contracts up to $25,000
for a single family property, with a maximum term of 20 years. The FHA will
insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit for a
$48,000 limit for four units for owner-occupied multifamily homes. If the loan
amount is $15,000 or more, the FHA requires a drive-by appraisal, the current
tax assessment value, or a full Uniform Residential Appraisal
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Report dated within 12 months of the closing to verify the property's value. The
maximum loan amount on transactions requiring an appraisal is the amount of
equity in the property shown by the market value determination of the property.
With respect to Title I loans, the FHA regulations do not require that a
borrower obtain title or fire and casualty insurance. However, if the related
mortgaged property is located in a flood hazard area, flood insurance in an
amount at least equal to the loan amount is required. In addition, the FHA
regulations do not require that the borrower obtain insurance against physical
damage arising from earth movement (including earthquakes, landslides and
mudflows). Accordingly, if a mortgaged property that secures a Title I loan
suffers any uninsured hazard or casualty losses, holders of the related series
of securities that are secured in whole or in part by such Title I loan may bear
the risk of loss to the extent that such losses are not recovered by foreclosure
on the defaulted loans or from any FHA insurance proceeds. Such loss may be
otherwise covered by amounts available from the credit enhancement provided for
the related series of securities, if specified in the related prospectus
supplement.
Following a default on a Title I loan insured by the FHA, the master
servicer may, subject to certain conditions and mandatory loss mitigation
procedures, either commence foreclosure proceedings against the improved
property securing the loan, if applicable, or submit a claim to FHA, but may
submit a claim to FHA after proceeding against the improved property only with
the prior approval of the Secretary of HUD. The availability of FHA Insurance
following a default on a Title I loan is subject to a number of conditions,
including strict compliance with FHA regulations in originating and servicing
the Title I loan. Failure to comply with FHA regulations may result in a denial
of or surcharge on the FHA insurance claim. Prior to declaring a Title I loan in
default and submitting a claim to FHA, the master servicer must take certain
steps to attempt to cure the default, including personal contact with the
borrower either by telephone or in a meeting and providing the borrower with 30
days' written notice prior to declaration of default. FHA may deny insurance
coverage if the borrower's nonpayment is related to a valid objection to faulty
contractor performance. In such event, the master servicer or other entity as
specified in the related prospectus supplement will seek to obtain payment by or
a judgment against the borrower, and may resubmit the claim to FHA following
such a judgment.
VA GUARANTEES
The United States Department of Veterans Affairs is an Executive Branch
Department of the United States, headed by the Secretary of Veterans Affairs.
The VA currently administers a variety of federal assistance programs on behalf
of eligible veterans and their dependents and beneficiaries. The VA administers
a loan guaranty program under which the VA guarantees a portion of loans made to
eligible veterans. If so provided in the prospectus supplement, a number of the
mortgage loans will be guaranteed by the VA.
Under the VA loan guaranty program, a VA loan may be made to any eligible
veteran by an approved private sector mortgage lender. The VA guarantees payment
to the holder of that loan of a fixed percentage of the loan indebtedness, up to
a maximum dollar amount, in the event of default by the veteran borrower. When a
delinquency is reported to the VA and no realistic alternative to foreclosure is
developed by the loan holder or through the VA's supplemental servicing of the
loan, the VA determines, through an economic analysis, whether the VA will (a)
authorize the holder to convey the property securing the VA loan to the
Secretary of Veterans Affairs following termination or (b) pay the loan guaranty
amount to the holder. The decision as to disposition of properties securing
defaulted VA loans is made on a case-by-case basis using the procedures set
forth in 38 U.S.C. Section 3732(c), as amended.
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The master servicer will be required to take steps as are reasonably
necessary to keep the VA guarantees in full force and effect.
LEGAL ASPECTS OF MORTGAGE ASSETS
The following discussion contains general summaries of legal aspects of
loans secured by residential and commercial properties. Because these legal
aspects are governed in part by applicable state law, which laws may differ
substantially from state to state, the summaries do not purport to be complete
nor to reflect the laws of any particular state, nor to encompass the laws of
all states in which the security for the mortgage assets is situated. If there
is a concentration of the mortgage assets included in a trust fund in a
particular state, the prospectus supplement for the related series of securities
will discuss any laws of that state that could materially impact the interest of
the securityholders.
MORTGAGE LOANS
The single-family loans, multifamily loans, commercial loans and mixed-use
loans will be secured by either mortgages, deeds of trust, security deeds or
deeds to secure debt depending upon the type of security instrument customary to
grant a security interest according to the prevailing practice in the state in
which the property subject to that mortgage loan is located. The filing of a
mortgage or a deed of trust creates a lien upon or conveys title to the real
property encumbered 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. Priority with
respect to mortgages and deeds of trust depends on their terms 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/homeowner or the land trustee, and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a land trust, title to the property is
held by a land trustee under a land trust agreement, while the
borrower/homeowner is the beneficiary of the land trust; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note. Although a deed of trust is similar to a mortgage, a deed of
trust normally has three parties, the trustor, similar to a mortgagor, who may
or may not be the borrower, the beneficiary, similar to a mortgagee, 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. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until the time as the underlying debt is repaid. The mortgagee's
authority under a mortgage and the trustee's authority under a deed of trust,
security deed or deed to secure debt are governed by the law of the state in
which the real property is located, the express provisions of the mortgage, deed
of trust, security deed or deed to secure debt and, sometimes, the directions of
the beneficiary.
COOPERATIVE LOANS
The cooperative owns or has a leasehold interest in all the real property
and owns in fee or leases the building and all separate dwelling units therein.
The cooperative is directly responsible for project management and, in most
cases, payment of real estate taxes, other governmental impositions and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and underlying land, or one or the other, the cooperative, as
project mortgagor, is also responsible for meeting these blanket mortgage
obligations. A blanket mortgage is ordinarily incurred by the cooperative in
connection with either the construction or purchase of the cooperative's
apartment building or the obtaining of capital by the cooperative. There may be
a lease on the underlying land and the cooperative, as lessee, is also
responsible
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for meeting the rental obligation. The interests of the occupants under
proprietary leases or occupancy agreements as to which the cooperative is the
landlord are generally subordinate to the interests of the holder of the blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (a) arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (b) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate proprietary
leases and occupancy agreements. Also, the blanket mortgage on a cooperative may
provide financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at final
maturity. The inability of the cooperative to refinance this mortgage and its
consequent inability to make the final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
foreclosure by the holder of the blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of the trust fund, the
collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing the tenant-stockholder's PRO RATA share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights is financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares as described under "Foreclosure on Cooperative Shares" below.
MANUFACTURED HOUSING CONTRACTS
Under the laws of most states, manufactured housing that is not permanently
affixed to its site constitutes personal property and is subject to the motor
vehicle registration laws of the state or other jurisdiction in which the unit
is located. In a few states, where certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC which has been adopted by all
states. Financing statements are effective for five years and must be renewed at
the end of each five years. The certificate of title laws adopted by the
majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department, or a similar entity, of the state. In the states that have
enacted certificate of title laws, a security interest in a unit of manufactured
housing, so long as it is not attached to land in so permanent a fashion as to
become a fixture, is generally perfected by the recording of the interest on the
certificate of title to the unit in the appropriate motor vehicle registration
office or by delivery of the required documents and payment of a fee to such
office, depending on state law.
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The master servicer will be required under the related servicing agreement
to effect the notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any manufactured home is registered. If the master servicer
fails, due to clerical errors or otherwise, to effect the notation or delivery,
or files the security interest under the wrong law, for example, under a motor
vehicle title statute rather than under the UCC, in a few states, the trustee
may not have a first priority security interest in the manufactured home
securing a manufactured housing contract. As manufactured homes have become
larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
manufactured homes may become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must file either a fixture filing under the provisions of the UCC or a
real estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located. Generally, manufactured housing contracts will
contain provisions prohibiting the obligor from permanently attaching the
manufactured home to its site. So long as the obligor does not violate this
agreement, a security interest in the manufactured home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site,
other parties could obtain an interest in the manufactured home that is prior to
the security interest originally retained by the seller and transferred to the
depositor.
The depositor will assign or cause to be assigned a security interest in
the manufactured homes to the trustee, on behalf of the securityholders. Neither
the depositor, the master servicer nor the trustee will amend the certificates
of title to identify the trustee, on behalf of the securityholders, as the new
secured party and, accordingly, the depositor or the mortgage loan seller will
continue to be named as the secured party on the certificates of title relating
to the manufactured homes. In most states, an assignment is an effective
conveyance of a security interest in a manufactured home without amendment of
any lien noted on the related certificate of title and the new secured party
succeeds to the depositor's rights as the secured party. However, in several
states there exists a risk that, in the absence of an amendment to the
certificate of title, the assignment of the security interest might not be held
effective against creditors of the depositor or mortgage loan seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
a manufactured home or subsequent lenders who take a security interest in the
manufactured home. If there are any manufactured homes as to which the depositor
has failed to perfect or cause to be perfected the security interest assigned to
the trust fund, the security interest would be subordinate to subsequent
purchasers for value of manufactured homes and holders of perfected security
interests. There also exists a risk in not identifying the trustee, on behalf of
the securityholders, as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the trustee could be
released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws of
most states, the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter until the owner
re-registers the manufactured home in that state. If the owner were to relocate
a manufactured home to another state and re-register the manufactured home in
the new state, and if the depositor did not take steps to re-perfect its
security interest in the new state, the security interest in the manufactured
home would cease to be perfected.
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A majority of states generally require surrender of a certificate of title to
re-register a manufactured home. Accordingly, the depositor must surrender
possession if it holds the certificate of title to the manufactured home or, in
the case of manufactured homes registered in states that provide for notation of
lien, the depositor would receive notice of surrender if the security interest
in the manufactured home is noted on the certificate of title. Accordingly, the
depositor would have the opportunity to re-perfect its security interest in the
manufactured home in the state of relocation. In states that do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. Similarly, when an obligor under a manufactured housing
conditional sales contract sells a manufactured home, the obligee must surrender
possession of the certificate of title or it will receive notice as a result of
its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under each related servicing agreement, the master
servicer will be obligated to take those steps, at the master servicer's
expense, as are necessary to maintain perfection of security interests in the
manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home take priority even over a perfected security interest. The
depositor will obtain the representation of the mortgage loan seller that it has
no knowledge of any liens of that type with respect to any manufactured home
securing a manufactured home loan. However, liens could arise at any time during
the term of a manufactured home loan. No notice will be given to the trustee or
securityholders in the event a lien for repairs arises.
HOME IMPROVEMENT CONTRACTS
The home improvement contracts, other than those home improvement contracts
that are unsecured or secured by mortgages on real estate, generally are
"chattel paper" or constitute "purchase money security interests", each as
defined in the UCC. Pursuant to the UCC, the sale of chattel paper is treated in
a manner similar to perfection of a security interest in chattel paper. Under
the related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a designated 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. 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.
The contracts that are secured by the home improvements financed thereby
grant to the originator of the contracts a purchase money security interest in
such 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. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such 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 such 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 such 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.
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So long as the home improvement has not become subject to the real estate
law, a creditor can repossess a home improvement securing a contract by
voluntary surrender, "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, judicial process. The holder of a
contract must give the debtor a number of days' notice, which varies from 10 to
30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the
related property so that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equity principles, may limit or delay the ability of
a lender to repossess and resell collateral or enforce a deficiency judgment.
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust, which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In several 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 several states must provide notice to any other
individual having an interest in the real property, including any junior
lienholder. 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 attorneys' fees, that may be recovered by a lender. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specific period of time in one or
more newspapers. In addition, several state laws require that a copy of the
notice of sale be posted on the property, recorded and sent to all parties
having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage and in the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. A mortgagor is usually bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action established a
waiver of fraud, bad faith, oppressive or unconscionable conduct warranted a
court of equity to refuse affirmative relief to the mortgagee. A court of equity
may relieve the mortgagor from an entirely technical default where the default
was not willful.
A foreclosure action or sale in accordance with a power of sale is subject
to most of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring up to several years to
complete. Moreover, recent judicial decisions suggest that a non- collusive,
regularly conducted foreclosure sale or sale in accordance with a power of 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
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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 mortgage note may take several
years.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty 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 the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burdens of ownership, including obtaining
casualty insurance, paying taxes and making repairs at its own expense as are
necessary to render the property suitable for sale. 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 insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages if the mortgagor is in
default thereunder. In either event the amounts expended will be added to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, if the foreclosure of a junior mortgage triggers
the enforcement of a due-on-sale clause in a senior mortgage, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those mortgage loans which are
junior mortgage loans, if the lender purchases the property, the lender's title
will be subject to all senior liens and claims and some governmental liens. The
proceeds received by the referee or trustee from the sale are applied first to
the costs, fees and expenses of sale, real estate taxes and then in satisfaction
of the indebtedness secured by the mortgage or deed of trust under which the
sale was conducted. Any remaining proceeds are generally payable to the holders
of junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the mortgagor or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure action
of the senior mortgagee or may require the institution of separate legal
proceedings.
If the master servicer were to foreclose on any junior lien it would do so
subject to any related senior lien. In order for the debt related to the junior
mortgage loan to be paid in full at the sale, a bidder at the foreclosure sale
of the junior mortgage loan would have to bid an amount sufficient to pay off
all sums due under the junior mortgage loan and the senior lien or purchase the
mortgaged property subject to the senior lien. If proceeds from a foreclosure or
similar sale of the mortgaged property are insufficient to satisfy all senior
liens and the junior mortgage loan in the aggregate, the trust fund as the
holder of the junior lien and, accordingly, holders of one or more classes of
related securities bear (1) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (2) the risk of loss if
the deficiency judgment is not realized upon. Moreover, deficiency judgments may
not be available in a jurisdiction. In addition, liquidation expenses with
respect to defaulted junior mortgage loans do not vary directly with the
outstanding principal balance of the loans at the time of default. Therefore,
assuming that the master servicer took the same steps in realizing upon a
defaulted junior mortgage loan having a small remaining principal balance as it
would in the case of a defaulted junior mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the outstanding principal balance of the small junior
mortgage loan than would be the case with the defaulted junior mortgage loan
having a large remaining principal balance.
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In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In a few 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 foreclose if the default under the mortgage instrument is not
monetary, for example, the borrower's failure to adequately maintain the
property or the borrower's execution of a second mortgage or deed of trust
affecting the property. Finally, a few courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due process
concerns for adequate notice require that borrowers under deeds of trust or
mortgages receive notices in addition to the statutorily-prescribed minimums.
For the most part, these cases have upheld the notice provisions as being
reasonable or have found that the sale by a trustee under a deed of trust, or
under a mortgage having a power of sale, does not involve sufficient state
action to afford constitutional protection to the borrower.
FORECLOSURE ON MORTGAGED PROPERTIES LOCATED IN THE COMMONWEALTH OF PUERTO RICO
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a real
estate mortgage usually follows an ordinary civil action filed in the Superior
Court for the district where the mortgaged property is located. If the defendant
does not contest the action filed, a default judgment is rendered for the
plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of these actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale upon
foreclosure of a mortgaged property that (1) is subject to a mortgage loan that
was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of the property and (2) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after the sale. This payment
would reduce the amount of sales proceeds available to satisfy the mortgage loan
and may increase the amount of the loss.
FORECLOSURE ON COOPERATIVE SHARES
The cooperative shares and proprietary lease or occupancy agreement owned
by the tenant- stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement, and may be canceled by the cooperative for failure by the
tenant- stockholder to pay rent or other obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the cooperative
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apartment building incurred by the tenant-stockholder. Typically, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate the
lease or agreement in the event the tenant- stockholder fails to make payments
or defaults in the performance of covenants required thereunder. Typically, the
lender and the cooperative enter into a recognition agreement that, together
with any lender protection provisions contained in the proprietary lease,
establishes the rights and obligations of both parties in the event of a default
by the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement will usually constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under the
proprietary lease or occupancy agreement or that have become liens on the shares
relating to the proprietary lease or occupancy agreement. The total amount owed
to the cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Under the laws applicable in most states, foreclosure on the cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to those shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a foreclosure sale has been conducted in a commercially reasonable
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the method,
manner, time, place and terms of the foreclosure. Generally, a sale conducted
according to the usual practice of banks selling similar collateral will be
considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. Unless as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located,
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repossession of the manufactured home in the event of a default by the obligor
will generally be governed by the UCC. Article 9 of the UCC provides the
statutory framework for the repossession of manufactured housing. While the UCC
as adopted by the various states may vary in minimal ways, the general
repossession procedure established by the UCC is as follows:
o Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession maybe effected either
through self- help pursuant to a peaceable retaking without court
order, voluntary repossession or through judicial process by means of
repossession under a court-issued writ of replevin. The self-help or
voluntary repossession methods are more commonly employed, and are
accomplished simply by retaking possession of the manufactured home. In
cases in which the debtor objects or raises a defense to repossession,
a court order must be obtained from the appropriate state court, and
the manufactured home must then be repossessed in accordance with that
order. Whether the method employed is self-help, voluntary repossession
or judicial repossession, the repossession can be accomplished either
by an actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the occupants and
their belongings from the manufactured home and maintaining possession
of the manufactured home on the location where the occupants were
residing. Various factors may affect whether the manufactured home is
physically removed or left on location, such as the nature and term of
the lease of the site on which it is located and the condition of the
unit. In many cases, leaving the manufactured home on location is
preferable if the home is already set up because the expenses of
retaking and redelivery will be saved. However, in those cases where
the home is left on location, expenses for site rentals will usually be
incurred.
o Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may
be by public or private sale provided the method, manner, time, place
and terms of the sale are commercially reasonable.
o Sale proceeds are to be applied first to repossession expenses like
those expenses incurred in retaking, storage, preparing for sale
including refurbishing costs and selling, and then to satisfaction of
the indebtedness. While several states impose prohibitions or
limitations on deficiency judgments if the net proceeds from resale do
not cover the full amount of the indebtedness, the remainder may be
sought from the debtor in the form of a deficiency judgment in those
states that do not prohibit or limit deficiency judgments. The
deficiency judgment is a personal judgment against the debtor for the
shortfall. Occasionally, after resale of a manufactured home and
payment of all expenses and indebtedness, there is a surplus of funds.
In that case, the UCC requires the party suing for the deficiency
judgment to remit the surplus to the debtor. Because the defaulting
owner of a manufactured home generally has very little capital or
income available following repossession, a deficiency judgment may not
be sought in many cases or, if obtained, will be settled at a
significant discount in light of the defaulting owner's strained
financial condition.
RIGHTS OF REDEMPTION WITH RESPECT TO MORTGAGE LOANS
In several states, after sale in accordance with 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 nonstatutory right that must be exercised prior
to the foreclosure sale. In several 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
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foreclosed property. The right of redemption would defeat the title of any
purchaser acquired at a public sale. Consequently, the practical effect of a
right of redemption is to force the lender to retain the property and pay the
expenses of ownership and maintenance of the property until the redemption
period has expired. In several states, there is no right to redeem property
after a trustee's sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
While state laws do not usually require notice to be given to debtors prior
to repossession, many states do require delivery of a notice of default and of
the debtor's right to cure defaults before repossession of a manufactured home.
The law in most states also requires that the debtor be given notice of sale
prior to the resale of the home so that the owner may redeem at or before
resale. In addition, the sale must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Several states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
several 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.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, the filing of a
petition acts as a stay against the enforcement of remedies of collection of a
debt. Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 13 rehabilitative plan to cure a monetary default
with respect to a mortgage loan on a debtor's residence by paying arrearages
within a reasonable time period and reinstating the original mortgage loan
payment schedule even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court (provided no sale of the
property had yet occurred) prior to the filing of the debtor's Chapter 13
petition. Several courts with federal bankruptcy jurisdiction have approved
plans, based on the particular facts of the reorganization case, that effected
the curing of a mortgage loan default by paying arrearages over a number of
years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified if
the borrower has filed a petition under Chapter 13. These courts have suggested
that the 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, attorneys' fees and costs to the extent
the value of the security exceeds the debt.
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The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission for purposes of analyzing the nation's bankruptcy laws and
making recommendations to Congress for legislative changes to the bankruptcy
laws. A similar commission was involved in developing the Bankruptcy Code. The
NBRC delivered its report to Congress, the President of the United States and
the Chief Justice of the Supreme Court on October 20, 1997. Among other topics,
high leverage loans were addressed in the NBRC's report. Despite several
ambiguities, the NBRC's report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a debtor's principal residence as protected only to the
extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than that
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a debtor's principal residence may not be
modified to reduce the claim below the appraised value of the property at the
time the security interest was made. A strong dissent by some members of the
NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2) be
extended to creditors principally secured by the debtor's principal residence.
Additionally, the NBRC's report recommends that a creditor's secured claim in
real property should be determined by the property's fair market value, less
hypothetical costs of sale. The standard advocated by this recommendation would
not apply to mortgages on the primary residence of a Chapter 11 or 13 debtor who
retains the residence if the mortgages are protected from modification such as
those senior mortgages not subject to modification under Bankruptcy Code
Sections 1322(b)(2) and 1123(b)(5). The final NBRC report may ultimately lead to
substantive changes to the existing Bankruptcy Code, such as reducing
outstanding loan balances to the appraised value of a debtor's principal
residence at the time the security interest in the property was taken, which
could affect the mortgage loans included in a trust fund and the enforcement of
rights therein.
Several tax liens arising under the Code, may provide priority over the
lien of a mortgage or deed of trust. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of single family mortgage loans by numerous federal and state consumer
protection laws. These laws include the Federal Truth-in-Lending Act, Regulation
Z, Real Estate Settlement Procedures Act, Regulation X, Equal Credit Opportunity
Act, Regulation B, Fair Credit Billing Act, Fair Housing Act, Fair Credit
Reporting Act and related statutes. These federal laws impose specific statutory
liabilities upon lenders who originate mortgage loans and who fail to comply
with the provisions of the law. This liability may affect assignees of the
mortgage loans. In particular, the originators' failure to comply with
requirements of the Federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of the obligations to monetary
penalties and could result in obligors' rescinding loans against either
originators or assignees.
In addition, some of the Mortgage Loans may be subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Home Ownership and Equity Protection Act of 1994
(the "Homeownership Act"), if such Mortgage Loans were originated on or after
October 1, 1995, are not loans made to finance the purchase of the mortgaged
property and have mortgage rates or origination costs in excess of certain
prescribed levels (the "High Cost Loans"). The Homeownership Act requires
certain additional disclosures, specifies the timing of those disclosures and
limits or prohibits inclusion of certain provisions in mortgages subject to the
Homeownership Act. Purchasers or assignees of any High Cost Loan, including the
trust, could be liable under federal law for all claims and subject to all
defenses that the borrower could assert against the originator of the High Cost
Loan, under the federal Truth-in-Lending Act or any other law, unless the
purchaser or assignee did not know and could not with reasonable diligence have
determined that the loan was subject to the provisions of the Homeownership Act.
Remedies available to the borrower include monetary penalties, as well as
rescission rights if appropriate disclosures were not given as required or if
the particular mortgage includes provisions prohibited by the law. The maximum
damages that may be recovered under these provisions from an
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assignee, including the trust, is the remaining amount of indebtedness plus the
total amount paid by the borrower in connection with the Mortgage Loan.
FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Several courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral, which, in the case of a
cooperative loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement, was conducted in a commercially
reasonable manner.
JUNIOR MORTGAGES
The mortgage loans may be secured by junior mortgages or deeds of trust,
which are junior to senior mortgages or deeds of trust which are not part of the
trust fund. The rights of the securityholders as the holders of a junior deed of
trust or a junior mortgage are subordinate in lien priority and in payment
priority to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale in
accordance with the deed of trust, the junior mortgagee's or junior
beneficiary's lien will be extinguished unless the junior lienholder satisfies
the defaulted senior loan or asserts its subordinate interest in a property in
foreclosure proceedings. See "--Foreclosure on Mortgages."
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. If there is a
conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends sums, these sums will generally
have priority over all sums due under the junior mortgage.
HOME EQUITY LINE OF CREDIT LOANS
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make home equity line of credit loans typically
contains a 'future advance' clause, which provides, in essence, that additional
amounts advanced to or on behalf of the borrower by the beneficiary or lender
are to be secured by the deed of trust or mortgage. Any amounts so advances
after the cut-off date with respect to any Mortgage will not be included in the
trust fund. The priority of the lien securing any advance made under the clause
may depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of the intervening junior trust deeds
or mortgages and other liens at the time of the advance. In most states, the
trust deed or mortgage liens securing mortgage loans of the type which includes
home equity credit lines applies retroactively to the date of the original
recording of the trust deed or mortgage, provided that the total amount of
advances under the home equity credit line does not exceed the maximum specified
principal amount of the recorded trust deed or
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mortgage, except as to advances made after receipt by the lender of a written
notice of lien from a judgment lien creditor of the trustor.
CONSUMER PROTECTION LAWS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS AND HOME
IMPROVEMENT CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act, Regulation Z, the Equal Credit Opportunity Act,
Regulation B, the Fair Credit Reporting Act, the Real Estate Settlement
Procedures Act, Regulation X, the Fair Housing Act and related statutes. These
laws can impose specific statutory liabilities upon creditors who fail to comply
with their provisions. This liability may affect an assignee's ability to
enforce a contract. In particular, the originators' failure to comply with
requirements of the Federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of the obligations to monetary
penalties and could result in obligors' rescinding the contracts against either
the originators or assignees. Further, if the manufactured housing contracts or
home improvement contracts are deemed High Cost Loans within the meaning of the
Homeownership Act, they would be subject to the same provisions of the
Homeownership Act as mortgage loans as described in "--Anti-Deficiency
Legislation and Other Limitations on Lenders" above.
Manufactured housing contracts and home improvement contracts often contain
provisions obligating the obligor to pay late charges if payments are not timely
made. Federal and state law may specifically limit the amount of late charges
that may be collected. Unless the prospectus supplement indicates otherwise,
under the related servicing agreement, late charges will be retained by the
master servicer as additional servicing compensation, and any inability to
collect these amounts will not affect payments to securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission has
the effect of subjecting a seller, and related creditors and their assignees, in
a consumer credit transaction and any assignee of the creditor to all claims and
defenses which the debtor in the transaction could assert against the seller of
the goods. Liability under the FTC Rule is limited to the amounts paid by a
debtor on the contract, and the holder of the contract may also be unable to
collect amounts still due thereunder.
Most of the manufactured housing contracts and home improvement contracts
in a trust fund will be subject to the requirements of the FTC Rule.
Accordingly, the trustee, as holder of the manufactured housing contracts or
home improvement contracts, will be subject to any claims or defenses that the
purchaser of the related home or manufactured home may assert against the seller
of the home or manufactured home, subject to a maximum liability equal to the
amounts paid by the obligor on the manufactured housing contract or home
improvement contract. If an obligor is successful in asserting this type of
claim or defense, and if the mortgage loan seller had or should have had
knowledge of that claim or defense, the master servicer will have the right to
require the mortgage loan seller to repurchase the manufactured housing contract
or home
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improvement contract because of a breach of its mortgage loan seller's
representation and warranty that no claims or defenses exist that would affect
the obligor's obligation to make the required payments under the manufactured
housing contract or home improvement contract. The mortgage loan seller would
then have the right to require the originating dealer to repurchase the
manufactured housing contract from it and might also have the right to recover
from the dealer for any losses suffered by the mortgage loan seller with respect
to which the dealer would have been primarily liable to the obligor.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions including federal bankruptcy laws and
related state laws may interfere with or affect the ability of a lender to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
lender from repossessing a home, and as part of the rehabilitation plan reduce
the amount of the secured indebtedness to the market value of the home at the
time of bankruptcy, as determined by the court, leaving the party providing
financing as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness.
ENFORCEABILITY OF PROVISIONS
The mortgage loans in a trust fund will in most cases contain due-on-sale
clauses. These clauses permit the lender to accelerate the maturity of the loan
if the borrower sells, transfers, or conveys the property without the prior
consent of the lender. The enforceability of these clauses has been impaired in
various ways in several states by statute or decisional law. The ability of
lenders and their assignees and transferees to enforce due-on-sale clauses was
addressed by the Garn-St Germain Depository Institutions Act of 1982. This
legislation, subject to exceptions, preempts state constitutional, statutory and
case law that prohibits the enforcement of due-on-sale clauses. The Garn-St
Germain Act does encourage lenders to permit assumptions of loans at the
original rate of interest or at another rate less than the average of the
original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act, including federal savings
and loan associations and federal savings banks, may not exercise a due-on-sale
clause, even though a transfer of the property may have occurred. These include
intra-family transfers, some transfers by operation of law, leases of fewer than
three years and the creation of a junior encumbrance. Regulations promulgated
under the Garn-St Germain Act also prohibit the imposition of a prepayment
penalty upon the acceleration of a loan in accordance with a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the mortgage loans related to a series and the number of mortgage loans
that may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES UNDER MANUFACTURED HOUSING CONTRACTS
Generally, manufactured housing contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
the contracts by the obligee on the contract upon any sale or transfer that is
not consented to. The master servicer will, to the extent it has knowledge of
the conveyance or proposed conveyance, exercise or cause to be exercised its
rights to accelerate the maturity of the related manufactured housing contract
through enforcement of due-on-sale clauses, subject to applicable state law. The
transfer
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may be made by a delinquent obligor in order to avoid a repossession proceeding
with respect to a manufactured home.
In the case of a transfer of a manufactured home as to which the master
servicer desires to accelerate the maturity of the related manufactured housing
contract, the master servicer's ability to do so will depend on the
enforceability under state law of the due-on-sale clause. The Garn-St Germain
Act preempts, subject to exceptions and conditions, state laws prohibiting
enforcement of due-on-sale clauses applicable to the manufactured homes.
Consequently, the master servicer may be prohibited from enforcing a due-on-sale
clause in respect of those manufactured homes.
PREPAYMENT CHARGES AND PREPAYMENTS
The regulations of the Federal Home Loan Bank Board, predecessor to 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 to a refinancing lender.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, and, unless rents are to be paid directly to the
lender, retains a revocable license to collect the rents for so long as there is
no default. If the borrower defaults, the license terminates and the lender is
entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents. In addition, if bankruptcy or similar
proceedings are commenced by or in respect of the borrower, the lender's ability
to collect the rents may be adversely affected. In the event of borrower
default, the amount of rent the lender is able to collect from the tenants can
significantly affect the value of the lender's security interest.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor, as junior loans often do, and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan or
any junior loan, or both, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
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
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lenders after March 31, 1980. A similar federal statute was in effect with
respect to mortgage loans made during the first three months of 1980. The
statute authorized any state to reimpose interest rate limits by adopting before
April 1, 1983 a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Several
states have taken action to reimpose interest rate limits or to limit discount
points or other charges.
The depositor has been advised by counsel that a court interpreting Title V
would hold that mortgage loans originated on or after January 1, 1980 are
subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of the mortgage
loans, any such limitation under the state's usury law would not apply to the
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loans originated after the date of that state action will be eligible for
inclusion in a trust fund if the mortgage loans bear interest or provide for
discount points or charges in excess of permitted levels. No mortgage loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
Title V also provides that state usury limitations do not apply to any loan
that is secured by a first lien on specific kinds of manufactured housing if
certain conditions are met, including 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 or foreclosure with respect to the related
unit. Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
In any state in which application of Title V was expressly rejected or a
provision limiting discount points or other charges has been adopted, no
manufactured housing contract which imposes finance charges or provides for
discount points or charges in excess of permitted levels has been included in
the trust fund.
ALTERNATIVE MORTGAGE INSTRUMENTS
ARM Loans originated by non-federally chartered lenders have historically
been subject to a variety of restrictions. These restrictions differed from
state to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender complied
with applicable law. These difficulties were simplified substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act. Title VIII
provides that, notwithstanding any state law to the contrary,
o state-chartered banks may originate alternative mortgage instruments,
including ARM Loans, in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative
mortgage instruments by national banks,
o state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National
Credit Union Administration with respect to origination of alternative
mortgage instruments by federal credit unions, and
o all other non-federally chartered housing creditors, including, without
limitation, state-chartered savings and loan associations, savings
banks and mutual savings banks and mortgage banking companies may
originate alternative mortgage instruments in accordance with the
regulations
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promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan
associations.
Title VIII further provides that any state may reject applicability of the
provisions of Title VIII by adopting prior to October 15, 1985 a law or
constitutional provision expressly rejecting the applicability of these
provisions. Several states have taken this type of action.
The depositor has been advised by counsel that a court interpreting Title
VIII would hold that ARM Loans that were originated by state-chartered lenders
before the date of enactment of any state law or constitutional provision
rejecting applicability of Title VIII would not be subject to state laws
imposing restrictions or prohibitions on the ability of state-chartered lenders
to originate alternative mortgage instruments.
The Alternative Mortgage Transactions Parity Act permits the collection of
prepayment charges in connection with some types of eligible mortgage loans,
preempting any contrary state law prohibitions. However, some states, such as
Virginia, may not recognize the preemptive authority of the Parity Act.
All of the ARM Loans in a trust fund that were originated by a
state-chartered lender after the enactment of a state law or constitutional
provision rejecting the applicability of Title VIII will have complied with
applicable state law. All of the ARM Loans in a trust fund that were originated
by federally chartered lenders or that were originated by state-chartered
lenders prior to enactment of a state law or constitutional provision rejecting
the applicability of Title VIII will have been originated in compliance with all
applicable federal regulations.
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOMES
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials including components of manufactured housing such as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any loan or contract secured by a manufactured home with
respect to which a formaldehyde claim has been successfully asserted may be
liable to the obligor for the amount paid by the obligor on the related loan or
contract and may be unable to collect amounts still due under the loan or
contract. The successful assertion of this type of claim will constitute a
breach of a representation or warranty of the mortgage loan seller, and the
securityholders would suffer a loss only to the extent that:
o the mortgage loan seller breached its obligation to repurchase the loan
or contract in the event an obligor is successful in asserting the
claim, and
o the mortgage loan seller, the depositor or the trustee were
unsuccessful in asserting any claim of contribution or subrogation on
behalf of the securityholders against the manufacturer or other persons
who were directly liable to the plaintiff for the damages.
Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the
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result that recoveries from the manufacturers, suppliers or other persons may be
limited to their corporate assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, a borrower who enters military service after the origination of that
borrower's mortgage loan, including a borrower who was in reserve status and is
called to active duty after origination of the mortgage loan, may not be charged
interest, including fees and charges, above an annual rate of 6% during the
period of that borrower's active duty status unless a court orders otherwise
upon application of the lender. The Relief Act applies to borrowers who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard, and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to borrowers who enter military
service, including reservists who are called to active duty, after origination
of the related mortgage loan no information can be provided as to the number of
loans that may be affected by the Relief Act. Application of the Relief Act
would adversely affect, for an indeterminate period of time, the ability of the
master servicer to collect full amounts of interest on the applicable mortgage
loans. Any shortfalls in interest collections resulting from the application of
the Relief Act would result in a reduction of the amounts distributable to the
holders of the related series of securities, and would not be covered by
advances or, unless specified in the related prospectus supplement, any form of
credit support provided in connection with the securities. In addition, the
Relief Act imposes limitations that would impair the ability of the master
servicer to foreclose on an affected mortgage loan, cooperative loan or enforce
rights under a manufactured housing contract during the borrower's period of
active duty status, and, sometimes, during an additional three month period
thereafter. Thus, if the Relief Act applies to any mortgage asset that goes into
default, there may be delays in payment and losses incurred by the related
securityholders.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended, and under several state laws, a secured party which
takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property may become liable for the
costs of cleaning up hazardous substances regardless of whether they have
contaminated the property. CERCLA imposes strict as well as joint and several
liability on several classes of potentially responsible parties, including
current owners and operators of the property who did not cause or contribute to
the contamination. Furthermore, liability under CERCLA is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Lenders may be held liable under CERCLA as owners or
operators unless they qualify for the secured creditor exemption to CERCLA. This
exemption exempts from the definition of owners and operators those who, without
participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility. What constitutes
sufficient participation in the management of a property securing a loan or the
business of a borrower to render the exemption unavailable to a lender has been
a matter of interpretation by the courts. CERCLA has been interpreted to impose
liability on a secured party even absent foreclosure where the party
participated in the financial management of the borrower's business to a degree
indicating a capacity to influence waste disposal decisions. However, court
interpretations of the secured creditor exemption have been inconsistent. In
addition, when lenders foreclose and become owners of collateral property,
courts are inconsistent as to whether that ownership renders the secured
creditor exemption unavailable. Other federal and state laws may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead- based paint. Environmental cleanup costs may be
substantial. It is possible that the cleanup costs could become a liability of a
trust fund and reduce the amounts otherwise distributable to the holders
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of the related series of securities. Moreover, there are federal statutes and
state statutes that impose an environmental lien for any cleanup costs incurred
by the state on the property that is the subject of the cleanup costs. All
subsequent liens on a property generally are subordinated to an environmental
lien and in some states even prior recorded liens are subordinated to
environmental liens. In the latter states, the security interest of the trust
fund in a related parcel of real property that is subject to an environmental
lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the master servicer has
not made and will not make these kinds of evaluations prior to the origination
of the mortgage loans. Neither the master servicer nor any replacement servicer
will be required by any servicing agreement to undertake any environmental
evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure. The
master servicer will not make any representations or warranties or assume any
liability with respect to the absence or effect of contaminants on any related
real property or any casualty resulting from the presence or effect of
contaminants. The master servicer will not be obligated to foreclose on related
real property or accept a deed-in-lieu of foreclosure if it knows or reasonably
believes that there are material contaminated conditions on a property. A
failure so to foreclose may reduce the amounts otherwise available to
securityholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations statute can be seized by the government if the property
was used in or purchased with the proceeds of these crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984 the government may
seize the property even before conviction. The government must publish notice of
the forfeiture proceeding and may give notice to all parties "known to have an
alleged interest in the property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was at the
time of execution of the mortgage "reasonably without cause to believe" that the
property was used in or purchased with the proceeds of illegal drug or RICO
activities.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 and as a result, a mortgage loan that provided for
negative amortization violated New Hampshire's requirement that first mortgage
loans provide for computation of interest on a simple interest basis. The
holding was limited to the effect of DIDMC on state laws regarding the
compounding of interest and the court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender to
make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
INSTALLMENT CONTRACTS
The trust fund may also consist of installment sales contracts. Under an
installment sales contract the seller, referred to in this section as the
"lender", retains legal title to the property and enters into an agreement with
the purchaser, referred to in this section as the "borrower", for the payment of
the purchase
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price, plus interest, over the term of such contract. Only after full
performance by the borrower of the installment contract is the lender obligated
to convey title to the property to the purchaser. As with mortgage or deed of
trust financing, during the effective period of the installment contract the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing or able pursuant to state statute to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in such a
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is pursued if the borrower has filed
the installment contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under such statutes a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally the lender's procedures for obtaining possession and
clear title under an installment contract in a given state are simpler and less
time consuming and costly than are the procedures for foreclosing and obtaining
clear title to a property subject to one or more liens.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is the opinion of Thacher Proffitt & Wood,
counsel to the depositor, with respect to the material federal income tax
consequences of the purchase, ownership and disposition of the securities
offered under this prospectus and the prospectus supplement. This discussion is
for securityholders that hold the securities as capital assets within the
meaning of Section 1221 of the Code and does not purport to discuss all federal
income tax consequences that may be applicable to the individual circumstances
of banks, insurance companies, foreign investors, tax-exempt organizations,
dealers in securities or currencies, mutual funds, real estate investment
trusts, S corporations, estates and trusts, securityholders that hold the
securities as part of a hedge, straddle or, an integrated or conversion
transaction, or securityholders whose functional currency is not the United
States dollar.
The authorities on which this discussion and the opinion referred to below
are based are subject to change or differing interpretations which could apply
retroactively. Prospective investors should note that no rulings have been or
will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given that the IRS will
not take contrary positions. Taxpayers and preparers of tax returns should be
aware that under applicable Treasury regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice (1) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (2) is directly relevant to the determination of an
entry on a tax return. Accordingly, it is suggested that taxpayers consult their
own tax advisors and tax return
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preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed in this prospectus. In addition to
the federal income tax consequences described in this prospectus, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the securities. See "State and Other Tax
Consequences."
The following discussion addresses securities of five general types:
o REMIC Certificates representing interests in a trust fund, or a portion
thereof, that the trustee will elect to have treated as a REMIC under
the REMIC Provisions of the Code,
o Notes representing indebtedness of an owner trust for federal income
tax purposes,
o Grantor Trust Certificates representing interests in a Grantor Trust
Fund as to which no REMIC or FASIT election will be made,
o Partnership Certificates representing interests in a Partnership Trust
Fund which is treated as a partnership for federal income tax purposes,
and
o Debt Certificates representing indebtedness of a Partnership Trust Fund
for federal income tax purposes.
o FASIT Securities representing interests in a trust fund, or a portion
thereof, that the trustee will elect to have treated as a FASIT under
the FASIT Provisions of the Code.
The prospectus supplement for each series of certificates will indicate
whether one or more REMIC of FASIT elections will be made for the related trust
fund and will identify all regular interests and residual interests in the REMIC
or REMICs or the "regular interests," "high yield regular interests" or
"ownership interests" in the FASIT, as the case may be. For purposes of this tax
discussion, references to a securityholder or a holder are to the beneficial
owner of a security.
The following discussion is based in part upon the OID Regulations and in
part upon REMIC Regulations. The OID Regulations do not adequately address
issues relevant to the offered securities. As described at "Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount," in some instances the
OID Regulations provide that they are not applicable to securities like the
offered securities.
REMICS
CLASSIFICATION OF REMICS. On or prior to the date of the related
prospectus supplement with respect to the issuance of each series of REMIC
Certificates, counsel to the depositor will provide its opinion that, assuming
compliance with all provisions of the related pooling and servicing agreement,
for federal income tax purposes, the related trust fund or each applicable
portion of the related trust fund will qualify as a REMIC and the offered REMIC
Certificates will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in that REMIC within the meaning of
the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for status as a REMIC during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and for later years. In that event, the entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described under "Taxation
of Owners of REMIC Regular Certificates" and "Taxation of Owners of REMIC
Residual Certificates." Although the Code authorizes the Treasury
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Department to issue regulations providing relief in the event of an inadvertent
termination of REMIC status, these regulations have not been issued. If these
regulations are issued, relief in the event of an inadvertent termination may be
accompanied by sanctions, which may include the imposition of a corporate tax on
all or a portion of the REMIC's income for the period in which the requirements
for status as a REMIC are not satisfied. The pooling and servicing agreement
with respect to each REMIC will include provisions designed to maintain the
trust fund's status as a REMIC under the REMIC Provisions. It is not anticipated
that the status of any trust fund as a REMIC will be inadvertently terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. Except as provided
in the following sentence, the REMIC Certificates will be real estate assets
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion as the assets of the
REMIC underlying the certificates. If 95% or more of the assets of the REMIC
qualify for either of the treatments described in the previous sentence at all
times during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest,
including original issue discount, on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that the certificates are
treated as real estate assets within the meaning of Section 856(c)(4)(A) of the
Code. In addition, the REMIC Regular Certificates will be qualified mortgages
within the meaning of Section 860G(a)(3) of the Code if transferred to another
REMIC on its startup day in exchange for regular or residual interests of that
REMIC. The determination as to the percentage of the REMIC's assets that
constitute assets described in these sections of the Code will be made for each
calendar quarter based on the average adjusted basis of each category of the
assets held by the REMIC during the calendar quarter. The trustee will report
those determinations to certificateholders in the manner and at the times
required by Treasury regulations.
The assets of the REMIC will include mortgage loans, payments on mortgage
loans held prior to the distribution of these payments to the REMIC Certificates
and any property acquired by foreclosure held prior to the sale of this
property, and may include amounts in reserve accounts. It is unclear whether
property acquired by foreclosure held prior to the sale of this property and
amounts in reserve accounts would be considered to be part of the mortgage
loans, or whether these assets otherwise would receive the same treatment as the
mortgage loans for purposes of all of the Code sections discussed in the
immediately preceding paragraph. The related prospectus supplement will describe
the mortgage loans that may not be treated entirely as assets described in the
sections of the Code discussed in the immediately preceding paragraph. The REMIC
Regulations do provide, however, that cash received from payments on mortgage
loans held pending distribution is considered part of the mortgage loans for
purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property
will qualify as real estate assets under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES. For a series of REMIC Certificates, two or more
separate elections may be made to treat designated portions of the related trust
fund as REMICs for federal income tax purposes, creating a tiered REMIC
structure. As to each series of REMIC Certificates that is a tiered REMIC
structure, in the opinion of counsel to the depositor, assuming compliance with
all provisions of the related pooling and servicing agreement, each of the
REMICs in that series will qualify as a REMIC and the REMIC Certificates issued
by these REMICs will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
real estate assets within the meaning of Section 856(c)(4)(A) of the Code, and
loans secured by an interest in real property under Section 7701(a)(19)(C) of
the Code, and whether the income on the certificates is interest described in
Section 856(c)(3)(B) of the Code, all of the REMICs in that series will be
treated as one REMIC.
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TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL. Except as described in "Taxation of Owners of REMIC Residual
Certificates--Possible Pass-Through of Miscellaneous Itemized Deductions," REMIC
Regular Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, holders of REMIC Regular Certificates that ordinarily
report income under a cash method of accounting will be required to report
income for REMIC Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT. A REMIC Regular Certificate may be issued with
original issue discount within the meaning of Section 1273(a) of the Code. Any
holder of a REMIC Regular Certificate issued with original issue discount will
be required to include original issue discount in income as it accrues, in
accordance with the constant yield method, in advance of the receipt of the cash
attributable to that income if the original issue discount exceeds a DE MINIMIS
amount. In addition, Section 1272(a)(6) of the Code provides special rules
applicable to REMIC Regular Certificates and other debt instruments issued with
original issue discount. Regulations have not been issued under that section.
The Code requires that a reasonable Prepayment Assumption be used for
mortgage loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of that discount to
reflect differences between the actual prepayment rate and the Prepayment
Assumption. The Prepayment Assumption is to be determined in a manner prescribed
in Treasury regulations; as noted in the preceding paragraph, those regulations
have not been issued. The Committee Report indicates that the regulations will
provide that the Prepayment Assumption used for a REMIC Regular Certificate must
be the same as that used in pricing the initial offering of the REMIC Regular
Certificate. The Prepayment Assumption used in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
none of the depositor, the master servicer or the trustee will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold, excluding sales to bond houses, brokers and underwriters. If
less than a substantial amount of a class of REMIC Regular Certificates is sold
for cash on or prior to the closing date, the issue price for that class will be
the fair market value of that class on the closing date. Under the OID
Regulations, the stated redemption price of a REMIC Regular Certificate is equal
to the total of all payments to be made on the certificate other than qualified
stated interest. Qualified stated interest is interest that is unconditionally
payable at least annually during the entire term of the instrument at a single
fixed rate, a qualified floating rate, an objective rate, a combination of a
single fixed rate and one or more qualified floating rates or one qualified
inverse floating rate, or a combination of qualified floating rates that does
not operate in a manner that accelerates or defers interest payments on the
REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
the REMIC Regular Certificates. If the original issue discount rules apply to
the certificates in a particular series, the related prospectus supplement will
describe the manner in which these rules will be applied with respect to the
certificates in that series that bear an adjustable interest rate in preparing
information returns to the certificateholders and the IRS.
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The first interest payment on a REMIC Regular Certificate may be made more
than one month after the date of issuance, which is a period longer than the
subsequent monthly intervals between interest payments. Assuming the accrual
period for original issue discount is each monthly period that ends on the day
prior to each distribution date, as a consequence of this long first accrual
period some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
If the accrued interest to be paid on the first distribution date is
computed for a period that begins prior to the closing date, a portion of the
purchase price paid for a REMIC Regular Certificate will reflect the accrued
interest. In these cases, information returns to the certificateholders and the
IRS will take the position that the portion of the purchase price paid for the
interest accrued for periods prior to the closing date is part of the overall
cost of the REMIC Regular Certificate, and not a separate asset the cost of
which is recovered entirely out of interest received on the next distribution
date, and that portion of the interest paid on the first distribution date in
excess of interest accrued for a number of days corresponding to the number of
days from the closing date to the first distribution date should be included in
the stated redemption price of the REMIC Regular Certificate. However, the OID
Regulations state that all or a portion of the accrued interest may be treated
as a separate asset the cost of which is recovered entirely out of interest paid
on the first distribution date. It is unclear how an election to do so would be
made under the OID Regulations and whether this election could be made
unilaterally by a certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
DE MINIMIS if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of a REMIC Regular Certificate is computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of the REMIC Regular Certificate, by multiplying (1) the number of
complete years from the issue date until that payment is expected to be made,
presumably taking into account the Prepayment Assumption, by (2) a fraction, the
numerator of which is the amount of the payment, and the denominator of which is
the stated redemption price at maturity of the REMIC Regular Certificate. Under
the OID Regulations, original issue discount of only a DE MINIMIS amount, other
than DE MINIMIS original issue discount attributable to a teaser interest rate
or an initial interest holiday, will be included in income as each payment of
stated principal is made, based on the product of the total amount of the DE
MINIMIS original issue discount attributable to that certificate and a fraction,
the numerator of which is the amount of the principal payment and the
denominator of which is the outstanding stated principal amount of the REMIC
Regular Certificate. The OID Regulations also would permit a certificateholder
to elect to accrue DE MINIMIS original issue discount into income currently
based on a constant yield method. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount" for a description of this election under the OID
Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
DE MINIMIS amount, the holder of the certificate must include in ordinary gross
income the sum of the daily portions of original issue discount for each day
during its taxable year on which it held the REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as described in the following
paragraph.
An accrual period is a period that ends on the day prior to a distribution
date and begins on the first day following the immediately preceding accrual
period, except that the first accrual period begins on the closing date. As to
each accrual period, a calculation will be made of the portion of the original
issue discount that
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accrued during the accrual period. The portion of original issue discount that
accrues in any accrual period will equal the excess of (1) the sum of (a) the
present value, as of the end of the accrual period, of all of the distributions
remaining to be made on the REMIC Regular Certificate in future periods and (b)
the distributions made on the REMIC Regular Certificate during the accrual
period of amounts included in the stated redemption price, over (2) the adjusted
issue price of the REMIC Regular Certificate at the beginning of the accrual
period. The present value of the remaining distributions referred to in the
preceding sentence will be calculated assuming that distributions on the REMIC
Regular Certificate will be received in future periods based on the mortgage
loans being prepaid at a rate equal to the Prepayment Assumption, using a
discount rate equal to the original yield to maturity of the certificate and
taking into account events, including actual prepayments, that have occurred
before the close of the accrual period. For these purposes, the original yield
to maturity of the certificate will be calculated based on its issue price and
assuming that distributions on the certificate will be made in all accrual
periods based on the mortgage loans being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of the
certificate, increased by the aggregate amount of original issue discount that
accrued with respect to the certificate in prior accrual periods, and reduced by
the amount of any distributions made on the certificate in prior accrual periods
of amounts included in the stated redemption price. The original issue discount
accruing during any accrual period will be allocated ratably to each day during
the accrual period to determine the daily portion of original issue discount for
that day.
If a REMIC Regular Certificate issued with original issue discount is
purchased at a cost, excluding any portion of the cost attributable to accrued
qualified stated interest, less than its remaining stated redemption price, the
purchaser will also be required to include in gross income the daily portions of
any original issue discount for the certificate. However, if the cost of the
certificate is in excess of its adjusted issue price, each daily portion will be
reduced in proportion to the ratio the excess bears to the aggregate original
issue discount remaining to be accrued on the REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (1) the adjusted issue price or, in the case of the first accrual period,
the issue price, of the certificate at the beginning of the accrual period which
includes that day and (2) the daily portions of original issue discount for all
days during the accrual period prior to that day.
MARKET DISCOUNT. A certificateholder that purchases a REMIC Regular
Certificate at a market discount will recognize gain upon receipt of each
distribution representing stated redemption price. A REMIC Regular Certificate
issued without original issue discount will have market discount if purchased
for less than its remaining stated principal amount and a REMIC Regular
Certificate issued with original issue discount will have market discount if
purchased for less than its adjusted issue price. Under Section 1276 of the
Code, a certificateholder that purchases a REMIC Regular Certificate at a market
discount in excess of a DE MINIMIS amount will be required to allocate the
portion of each distribution representing stated redemption price first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent. A certificateholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis. If made, the election will apply to all market discount bonds
acquired by the certificateholder on or after the first day of the first taxable
year to which the election applies. In addition, the OID Regulations permit a
certificateholder to elect to accrue all interest and discount in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that the certificateholder acquires during
the taxable year of the election or later taxable years, and possibly previously
acquired instruments. Similarly, a certificateholder that made this election for
a certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the
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certificateholder owns or acquires. Each of these elections to accrue interest,
discount and premium with respect to a certificate on a constant yield method or
as interest would be irrevocable, except with the approval of the IRS. See
"Taxation of Owners of REMIC Regular Certificates--Premium" below.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be DE MINIMIS for purposes of Section 1276 of the Code if the
market discount is less than 0.25% of the remaining stated redemption price of
the REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as DE MINIMIS under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a DE MINIMIS amount. This treatment would result in discount being included
in income at a slower rate than discount would be required to be included in
income using the method described above. See "Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, the rules
described in the Committee Report apply. The Committee Report indicates that in
each accrual period market discount on REMIC Regular Certificates should accrue,
at the certificateholder's option:
(1) on the basis of a constant yield method,
(2) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid in the accrual
period bears to the total amount of stated interest remaining to be
paid on the REMIC Regular Certificate as of the beginning of the
accrual period, or
(3) in the case of a REMIC Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining on the
REMIC Regular Certificate at the beginning of the accrual period.
Moreover, the Prepayment Assumption used in calculating the accrual of
original issue discount is also used in calculating the accrual of market
discount. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect these regulations might have
on the tax treatment of a REMIC Regular Certificate purchased at a discount in
the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of the certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of these methods,
less any accrued market discount previously reported as ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these
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purposes, the DE MINIMIS rule applies. Any such deferred interest expense would
not exceed the market discount that accrues during the taxable year and is, in
general, allowed as a deduction not later than the year in which the market
discount is includible in income. If a holder elects to include market discount
in income currently as it accrues on all market discount instruments acquired by
the holder in that taxable year or later taxable years, the interest deferral
rule will not apply.
PREMIUM. A REMIC Regular Certificate purchased at a cost, excluding any
portion of the cost attributable to accrued qualified stated interest, greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of a REMIC Regular Certificate may elect under Section 171
of the Code to amortize the premium under the constant yield method over the
life of the certificate. If made, the election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the certificateholder as having made the election to amortize premium
generally. The Committee Report states that the same rules that apply to accrual
of market discount, which rules will require use of a Prepayment Assumption in
accruing market discount with respect to REMIC Regular Certificates without
regard to whether the certificates have original issue discount, will also apply
in amortizing bond premium under Section 171 of the Code. See "Taxation of
Owners of REMIC Regular Certificates--Market Discount" above.
REALIZED LOSSES. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire the certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more realized losses on the mortgage loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until the holder's certificate
becomes wholly worthless, i.e., until its outstanding principal balance has been
reduced to zero, and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to the certificate, without
giving effect to any reduction in distributions attributable to defaults or
delinquencies on the mortgage loans or the certificate underlying the REMIC
Certificates, as the case may be, until it can be established the reduction
ultimately will not be recoverable. As a result, the amount of taxable income
reported in any period by the holder of a REMIC Regular Certificate could exceed
the amount of economic income actually realized by that holder in the period.
Although the holder of a REMIC Regular Certificate eventually will recognize a
loss or reduction in income attributable to previously accrued and included
income that as the result of a realized loss ultimately will not be realized,
the law is unclear with respect to the timing and character of this loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not subject to entity-level taxation, except with regard to
prohibited transactions and some other transactions. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the mortgage loans or as debt instruments issued
by the REMIC. See "--Prohibited Transactions Tax and Other Taxes" below.
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A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the holder owned the REMIC Residual Certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a 30 days per month/90 days per
quarter/360 days per year convention unless otherwise disclosed in the related
prospectus supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be portfolio income for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of passive losses.
A holder of a REMIC Residual Certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income, or net loss, of the REMIC for each day that it holds the REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss. The Committee Report indicates that some modifications of
the general rules may be made, by regulations, legislation or otherwise to
reduce, or increase, the income of a REMIC Residual Certificateholder that
purchased the REMIC Residual Certificate from a prior holder of the certificate
at a price greater than, or less than, the adjusted basis, the REMIC Residual
Certificate would have had in the hands of an original holder of the
certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of the REMIC Residual Certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that any of these payments would be
includible in income immediately upon its receipt, the IRS might assert that
these payments should be included in income over time according to an
amortization schedule or according to another method. Because of the uncertainty
concerning the treatment of these payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of these
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report, or the tax liability associated with the income, may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to excess inclusions, and
noneconomic residual interests discussed at "-Noneconomic REMIC Residual
Certificates." The fact that the tax liability associated with the income
allocated to REMIC Residual Certificateholders may exceed the cash distributions
received by the REMIC Residual Certificateholders for the corresponding period
may significantly adversely affect the REMIC Residual Certificateholders'
after-tax rate of return. This disparity between income and distributions may
not be offset by corresponding losses or reductions of income attributable to
the REMIC Residual Certificateholder until subsequent tax years and, then, may
not be completely offset due to changes in the Code, tax rates or character of
the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal
the income from the mortgage loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest, including original issue discount and reduced by any premium on
issuance, on the REMIC Regular
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Certificates, whether or not offered by the prospectus, amortization of any
premium on the mortgage loans, bad debt losses with respect to the mortgage
loans and, except as described below, for servicing, administrative and other
expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates, or if a class of REMIC Certificates is not sold
initially, their fair market values. The aggregate basis will be allocated among
the mortgage loans and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any offered REMIC Certificates
will be determined in the manner described above under "--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount." The issue price of a REMIC
Certificate received in exchange for an interest in the mortgage loans or other
property will equal the fair market value of the interests in the mortgage loans
or other property. Accordingly, if one or more classes of REMIC Certificates are
retained initially rather than sold, the trustee may be required to estimate the
fair market value of the interests in order to determine the basis of the REMIC
in the mortgage loans and other property held by the REMIC.
Subject to possible application of the DE MINIMIS rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to mortgage loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates. However, a REMIC that acquires loans at a market discount must
include the market discount in income currently, as it accrues, on a constant
yield basis. See "--Taxation of Owners of REMIC Regular Certificates" above,
which describes a method for accruing discount income that is analogous to that
required to be used by a REMIC as to mortgage loans with market discount that it
holds.
A mortgage loan will be deemed to have been acquired with either discount
or premium to the extent that the REMIC's basis in the mortgage loan is either
less than or greater than its stated redemption price. Any discount will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to the income, under a method similar to the method
described above for accruing original issue discount on the REMIC Regular
Certificates. It is anticipated that each REMIC will elect under Section 171 of
the Code to amortize any premium on the mortgage loans. Premium on any mortgage
loan to which the election applies may be amortized under a constant yield
method, presumably taking into account a Prepayment Assumption. This election
would not apply to any mortgage loan originated on or before September 27, 1985,
premium on which should be allocated among the principal payments on that
mortgage loan and be deductible by the REMIC as those payments become due or
upon the prepayment of the mortgage loan.
A REMIC will be allowed deductions for interest, including original issue
discount, on the REMIC Regular Certificates, whether or not offered by this
prospectus, equal to the deductions that would be allowed if these REMIC Regular
Certificates were indebtedness of the REMIC. Original issue discount will be
considered to accrue for this purpose as described above under "--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount," except that the
DE MINIMIS rule and the adjustments for subsequent holders of these REMIC
Regular Certificates will not apply.
Issue premium is the excess of the issue price of a REMIC Regular
Certificate over its stated redemption price. If a class of REMIC Regular
Certificates is issued with issue premium, the net amount of interest deductions
that are allowed the REMIC in each taxable year for the REMIC Regular
Certificates of that class will be reduced by an amount equal to the portion of
the issue premium that is considered to be amortized or repaid in that year.
Although the matter is not entirely clear, it is likely that issue premium would
be amortized under a constant yield method in a manner analogous to the method
of accruing original issue
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discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
Subject to the exceptions described in the following sentences, the
taxable income of a REMIC will be determined in the same manner as if the REMIC
were an individual having the calendar year as its taxable year and using the
accrual method of accounting. However, no item of income, gain, loss or
deduction allocable to a prohibited transaction will be taken into account. See
"--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code, allowing these deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income, will not be applied at the REMIC level and the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. These expenses will be allocated as a separate
item to the holders of REMIC Certificates, subject to the limitation of Section
67 of the Code. If the deductions allowed to the REMIC exceed its gross income
for a calendar quarter, the excess will be the net loss for the REMIC for that
calendar quarter. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for the REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased, but not below zero, by distributions made, and
by net losses allocated, to the REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent the net loss exceeds the REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of the calendar quarter, determined without regard to the net loss.
Any loss that is not currently deductible by reason of this limitation may be
carried forward indefinitely to future calendar quarters and, subject to the
same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds this adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. Holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that the distributions will be
treated as nontaxable returns of capital. Their bases in the REMIC Residual
Certificates will initially equal the amount paid for the REMIC Residual
Certificates and will be increased by the REMIC Residual Certificateholders'
allocable shares of taxable income of the REMIC. However, these bases increases
may not occur until the end of the calendar quarter, or perhaps the end of the
calendar year, with respect to which the REMIC taxable income is allocated to
the REMIC Residual Certificateholders. To the extent the REMIC Residual
Certificateholders' initial bases are less than the distributions to the REMIC
Residual Certificateholders, and increases in initial bases either occur after
the distributions or, together with their initial bases, are less than the
amount of the distributions, gain will be recognized by the REMIC Residual
Certificateholders on these distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of
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any net losses of the REMIC or upon the sale of its REMIC Residual Certificate.
See "--Sales of REMIC Certificates" Below.
For a discussion of possible modifications of these rules that may require
adjustments to income of a holder of a REMIC Residual Certificate other than an
original holder in order to reflect any difference between the cost of the REMIC
Residual Certificate to the REMIC Residual Certificateholder and the adjusted
basis the REMIC Residual Certificate would have in the hands of an original
holder. See "--Taxation of Owners of REMIC Residual Certificates--General"
above.
EXCESS INCLUSIONS. Any excess inclusions with respect to a REMIC Residual
Certificate will be subject to federal income tax in all events.
In general, the excess inclusions with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of
(1) the daily portions of REMIC taxable income allocable to the REMIC
Residual Certificate over
(2) the sum of the daily accruals for each day during the quarter that the
REMIC Residual Certificate was held by the REMIC Residual
Certificateholder.
The daily accruals of a REMIC Residual Certificateholder will be
determined by allocating to each day during a calendar quarter its ratable
portion of the product of the adjusted issue price of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120% of the long-term
Federal rate in effect on the closing date. For this purpose, the adjusted issue
price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Certificate,
increased by the sum of the daily accruals for all prior quarters and decreased,
but not below zero, by any distributions made with respect to the REMIC Residual
Certificate before the beginning of that quarter. The issue price of a REMIC
Residual Certificate is the initial offering price to the public, excluding bond
houses and brokers, at which a substantial amount of the REMIC Residual
Certificates were sold. The long-term Federal rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS. Although it has not done so, the
Treasury has authority to issue regulations that would treat the entire amount
of income accruing on a REMIC Residual Certificate as an excess inclusion if the
REMIC Residual Certificates are considered to have significant value.
For REMIC Residual Certificateholders, an excess inclusion:
(1) will not be permitted to be offset by deductions, losses or loss
carryovers from other activities,
(2) will be treated as unrelated business taxable income to an otherwise
tax-exempt organization and
(3) will not be eligible for any rate reduction or exemption under any
applicable tax treaty with respect to the 30% United States withholding
tax imposed on distributions to REMIC Residual Certificateholders that
are foreign investors. See, however, "--Foreign Investors in REMIC
Certificates" below.
Furthermore, for purposes of the alternative minimum tax, excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and alternative minimum taxable income may not be less
than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's income tax to
an amount lower than the alternative minimum tax on excess inclusions.
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In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
Residual Certificates, as reduced, but not below zero, by the real estate
investment trust taxable income, will be allocated among the shareholders of the
trust in proportion to the dividends received by the shareholders from the
trust, and any amount so allocated will be treated as an excess inclusion with
respect to a REMIC Residual Certificate as if held directly by the shareholder.
"Real estate investment trust taxable income" is defined by Section 857(b)(2) of
the Code, and as used in the prior sentence does not include any net capital
gain. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and cooperatives; the REMIC
Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the REMIC Regulations,
transfers of noneconomic REMIC Residual Certificates will be disregarded for all
federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the noneconomic REMIC Residual
Certificate. The REMIC Regulations provide that a REMIC Residual Certificate is
"noneconomic" unless, based on the Prepayment Assumption and on any required or
permitted clean up calls, or required liquidation provided for in the REMIC's
organizational documents, the present value of the expected future
distributions, discounted using the applicable Federal rate for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, on the REMIC
Residual Certificate equals at least the present value of the expected tax on
the anticipated excess inclusions, and the transferor reasonably expects that
the transferee will receive distributions with respect to the REMIC Residual
Certificate at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. Accordingly,
all transfers of REMIC Residual Certificates that may constitute noneconomic
residual interests will be subject to restrictions under the terms of the
related pooling and servicing agreement that are intended to reduce the
possibility of a transfer of REMIC Residual Certificates being disregarded.
These restrictions will require each party to a transfer to provide an affidavit
that no purpose of the transfer is to impede the assessment or collection of
tax, including representations as to the financial condition of the prospective
transferee, for which the transferor is also required to make a reasonable
investigation to determine the transferee's historic payment of its debts and
ability to continue to pay its debts as they come due in the future. Prior to
purchasing a REMIC Residual Certificate, a prospective purchaser should consider
the possibility that a purported transfer of the REMIC Residual Certificate by
that prospective purchaser to another purchaser at a future date may be
disregarded in accordance with the rule described in the first sentence of this
paragraph, which would result in the retention of tax liability by the
purchaser.
The IRS has issued proposed changes to the REMIC Regulations that would
add to the conditions necessary to assure that a transfer of a noneconomic
residual interest would be respected. The proposed additional condition would
require that the amount received by the transferee be no less on a present value
basis than the present value of the net tax detriment attributable to holding a
residual interest reduced by the present value of the projected payments to be
received on the residual interest. In Revenue Procedure 2001-12, pending
finalization of the new regulations, the IRS has expanded the "safe harbor" for
transfers of noneconomic residual interests to include certain transfers to
domestic taxable corporations with large amounts of gross and net assets where
agreement is made that all future transfers will be to taxable domestic
corporations in transactions that qualify for one of the "safe harbor"
provisions. Eligibility for this safe harbor requires, among other things, that
the facts and circumstances known to the transferor at the time of transfer not
indicate to a reasonable person that the taxes with respect to the residual
interest will not be paid, with an unreasonable low cost for the transfer
specifically mentioned as negating eligibility. These changes are proposed to be
effective for transfers of residual interests occurring after February 4, 2000.
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The related prospectus supplement will disclose whether offered REMIC
Residual Certificates may be considered noneconomic residual interests under the
REMIC Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will not be considered noneconomic will be based upon assumptions,
and the depositor will make no representation that a REMIC Residual Certificate
will not be considered noneconomic for purposes of the rules described in the
preceding paragraph. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES. In general, all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment, must be marked to market in accordance with the applicable Code
provision and the related regulations. Under Treasury regulations, a REMIC
Residual Certificate acquired after January 4, 1995 is not treated as a security
and thus may not be marked to market.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of these fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Except as stated in the
related prospectus supplement, these fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a pass-through entity beneficially owned by one or more individuals,
estates or trusts,
o an amount equal to the individual's, estate's or trust's share of the
fees and expenses will be added to the gross income of the holder, and
o the individual's, estate's or trust's share of the fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject
to the limitation of Section 67 of the Code.
Section 67 of the Code permits these deductions only to the extent they
exceed in the aggregate two percent of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (1) 3% of the excess of the
individual's adjusted gross income over that amount or (2) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of a holder of a REMIC Certificate that is an individual, estate or trust, or a
pass-through entity beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for the holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of the fees and other deductions will be
included in the holder's gross income. Accordingly, these REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Prospective investors should consult with their own tax advisors prior
to making an investment in the certificates.
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SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will be:
o equal the cost of the REMIC Regular Certificate to the
certificateholder,
o increased by income reported by such certificateholder with respect to
the REMIC Regular Certificate, including original issue discount and
market discount income, and
o reduced, but not below zero, by distributions on the REMIC Regular
Certificate received by the certificateholder and by any amortized
premium.
The adjusted basis of a REMIC Residual Certificate will be determined as
described under "--Taxation of Owners of REMIC Residual Certificates--Basis
Rules, Net Losses and Distributions." Except as provided in the following four
paragraphs, gain or loss from the sale of a REMIC Certificate will be capital
gain or loss, provided the REMIC Certificate is held as a capital asset within
the meaning of Section 1221 of the Code.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent the gain does not
exceed the excess, if any, of (1) the amount that would have been includible in
the seller's income with respect to the REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the applicable Federal
rate, determined as of the date of purchase of the REMIC Regular Certificate,
over (2) the amount of ordinary income actually includible in the seller's
income prior to the sale. In addition, gain recognized on the sale of a REMIC
Regular Certificate by a seller who purchased the REMIC Regular Certificate at a
market discount will be taxable as ordinary income in an amount not exceeding
the portion of the discount that accrued during the period the REMIC Certificate
was held by the holder, reduced by any market discount included in income under
the rules described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium."
REMIC Certificates will be evidences of indebtedness within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which this section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a conversion transaction within the
meaning of Section 1258 of the Code. A conversion transaction includes a
transaction in which the taxpayer has taken two or more positions in the same or
similar property that reduce or eliminate market risk, if substantially all of
the taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate applicable Federal rate at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include the net capital
gain in total net investment income for the taxable year, for purposes of the
rule that limits the deduction of interest on indebtedness incurred to purchase
or carry property held for investment to a taxpayer's net investment income.
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Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires the REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a taxable mortgage pool, as defined in Section 7701(i) of the Code,
during the period beginning six months before, and ending six months after, the
date of the sale, such sale will be subject to the wash sale rules of Section
1091 of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to the REMIC Residual Certificateholder's adjusted basis in the newly- acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. In the event a
REMIC engages in a prohibited transaction, the Code imposes a 100% tax on the
income derived by the REMIC from the prohibited transaction. A prohibited
transaction may occur upon the disposition of a mortgage loan, the receipt of
income from a source other than a mortgage loan or 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 REMIC Certificates. It is not anticipated that any
REMIC will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, a contribution to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition on the REMIC of
a tax equal to 100% of the value of the contributed property. Each pooling and
servicing agreement will include provisions designed to prevent the acceptance
of any contributions that would be subject to this tax.
REMICs also are subject to federal income tax at the highest corporate rate
on net income from foreclosure property, determined by reference to the rules
applicable to real estate investment trusts. Net income from foreclosure
property generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
It is not anticipated that any REMIC will recognize net income from foreclosure
property subject to federal income tax.
To the extent permitted by then applicable laws, any tax resulting from a
prohibited transaction, tax resulting from a contribution made after the closing
date, tax on net income from foreclosure property or state or local income or
franchise tax that may be imposed on the REMIC will be borne by the related
master servicer or trustee in either case out of its own funds, provided that
the master servicer or the trustee has sufficient assets to do so, and provided
that the tax arises out of a breach of the master servicer's or the trustee's
obligations under the related pooling and servicing agreement and in respect of
compliance with applicable laws and regulations. Any of these taxes not borne by
the master servicer or the trustee will be charged against the related trust
fund resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS. If a REMIC Residual Certificate is transferred to a disqualified
organization, a tax would be imposed in an amount equal to the product of:
o the present value, discounted using the applicable Federal rate for
obligations whose term ends on the close of the last quarter in which
excess inclusions are expected to accrue with respect to the REMIC
Residual Certificate, of the total anticipated excess inclusions with
respect to the REMIC Residual Certificate for periods after the
transfer and
o the highest marginal federal income tax rate applicable to
corporations.
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The anticipated excess inclusions must be determined as of the date that
the REMIC Residual Certificate is transferred and must be based on events that
have occurred up to the time of the transfer, the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. The tax would be imposed on the transferor of
the REMIC Residual Certificate, except that where the transfer is through an
agent for a disqualified organization, the tax would instead be imposed on the
agent. However, a transferor of a REMIC Residual Certificate would in no event
be liable for the tax with respect to a transfer if the transferee furnishes to
the transferor an affidavit that the transferee is not a disqualified
organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. Moreover, an entity will not
qualify as a REMIC unless there are reasonable arrangements designed to ensure
that
o residual interests in the entity are not held by disqualified
organizations and
o information necessary for the application of the tax described herein
will be made available. Restrictions on the transfer of REMIC Residual
Certificates and other provisions that are intended to meet this
requirement will be included in the pooling and servicing agreement,
and will be discussed more fully in any prospectus supplement relating
to the offering of any REMIC Residual Certificate.
In addition, if a pass-through entity includes in income excess inclusions
with respect to a REMIC Residual Certificate, and a disqualified organization is
the record holder of an interest in the entity, then a tax will be imposed on
the entity equal to the product of (1) the amount of excess inclusions on the
REMIC Residual Certificate that are allocable to the interest in the
pass-through entity held by the disqualified organization and (2) the highest
marginal federal income tax rate imposed on corporations. A pass-through entity
will not be subject to this tax for any period, however, if each record holder
of an interest in the pass-through entity furnishes to the pass-through entity
o the holder's social security number and a statement under penalties of
perjury that the social security number is that of the record holder or
o a statement under penalties of perjury that the record holder is not a
disqualified organization. Notwithstanding the preceding two sentences,
in the case of a REMIC Residual Certificate held by an electing large
partnership, as defined in Section 775 of the Code, all interests in
the partnership shall be treated as held by disqualified organizations,
without regard to whether the record holders of the partnership furnish
statements described in the preceding sentence, and the amount that is
subject to tax under the second preceding sentence is excluded from the
gross income of the partnership allocated to the partners, in lieu of
allocating to the partners a deduction for the tax paid by the
partnership.
For these purposes, a disqualified organization means:
o the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of the foregoing, not including, however,
instrumentalities described in Section 168(h)(2)(D) of the Code or the
Federal Home Loan Mortgage Corporation,
o any organization, other than a cooperative described in Section 521 of
the Code, that is exempt from federal income tax, unless it is subject
to the tax imposed by Section 511 of the Code or
o any organization described in Section 1381(a)(2)(C) of the Code.
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For these purposes, a pass-through entity means any regulated investment
company, real estate investment trust, trust, partnership or other entity
described in Section 860E(e)(6)(B) of the Code. In addition, a person holding an
interest in a pass-through entity as a nominee for another person will, with
respect to the interest, be treated as a pass-through entity.
TERMINATION. A REMIC will terminate immediately after the distribution date
following receipt by the REMIC of the final payment in respect of the mortgage
loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual certificate, if the last distribution on the REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in the Certificate, the REMIC Residual Certificateholder should,
but may not, be treated as realizing a loss equal to the amount of the
difference, and the loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
The trustee or other party specified in the related prospectus supplement will
file REMIC federal income tax returns on behalf of the related REMIC, and under
the terms of the related pooling and servicing agreement, will either (1) be
irrevocably appointed by the holders of the largest percentage interest in the
related REMIC Residual Certificates as their agent to perform all of the duties
of the tax matters person with respect to the REMIC in all respects or (2) will
be designated as and will act as the tax matters person with respect to the
related REMIC in all respects and will hold at least a nominal amount of REMIC
Residual Certificates.
The trustee, as the tax matters person or as agent for the tax matters
person, subject to notice requirements and various restrictions and limitations,
generally will have the authority to act on behalf of the REMIC and the REMIC
Residual Certificateholders in connection with the administrative and judicial
review of items of income, deduction, gain or loss of the REMIC, as well as the
REMIC's classification. REMIC Residual Certificateholders generally will be
required to report such REMIC items consistently with their treatment on the
REMIC's tax return and may be bound by a settlement agreement between the
Trustee, as either tax matters person or as agent for the tax matters person,
and the IRS concerning any REMIC item subject to that settlement agreement.
Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of a REMIC Residual Certificateholder's return. Any person
that holds a REMIC Residual Certificate as a nominee for another person may be
required to furnish the REMIC, in a manner to be provided in Treasury
regulations, with the name and address of the person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC regular interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and some other non-individuals will be provided interest and
original issue discount income information and the information set forth in the
following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring the information to be reported to the IRS. Reporting with respect
to the REMIC Residual Certificates, including income, excess inclusions,
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investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
The REMIC Regular Certificate information reports will include a statement
of the adjusted issue price of the REMIC Regular Certificate at the beginning of
each accrual period. In addition, the reports will include information required
by regulations with respect to computing the accrual of any market discount.
Because exact computation of the accrual of market discount on a constant yield
method would require information relating to the holder's purchase price that
the REMIC may not have, Treasury regulations only require that information
pertaining to the appropriate proportionate method of accruing market discount
be provided. See "--Taxation of Owners of REMIC Regular Certificates--Market
Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by the Trustee or other party designated in the related prospectus
supplement.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the backup withholding tax under Section 3406 of
the Code at a rate of 31% if recipients of the payments fail to furnish to the
payor information including their taxpayer identification numbers, or otherwise
fail to establish an exemption from the backup withholding tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against the recipient's federal income tax. Furthermore, penalties may be
imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular Certificateholder
that is not a United States Person and is not subject to federal income tax as a
result of any direct or indirect connection to the United States in addition to
its ownership of a REMIC Regular Certificate, will not be subject to United
States federal income or withholding tax in respect of a distribution on a REMIC
Regular Certificate, provided that the holder complies to the extent necessary
with identification requirements including delivery of a statement signed by the
certificateholder under penalties of perjury, certifying that the
certificateholder is not a United States Person and providing the name and
address of the certificateholder. The IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to the holder may be subject to a
tax rate of 30%, subject to reduction under any applicable tax treaty.
Special rules apply to partnerships, estates and trusts, and in certain
circumstances certifications as to foreign status and other matters may be
required to be provided by partners and beneficiaries thereof.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on the United
States shareholder's allocable portion of the interest income received by the
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, it is suggested that certificateholders who
are non-resident alien individuals consult their tax advisors concerning this
question.
Except as stated in the related prospectus supplement, transfers of REMIC
Residual Certificates to investors that are not United States Persons will be
prohibited under the related pooling and servicing agreement.
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NEW WITHHOLDING REGULATIONS
The IRS has issued new regulations which make certain modifications to the
withholding, backup withholding and information reporting rules described above.
The new regulations attempt to unify certification requirements and modify
reliance standards. These regulations will generally be effective for payments
made after December 31, 2000, subject to transition rules. Prospective investors
are urged to consult their tax advisors regarding these regulations.
NOTES
On or prior to the date of the related prospectus supplement with respect
to the proposed issuance of each series of notes, counsel to the depositor will
provide its opinion that, assuming compliance with all provisions of the
indenture, owner trust agreement and other related documents, for federal income
tax purposes (1) the notes will be treated as indebtedness and (2) the issuer,
as created under the owner trust agreement, will not be characterized as an
association or publicly traded partnership taxable as a corporation or as a
taxable mortgage pool. For purposes of this tax discussion, references to a
noteholder or a holder are to the beneficial owner of a note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not constitute
"loans . . . secured by an interest in real property" within the meaning of Code
section 7701(a)(19)(C)(v); and notes held by a real estate investment trust will
not constitute real estate assets within the meaning of Code section
856(c)(4)(A) and interest on notes will not be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, except that (1) income reportable on the
notes is not required to be reported under the accrual method unless the holder
otherwise uses the accrual method and (2) the special rule treating a portion of
the gain on sale or exchange of a REMIC Regular Certificate as ordinary income
is inapplicable to the notes. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates" and "--Sales of REMIC Certificates."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
On or prior to the date of the related prospectus supplement with respect
to the proposed issuance of each series of Grantor Trust Certificates, counsel
to the depositor will provide its opinion that, assuming compliance with all
provisions of the related pooling and servicing agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of Chapter 1 of the Code and not as a partnership or an association
taxable as a corporation.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
prospectus supplement, counsel to the depositor will provide its opinion that
Grantor Trust Fractional Interest Certificates will represent interests in
"loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; "obligation[s]
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(including any participation or certificate of beneficial ownership therein)
which . . .[are] principally secured by an interest in real property" within the
meaning of Section 860G(a)(3) of the Code; and real estate assets within the
meaning of Section 856(c)(4)(A) of the Code. In addition, counsel to the
depositor will deliver its opinion that interest on Grantor Trust Fractional
Interest Certificates will to the same extent be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code.
The assets constituting certain Grantor Trust Funds may include buydown
mortgage loans. The characterization of an investment in buydown mortgage loans
will depend upon the precise terms of the related buydown agreement, but to the
extent that the buydown mortgage loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the preceding paragraph. No directly applicable precedents exist with respect
to the federal income tax treatment or the characterization of investments in
buydown mortgage loans. Accordingly, holders of Grantor Trust Certificates
should consult their own tax advisors with respect to the characterization of
investments in Grantor Trust Certificates representing an interest in a Grantor
Trust Fund that includes buydown mortgage loans.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of mortgage loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, and real estate assets within the meaning
of Section 856(c)(4)(A) of the Code, and the interest on the mortgage loans is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and income from the Grantor Trust Certificates will be
characterized the same way. However, the policies underlying these sections, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts, suggest that this characterization is
appropriate. Counsel to the depositor will not deliver any opinion on these
questions. It is suggested that prospective purchasers to which the
characterization of an investment in Grantor Trust Strip Certificates is
material consult their tax advisors regarding whether the Grantor Trust Strip
Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the mortgage loans, including amounts used to
pay reasonable servicing fees and other expenses, and will be entitled to deduct
their shares of any reasonable servicing fees and other expenses. Because of
stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable on the same
certificate representing interest on the mortgage loans. Under Section 67 of the
Code, an individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through some pass-through entities will be allowed a
deduction for the reasonable servicing fees and expenses only to the extent that
the aggregate of the holder's miscellaneous itemized deductions exceeds two
percent of the holder's adjusted gross income. In addition, Section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (1) 3% of the excess of the individual's adjusted gross
income over the amount or (2) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
reportable by holders of Grantor Trust Fractional Interest Certificates who are
subject to the limitations of either Section 67 or Section 68 of the Code may be
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substantial. Further, certificateholders other than corporations subject to the
alternative minimum tax may not deduct miscellaneous itemized deductions in
determining the holder's alternative minimum taxable income. Although it is not
entirely clear, it appears that in transactions in which multiple classes of
Grantor Trust Certificates, including Grantor Trust Strip Certificates, are
issued, the fees and expenses should be allocated among the classes of Grantor
Trust Certificates using a method that recognizes that each class benefits from
the related services. In the absence of statutory or administrative
clarification as to the method to be used, it is intended to base information
returns or reports to the IRS and certificateholders on a method that allocates
the expenses among classes of Grantor Trust Certificates with respect to each
period on the distributions made to each class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
stripped bond rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates or
(2) the depositor or any of its affiliates retains, for its own account or for
purposes of resale, a right to receive a specified portion of the interest
payable on the mortgage loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established safe harbors. The servicing fees paid
with respect to the mortgage loans for a series of Grantor Trust Certificates
may be higher than those safe harbors and, accordingly, may not constitute
reasonable servicing compensation. The related prospectus supplement will
include information regarding servicing fees paid to the master servicer, any
subservicer or their respective affiliates necessary to determine whether the
safe harbor rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with original issue discount within the meaning of Section 1273(a) of the
Code, subject, however, to the discussion in the sixth following paragraph
regarding the possible treatment of stripped bonds as market discount bonds and
the discussion regarding DE MINIMIS market discount. See "--Taxation of Owners
of Grantor Trust Fractional Interest Certificates--Discount" below.
Under the stripped bond rules, the holder of a Grantor Trust Fractional
Interest Certificate, whether a cash or accrual method taxpayer, will be
required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on the
certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of the certificate's stated redemption price over
its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by the purchaser
for the Grantor Trust Fractional Interest Certificate. The stated redemption
price of a Grantor Trust Fractional Interest Certificate will be the sum of all
payments to be made on the certificate, other than qualified stated interest, if
any, as well as the certificate's share of reasonable servicing fees and other
expenses. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Stripped Bond Rules Do Not Apply" for a definition of qualified
stated interest.
In general, the amount of the income that accrues in any month would equal
the product of the holder's adjusted basis in the Grantor Trust Fractional
Interest Certificate at the beginning of the month, see "Sales of Grantor Trust
Certificates", and the yield of the Grantor Trust Fractional Interest
Certificate to the holder. This yield is equal to a rate that, compounded based
on the regular interval between distribution dates and
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used to discount the holder's share of future payments on the mortgage loans,
causes the present value of those future payments to equal the price at which
the holder purchased the certificate. In computing yield under the stripped bond
rules, a certificateholder's share of future payments on the mortgage loans will
not include any payments made in respect of any ownership interest in the
mortgage loans retained by the depositor, the master servicer, any subservicer
or their respective affiliates, but will include the certificateholder's share
of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates represent
an interest in any pool of debt instruments the yield on which may be affected
by reason of prepayments, Section 1272(a)(6) of the Code requires (1) the use of
a reasonable Prepayment Assumption in accruing original issue discount and (2)
adjustments in the accrual of original issue discount when prepayments do not
conform to the Prepayment Assumption. It is unclear whether those provisions
would be applicable to the Grantor Trust Fractional Interest Certificates that
do not represent an interest in any pool of debt instruments the yield on which
may be affected by reason of prepayments, or whether use of a reasonable
Prepayment Assumption may be required or permitted without reliance on these
rules. It is also uncertain, if a Prepayment Assumption is used, whether the
assumed prepayment rate would be determined based on conditions at the time of
the first sale of the Grantor Trust Fractional Interest Certificate or, for a
particular holder, at the time of purchase of the Grantor Trust Fractional
Interest Certificate by that holder. It is suggested that Certificateholders
consult their own tax advisors concerning reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates and, in particular,
whether a Prepayment Assumption should be used in reporting original issue
discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the mortgage loans allocable to the
certificate, the use of a Prepayment Assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a price less than or greater than the principal amount of the
certificate, that is, at a discount or a premium, the use of a reasonable
Prepayment Assumption would increase or decrease the yield, and thus accelerate
or decelerate, respectively, the reporting of income.
If a Prepayment Assumption is not used, then when a mortgage loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the mortgage loan that is allocable to the certificate and the portion of the
adjusted basis of the certificate that is allocable to the certificateholder's
interest in the mortgage loan. If a Prepayment Assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. It is unclear whether any
other adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments. See "--REMICs--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount."
It is intended to base information reports or returns to the IRS and
certificateholders in transactions subject to the stripped bond rules on a
Prepayment Assumption that will be disclosed in the related prospectus
supplement and on a constant yield computed using a representative initial
offering price for each class of certificates. However, none of the depositor,
the master servicer or the trustee will make any representation that the
mortgage loans will in fact prepay at a rate conforming to the Prepayment
Assumption or any other rate and certificateholders should bear in mind that the
use of a representative initial offering price will mean that the information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial certificateholders of each series
who bought at that price.
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Under Treasury regulation Section 1.1286-1, stripped bonds may to be
treated as market discount bonds and any purchaser of a stripped bond treated as
a market discount bond is to account for any discount on the bond as market
discount rather than original issue discount. This treatment only applies,
however, if immediately after the most recent disposition of the bond by a
person stripping one or more coupons from the bond and disposing of the bond or
coupon (1) there is no, or only a DE MINIMIS amount of, original issue discount
or (2) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan, before subtracting any servicing fee or any stripped
coupon. If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the mortgage loans, the related prospectus supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the mortgage loans, then that original issue discount or market discount will be
considered to be DE MINIMIS. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as DE MINIMIS
original issue and market discount described in "--Characteristics of
Investments in Grantor Trust Certificates--If Stripped Bond Rules Do Not Apply"
and "--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the certificateholder will be required to
report its share of the interest income on the mortgage loans in accordance with
the certificateholder's normal method of accounting. The original issue discount
rules will apply to a Grantor Trust Fractional Interest Certificate to the
extent it evidences an interest in mortgage loans issued with original issue
discount.
The original issue discount, if any, on the mortgage loans will equal the
difference between the stated redemption price of the mortgage loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on the mortgage loan other than qualified
stated interest. Qualified stated interest is interest that is unconditionally
payable at least annually at a single fixed rate, a qualified floating rate, an
objective rate, a combination of a single fixed rate and one or more qualified
floating rates or one qualified inverse floating rate, or a combination of
qualified floating rates that does not operate in a manner that accelerates or
defers interest payments on the mortgage loan. In general, the issue price of a
mortgage loan will be the amount received by the borrower from the lender under
the terms of the mortgage loan, less any points paid by the borrower, and the
stated redemption price of a mortgage loan will equal its principal amount,
unless the mortgage loan provides for an initial below-market rate of interest
or the acceleration or the deferral of interest payments. The determination as
to whether original issue discount will be considered to be DE MINIMIS will be
calculated using the same test described in the REMIC discussion. See
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount"
above.
In the case of mortgage loans bearing adjustable or variable interest
rates, the related prospectus supplement will describe the manner in which the
rules will be applied with respect to those mortgage loans by the master
servicer or the trustee in preparing information returns to the
certificateholders and the IRS.
If original issue discount is in excess of a DE MINIMIS amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a Prepayment Assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by these pools, it is intended to base information reports and returns to the
IRS and certificateholders on the use of a Prepayment Assumption. However, in
the case of certificates not backed by these pools, it currently is not intended
to base the reports and returns on the use of a
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Prepayment Assumption. It is suggested that certificateholders consult their own
tax advisors concerning whether a Prepayment Assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related prospectus
supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to mortgage loans in the series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases the Grantor Trust Fractional Interest Certificate at a cost less than
the certificate's allocable portion of the aggregate remaining stated redemption
price of the mortgage loans held in the related trust fund will also be required
to include in gross income the certificate's daily portions of any original
issue discount with respect to the mortgage loans. However, the daily portion
will be reduced, if the cost of the Grantor Trust Fractional Interest
Certificate to the purchaser is in excess of the certificate's allocable portion
of the aggregate adjusted issue prices of the mortgage loans held in the related
trust fund, approximately in proportion to the ratio the excess bears to the
certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on the mortgage loans. The adjusted issue price of a
mortgage loan on any given day equals the sum of (1) the adjusted issue price,
or, in the case of the first accrual period, the issue price, of the mortgage
loan at the beginning of the accrual period that includes that day and (2) the
daily portions of original issue discount for all days during the accrual period
prior to that day. The adjusted issue price of a mortgage loan at the beginning
of any accrual period will equal the issue price of the mortgage loan, increased
by the aggregate amount of original issue discount with respect to the mortgage
loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on the mortgage loan in prior accrual periods of amounts included
in its stated redemption price.
In addition to its regular reports, the master servicer or the trustee,
except as provided in the related prospectus supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
the holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a mortgage loan is considered to have been purchased at a market
discount, that is, in the case of a mortgage loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price,
or in the case of a mortgage loan issued with original issue discount, at a
purchase price less than its adjusted issue price. If market discount is in
excess of a DE MINIMIS amount, the holder generally will be required to include
in income in each month the amount of the discount that has accrued through the
month that has not previously been included in income, but limited, in the case
of the portion of the discount that is allocable to any mortgage loan, to the
payment of stated redemption price on the mortgage loan that is received by, or,
in the case of accrual basis certificateholders, due to, the trust fund in that
month. A certificateholder may elect to include market discount in income
currently as it accrues under a constant yield method based on the yield of the
certificate to the holder rather than including it on a deferred basis under
rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until regulations are issued by the Treasury Department, rules described in the
Committee Report will apply. Under those rules, in each accrual period market
discount on the mortgage loans should accrue, at the certificateholder's option:
(1) on the basis of a constant yield method, (2) in the case of a mortgage loan
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total stated interest
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remaining to be paid on the mortgage loan as of the beginning of the accrual
period, or (3) in the case of a mortgage loan issued with original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining at the beginning of the accrual
period. The Prepayment Assumption, if any, used in calculating the accrual of
original issue discount is to be used in calculating the accrual of market
discount. The effect of using a Prepayment Assumption could be to accelerate the
reporting of the discount income. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect the
regulations might have on the tax treatment of a mortgage loan purchased at a
discount in the secondary market.
Because the mortgage loans will provide for periodic payments of stated
redemption price, the market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which the discount
would be included in income if it were original issue discount.
Market discount with respect to mortgage loans may be considered to be DE
MINIMIS and, if so, will be includible in income under DE MINIMIS rules similar
to those described above in "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" with the exception that it is less likely
that a Prepayment Assumption will be used for purposes of these rules with
respect to the mortgage loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a DE MINIMIS amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the mortgage loans.
PREMIUM. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, that is, at a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of the premium
allocable to mortgage loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to mortgage loans originated before September 28, 1985 or to mortgage
loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the mortgage loan and be allowed as a
deduction as these payments are made, or, for a certificateholder using the
accrual method of accounting, when the payments of stated redemption price are
due.
It is unclear whether a Prepayment Assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a Prepayment Assumption and a mortgage loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the mortgage loan that is
allocable to the certificate and the portion of the adjusted basis of the
certificate that is allocable to the mortgage loan. If a Prepayment Assumption
is used to amortize this premium, it appears that this loss would be
unavailable. Instead, if a Prepayment Assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. It is unclear whether any other adjustments would be required to
reflect differences between the Prepayment Assumption used, and the actual rate
of prepayments. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
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TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The stripped coupon
rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply," no regulations or
published rulings under Section 1286 of the Code have been issued and
uncertainty exists as to how it will be applied to securities like the Grantor
Trust Strip Certificates. Accordingly, it is suggested that holders of Grantor
Trust Strip Certificates consult their own tax advisors concerning the method to
be used in reporting income or loss with respect to the certificates.
The OID Regulations do not apply to stripped coupons, although they provide
general guidance as to how the original issue discount sections of the Code will
be applied. In addition, the discussion below is subject to the discussion under
"--Application of Contingent Payment Rules" and assumes that the holder of a
Grantor Trust Strip Certificate will not own any Grantor Trust Fractional
Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of the holder's adjusted basis in the Grantor Trust
Strip Certificate at the beginning of that month and the yield of the Grantor
Trust Strip Certificate to the holder. The yield would be calculated based on
the price paid for that Grantor Trust Strip Certificate by its holder and the
payments remaining to be made thereon at the time of the purchase, plus an
allocable portion of the servicing fees and expenses to be paid with respect to
the mortgage loans. See "Characterization of Investments in Grantor Trust
Certificates--Stripped Bond Rules Apply" above.
As noted, Section 1272(a)(6) of the Code requires that a Prepayment
Assumption be used in computing the accrual of original issue discount with
respect to some categories of debt instruments, and that adjustments be made in
the amount and rate of accrual of the discount when prepayments do not conform
to the Prepayment Assumption. To the extent the Grantor Trust Strip Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, those provisions apply to Grantor Trust Strip
Certificates. It is unclear whether those provisions would be applicable to the
Grantor Trust Strip Certificates that do not represent an interest in any such
pool, or whether use of a Prepayment Assumption may be required or permitted in
the absence of these provisions. It is also uncertain, if a Prepayment
Assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust Strip
Certificate or, with respect to any subsequent holder, at the time of purchase
of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a Prepayment Assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and certificateholders on the
Prepayment Assumption disclosed in the related prospectus supplement and on a
constant yield computed using a representative initial offering price for each
class of certificates. However, none of the depositor, the master servicer or
the trustee will make any representation that the mortgage loans will in fact
prepay at a rate conforming to the Prepayment Assumption or at any other rate
and certificateholders should bear in mind that the use of a representative
initial offering price will mean that the information returns or reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate only
as to the initial certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
mortgage loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument rather than an interest in discrete mortgage loans and the effect of
prepayments is taken into
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account in computing yield with respect to the Grantor Trust Strip Certificate,
it appears that no loss may be available as a result of any particular
prepayment unless prepayments occur at a rate faster than the Prepayment
Assumption. However, if a Grantor Trust Strip Certificate is treated as an
interest in discrete mortgage loans, or if the Prepayment Assumption is not
used, then, when a mortgage loan is prepaid, the holder of a Grantor Trust Strip
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of the Grantor Trust Strip Certificate that is allocable to
the mortgage loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the mortgage loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments, the
"Contingent Payment Regulations", but it appears that Grantor Trust Strip
Certificates, to the extent subject to Section 1272(a)(6) of the Code as
described above, or due to their similarity to other mortgage-backed securities,
such as REMIC regular interests and debt instruments subject to Section
1272(a)(6) of the Code, that are expressly excepted from the application of the
Contingent Payment Regulations, are or may be excepted from these regulations.
Like the OID Regulations, the Contingent Payment Regulations do not specifically
address securities, like the Grantor Trust Strip Certificates, that are subject
to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the Contingent Payment Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply the noncontingent bond method. Under the noncontingent bond method, the
issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment schedule consists of all noncontingent payments and a projected amount
for each contingent payment based on the projected yield of the Grantor Trust
Strip Certificate.
The projected amount of each payment is determined so that the projected
payment schedule reflects the projected yield. The projected amount of each
payment must reasonably reflect the relative expected values of the payments to
be received by the holder of a Grantor Trust Strip Certificate. The projected
yield referred to above is a reasonable rate, not less than the applicable
Federal rate that, as of the issue date, reflects general market conditions, the
credit quality of the issuer, and the terms and conditions of the mortgage
loans. The holder of a Grantor Trust Strip Certificate would be required to
include as interest income in each month the adjusted issue price of the Grantor
Trust Strip Certificate at the beginning of the period multiplied by the
projected yield, and would add to, or subtract from, the income any variation
between the payment actually received in that month and the payment originally
projected to be made in that month.
Assuming that a Prepayment Assumption were used, if the Contingent Payment
Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates." Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis recognized on the sale or exchange of a
Grantor Trust Certificate by an investor who holds the Grantor Trust Certificate
as a capital asset will be capital gain or loss, except to the extent of accrued
and unrecognized market discount, which
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will be treated as ordinary income, and, in the case of banks and other
financial institutions, except as provided under Section 582(c) of the Code. The
adjusted basis of a Grantor Trust Certificate generally will equal its cost,
increased by any income reported by the seller, including original issue
discount and market discount income, and reduced, but not below zero, by any
previously reported losses, any amortized premium and by any distributions with
respect to the Grantor Trust Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in some circumstances. Gain attributable to
accrued and unrecognized market discount will be treated as ordinary income, as
will gain or loss recognized by banks and other financial institutions subject
to Section 582(c) of the Code. Furthermore, a portion of any gain that might
otherwise be capital gain may be treated as ordinary income to the extent that
the Grantor Trust Certificate is held as part of a conversion transaction within
the meaning of Section 1258 of the Code. A conversion transaction generally is
one in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate applicable Federal rate at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction. Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for that taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
GRANTOR TRUST REPORTING. The master servicer or the trustee will furnish to
each holder of a Grantor Trust Fractional Interest Certificate with each
distribution a statement setting forth the amount of the distribution allocable
to principal on the underlying mortgage loans and to interest thereon at the
related pass-through rate. In addition, the master servicer or the trustee will
furnish, within a reasonable time after the end of each calendar year, to each
holder of a Grantor Trust Certificate who was a holder at any time during that
year, information regarding the amount of any servicing compensation received by
the master servicer and subservicer and any other customary factual information
as the master servicer or the trustee deems necessary or desirable to enable
holders of Grantor Trust Certificates to prepare their tax returns and will
furnish comparable information to the IRS as and when required by law to do so.
Because the rules for accruing discount and amortizing premium with respect to
the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the trust fund's information reports of these
items of income and expense. Moreover, these information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial certificateholders that bought their certificates at the
representative initial offering price used in preparing the reports.
Except as disclosed in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the master servicer or the trustee.
BACKUP WITHHOLDING. In general, the rules described in "--REMICs--Backup
Withholding with Respect to REMIC Certificates" will also apply to Grantor Trust
Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC Regular
Certificates in "REMICS--Foreign Investors in REMIC Certificates" applies to
Grantor Trust Certificates except that Grantor Trust Certificates will, except
as disclosed in the related prospectus supplement, be eligible for exemption
from U.S. withholding tax, subject to the conditions described in the
discussion, only to the extent the related mortgage loans were originated after
July 18, 1984 and only to the extent such mortgage loans have not been converted
to real property.
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To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
certificateholder's trade or business in the United States, the Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non- resident alien individual.
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS. With respect to each series of
Partnership Certificates, counsel to the depositor will provide its opinion that
the trust fund will not be a taxable mortgage pool or an association, or
publicly traded partnership, taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
related pooling and servicing 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.
If the trust fund were taxable as a corporation for federal income tax
purposes, 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 on the
related mortgage loans, possibly reduced by its interest expense on any
outstanding debt securities. Any corporate income tax could materially reduce
cash available to make distributions on the Partnership Certificates and
certificateholders could be liable for any tax that is unpaid by the trust fund.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP CERTIFICATES. For federal
income tax purposes,
(1) Partnership Certificates held by a thrift institution taxed as a
domestic building and loan association will not constitute "loans ...
secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v);
(2) Partnership Certificates held by a real estate investment trust will
constitute real estate assets within the meaning of Code Section
856(c)(4)(A) and interest on Partnership Certificates will be treated
as "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section
856(c)(3)(B), based on the real estate investments trust's
proportionate interest in the assets of the Partnership Trust Fund
based on capital accounts; and
(3) Partnership Certificates held by a regulated investment company will
not constitute Government securities within the meaning of Code Section
851(b)(3)(A)(i).
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP. If specified in
the prospectus supplement, the depositor will agree, and the certificateholders
will agree by their purchase of Certificates, to treat the Partnership Trust
Fund as a partnership for purposes of federal and state income tax, franchise
tax and any other tax measured in whole or in part by income, with the assets of
the partnership being the assets held by the Partnership Trust Fund, the
partners of the partnership being the certificateholders, including the
depositor. However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Certificates and the depositor is not
clear, because there is no authority on transactions closely comparable to that
contemplated in the prospectus.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Certificates have certain
features characteristic of debt, the Partnership Certificates might be
considered debt of the depositor or the Partnership Trust Fund. Any alternative
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from
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treatment of the Partnership Certificates as equity in a partnership. The
following discussion assumes that the Partnership Certificates represent equity
interests in a partnership.
PARTNERSHIP TAXATION. As a partnership, the Partnership Trust Fund will not
be subject to federal income tax. Rather, each Certificateholder will be
required to separately take into account the holder's allocated share of income,
gains, losses, deductions and credits of the Partnership Trust Fund. It is
anticipated that the Partnership Trust Fund's income will consist primarily of
interest earned on the mortgage loans, including appropriate adjustments for
market discount, original issue discount and bond premium, as described above
under "--Grantor Trust Funds--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Ruled Do Not Apply--", "--Market
Discount" and "--Premium", and any gain upon collection or disposition of
mortgage loans. The Partnership Trust Fund's deductions will consist primarily
of interest accruing with respect to any outstanding debt securities, servicing
and other fees, and losses or deductions upon collection or disposition of any
outstanding debt securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement, which will
include a pooling and servicing agreement and related documents. The pooling and
servicing agreement will provide, in general, that the Certificateholders will
be allocated taxable income of the Partnership Trust Fund for each due period
equal to the sum of (1) the interest that accrues on the Partnership
Certificates in accordance with their terms for the due period, including
interest accruing at the applicable pass-through rate for the due period and
interest on amounts previously due on the Partnership Certificates but not yet
distributed; (2) any Partnership Trust Fund income attributable to discount on
the mortgage loans that corresponds to any excess of the principal amount of the
Partnership Certificates over their initial issue price; and (3) any other
amounts of income payable to the certificateholders for the due period. The
allocation will be reduced by any amortization by the Partnership Trust Fund of
premium on mortgage loans that corresponds to any excess of the issue price of
Partnership Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the depositor. Based
on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to certificateholders. Moreover, even
under that method of allocation, certificateholders may be allocated income
equal to the entire pass-through rate plus the other items described under that
method even though the Trust Fund might not have sufficient cash to make current
cash distributions of these amounts. Thus, cash basis holders will in effect be
required to report income from the Partnership Certificates on the accrual basis
and certificateholders may become liable for taxes on Partnership Trust Fund
income even if they have not received cash from the Partnership Trust Fund to
pay these taxes.
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, will constitute unrelated business
taxable income generally taxable to that holder under the Code.
A share of expenses of the Partnership Trust Fund, including fees of the
master servicer but not interest expense, allocable to an individual, estate or
trust certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "--Grantor Trust Funds--Taxation of Owners
of Grantor Trust Fractional Interest Certificates." Accordingly, deductions for
these expenses might be disallowed to the individual in whole or in part and
might result in that holder being taxed on an amount of income that exceeds the
amount of cash actually distributed to the holder over the life of the
Partnership Trust Fund.
Discount income or premium amortization with respect to each mortgage loan
would be calculated in a manner similar to the description under "--Grantor
Trust Funds--Taxation of Owners of Grantor Trust
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Fractional Interest Certificates - If Stripped Bond Rules Do Not Apply."
Notwithstanding this description, it is intended that the Partnership Trust Fund
will make all tax calculations relating to income and allocations to
certificateholders on an aggregate basis for all mortgage loans held by the
Partnership Trust Fund rather than on a mortgage loan-by-mortgage loan basis. If
the IRS were to require that these calculations be made separately for each
mortgage loan, the Partnership Trust Fund might be required to incur additional
expense, but it is believed that there would not be a material adverse effect on
certificateholders.
DISCOUNT AND PREMIUM. Unless indicated otherwise in the applicable
prospectus supplement, it is not anticipated that the mortgage loans will have
been issued with original issue discount and, therefore, the Partnership Trust
Fund should not have original issue discount income. However, the purchase price
paid by the Partnership Trust Fund for the mortgage loans may be greater or less
than the remaining principal balance of the mortgage loans at the time of
purchase. If so, the mortgage loans will have been acquired at a premium or
discount, as the case may be. As stated in the previous paragraph, the
Partnership Trust Fund intends to make any calculation of original issue
discount on an aggregate basis, but might be required to recompute it on a
mortgage loan-by-mortgage loan basis. See "--Grantor Trust Funds--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--Market Discount" and
"Premium."
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
stated in the second preceding paragraph, a portion of the market discount
income or premium deduction may be allocated to certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Partnership
Trust Fund will be deemed to terminate for federal income tax purposes if 50% or
more of the capital and profits interests in the Partnership Trust Fund are sold
or exchanged within a 12-month period. A 50% or greater transfer would cause a
deemed contribution of the assets of a Partnership Trust Fund, the old
partnership, to a new Partnership Trust Fund, the new partnership, in exchange
for interests in the new partnership. These interests would be deemed
distributed to the partners of the old partnership in liquidation thereof, which
would not constitute a sale or exchange.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Partnership Certificates in an amount equal to the
difference between the amount realized and the seller's tax basis in the
Partnership Certificates sold. A certificateholder's tax basis in an Partnership
Certificate will generally equal the holder's cost increased by the holder's
share of Partnership Trust Fund income includible in income and decreased by any
distributions received with respect to the Partnership Certificate. In addition,
both the tax basis in the Partnership Certificates and the amount realized on a
sale of an Partnership Certificate would include the holder's share of any
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Certificates, and, upon sale or other
disposition of some of the Partnership Certificates, allocate a portion of the
aggregate tax basis to the Partnership Certificates sold, rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate.
Any gain on the sale of an Partnership Certificate attributable to the
holder's share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
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If a certificateholder is required to recognize an aggregate amount of
income, not including income attributable to disallowed itemized deductions,
over the life of the Partnership Certificates that exceeds the aggregate cash
distributions with respect thereto, the excess will generally give rise to a
capital loss upon the retirement of the Partnership Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Partnership Trust Fund's taxable income and losses will be determined each due
period and the tax items for a particular due period will be apportioned among
the certificateholders in proportion to the principal amount of Partnership
Certificates owned by them as of the close of the last day of such due period.
As a result, a holder purchasing Partnership 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 a due period convention may not be permitted by existing
regulations. If a due period convention is not allowed or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the Partnership Trust Fund might be reallocated among the certificateholders.
The depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS. In the case of any distribution to a
certificateholder, no gain will be recognized to that certificateholder to the
extent that the amount of any money distributed with respect to the Partnership
Certificate exceeds the adjusted basis of the certificateholder's interest in
the Partnership Certificate. To the extent that the amount of money distributed
exceeds the certificateholder's adjusted basis, gain will be currently
recognized. In the case of any distribution to a certificateholder, no loss will
be recognized except upon a distribution in liquidation of a certificateholder's
interest. Any gain or loss recognized by a certificateholder will be capital
gain or loss.
SECTION 754 ELECTION. In the event that a certificateholder sells its
Partnership Certificates at a profit, the purchasing certificateholder will have
a higher basis in the Partnership Certificates than the selling
certificateholder had. An opposite result will follow if the Partnership
Certificate is sold at a loss. The tax basis of the Partnership Trust Fund's
assets would not be adjusted to reflect that higher or lower basis unless the
Partnership Trust Fund were 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 Partnership Trust Fund will not make such election.
As a result, a certificateholder might be allocated a greater or lesser amount
of Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the Partnership Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Partnership Trust Fund will be the calendar year. The trustee
will file a partnership information return, IRS Form 1065, with the IRS for each
taxable year of the Partnership Trust Fund and will report each
certificateholder's allocable share of items of Partnership Trust Fund income
and expense to holders and the IRS on Schedule K-1. The trustee will provide the
Schedule K-1 information to nominees that fail to provide the Partnership Trust
Fund with the information statement described below and the nominees will be
required to forward this information to the beneficial owners of the Partnership
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing
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information on the nominee, the beneficial owners and the Partnership
Certificates so held. Such information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner (x) the name, address and identification number of that person, (y)
whether that person is a United States Person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned agency or
instrumentality of either of the foregoing, and (z) information relating to
Partnership Certificates that were held, bought or sold on behalf of that person
throughout the year. In addition, brokers and financial institutions that hold
Partnership Certificates through a nominee are required to furnish directly to
the trustee information as to themselves and their ownership of Partnership
Certificates. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish any information statement to the Partnership Trust
Fund. The information referred to above for any calendar year must be furnished
to the Partnership Trust Fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Partnership Trust
Fund with the information described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the pooling
and servicing agreement and 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 until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
certificateholders, and a certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Partnership Trust Fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the Partnership
Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether the
Partnership Trust Fund would be considered to be engaged in a trade or business
in the United States for purposes of federal withholding taxes with respect to
non-United States Persons, because there is no clear authority dealing with that
issue under facts substantially similar to those in this case. Although it is
not expected that the Partnership Trust Fund would be engaged in a trade or
business in the United States for these purposes, unless the trustee was to
receive an opinion of counsel that the Partnership Trust Fund was not so
engaged, it is possible the trustee may withhold as if it were so engaged in
order to protect the Partnership Trust Fund from possible adverse consequences
of a failure to withhold. If so, the trustee would withhold on the portion of
its taxable income that is allocable to foreign certificateholders pursuant to
Section 1446 of the Code, at a rate of 35% for foreign holders that are taxable
as corporations and 39.6% for all other foreign holders. Amounts so withheld
would be deemed distributed to the foreign certificateholders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Partnership Trust Fund to change its withholding
procedures. In determining a holder's withholding status, the Partnership Trust
Fund may rely on IRS Form W-8BEN, 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 Partnership Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit that
number to the Partnership 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 Partnership Trust Fund, taking the position that no taxes were due
because the Partnership Trust Fund was not engaged in a U.S. trade or business.
However, interest payments made or accrued to a 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 Partnership
Trust Fund. If these interest
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payments are properly characterized as guaranteed payments, then the interest
will not be considered portfolio interest. As a result, certificateholders who
are foreign persons will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable treaty. In that event, 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 Partnership Certificates and
proceeds from the sale of the Partnership Certificates will be subject to a
backup withholding tax of 31% if the certificateholder fails to comply with
certain identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code.
It is suggested that prospective purchasers consult their tax advisors with
respect to the tax consequences to them of the purchase, ownership and
disposition of REMIC Certificates, Notes, Grantor Trust Certificates and
Partnership Certificates, including the tax consequences under state, local,
foreign and other tax laws and the possible effects of changes in federal or
other tax laws.
FASIT SECURITIES
GENERAL. The FASIT Provisions 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 securities. The FASIT Provisions
became effective on September 1, 1997 and Treasury regulations were issued in
proposed form on February 7, 2000. 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.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences", potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion described under "Federal
Income Tax Consequences" does not purport to describe any aspect of the tax laws
of any state or other jurisdiction. Therefore, prospective investors should
consult their own tax advisors with respect to the various tax consequences of
investments in the securities offered hereunder.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
INVESTORS AFFECTED
A federal law called the Employee Retirement Income Security Act of 1974,
as amended, the Code and a variety of state laws may affect your decision
whether to invest in the securities if you are investing for:
o a pension or other employee benefit plan of employers in the private
sector that are regulated under ERISA, referred to as an ERISA plan,
o an individual retirement account or annuity, called an IRA, or a
pension or other benefit plan for self-employed individuals, called a
Keogh plan,
o a pension and other benefit plan for the employees of state and local
governments, called a government plan, or
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o an insurance company general or separate account, a bank collective
investment fund or other pooled investment vehicle which includes the
assets of ERISA plans, IRAs, Keogh plans, and/or government plans.
A summary of the effects of those laws follows.
FIDUCIARY STANDARDS FOR ERISA PLANS AND RELATED INVESTMENT VEHICLES
ERISA imposes standards of fiduciary conduct on those who are responsible
for operating ERISA plans or investing their assets. These standards include
requirements that fiduciaries act prudently in making investment decisions and
diversify investments so as to avoid large losses unless under the circumstances
it is clearly prudent not to do so. If you are a fiduciary of an ERISA plan, you
are subject to these standards in deciding whether to invest the plan's assets
in securities. You may find the full text of the applicable standards of
fiduciary conduct in section 404 of ERISA. If you are a fiduciary of an ERISA
Plan, you should consult with your advisors concerning your investment decision
in the context of section 404 of ERISA.
PROHIBITED TRANSACTION ISSUES FOR ERISA PLANS, KEOGH PLANS, IRAS AND RELATED
INVESTMENT VEHICLES
GENERAL. Transactions involving the assets of an ERISA plan, a Keogh plan
or an IRA, called prohibited transactions, may result in the imposition of
excise taxes and, in the case of an ERISA plan, civil money penalties and
certain other extraordinary remedies. A prohibited transaction occurs when a
person with a pre-existing relationship to an ERISA plan, a Keogh plan or IRA,
known as a party in interest or a disqualified person, engages in a transaction
involving the assets of the plan or IRA. You may find the laws applicable to
prohibited transactions in section 406 of ERISA and section 4975 of the Code.
There are statutory and regulatory prohibited transaction exemptions, as well as
administrative exemptions granted by the United States Department of Labor.
Prohibited transactions exemptions waive the excise taxes, civil money penalties
and other remedies for certain prohibited transactions which are structured to
satisfy prescribed conditions.
PURCHASE AND SALE OF SECURITIES. If an ERISA plan, a Keogh plan, an IRA or
a related investment vehicle acquires securities from, or sells securities to, a
party in interest or a disqualified person, a prohibited transaction may occur.
In such a case, the party in interest or disqualified person might be liable for
excise taxes unless a prohibited transaction exemption is available. Where a
prohibited transaction involves an ERISA plan or related investment vehicle, the
fiduciary who causes or permits the prohibited transaction may also be liable
for civil money penalties.
TRANSACTIONS INCIDENTAL TO THE OPERATION OF THE TRUST. Transactions
involving the assets of a trust may also give rise to prohibited transactions to
the extent that an investment in securities causes the assets of a trust to be
considered assets, commonly known as plan assets, of an ERISA plan, a Keogh
plan, an IRA or a related investment vehicle. Whether an investment in
securities will cause a trust's assets to be treated as plan assets depends on
whether the securities are debt or equity investments for purposes of ERISA. The
United States Department of Labor has issued regulations, commonly known as the
plan asset regulations, which define debt and equity investments. The plan asset
regulations appear at 29 C.F.R. ss.2510.3-101.
Under the plan asset regulations, a trust's assets will not be plan assets
of an ERISA plan, Keogh plan, IRA or related investment vehicle that purchases
securities if the securities are considered debt. For this purpose, the
securities will be debt only if they are treated as indebtedness under
applicable local law and do not have any substantial equity features. The term
substantial equity features has no definition under the plan asset regulations.
In the absence of such a definition, we cannot assure you that the securities,
either
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when they are issued or at any later date, will have no substantial equity
features. The prospectus supplement for a particular offering of securities may
tell you whether we believe the securities should be treated as debt for ERISA
purposes.
To the extent that the securities do not constitute debt for purposes of
ERISA, they will constitute equity investments. In this case, an ERISA plan,
Keogh plan, IRA or related investment vehicle that acquires securities would
also acquire an undivided interest in each asset of the trust unless (1) the
trust is an operating company or a venture capital operating company as defined
in the plan asset regulations, (2) the securities are publicly offered
securities as defined in the plan asset regulations or (3) benefit plan
investors as defined in the plan asset regulations do not own 25% or more of the
securities or any other class of equity security issued by the trust. If the
securities may be treated as an equity investment under the plan asset
regulations, the prospectus supplement may tell you whether we believe any of
these exceptions will apply.
POSSIBLE EXEMPTIVE RELIEF
The United States Department of Labor has issued prohibited transaction
exemptions, which conditionally waive excise taxes and civil money penalties
that might otherwise apply to a type of transactions.
CLASS EXEMPTIONS. The United States Department of Labor has issued
Prohibited Transaction Class Exemptions, or PTCEs, which provide exemptive
relief to parties to any transaction which satisfies the conditions of the
exemption. A partial listing of the PTCEs which may be available for investments
in securities follows. Each of these exemptions is available only if specified
conditions are satisfied and may provide relief for some, but not all, of the
prohibited transactions that a particular transaction may cause. The prospectus
supplement for a particular offering of securities may tell you whether the
securities themselves satisfy the conditions of these exemptions. You should
consult with your advisors regarding the specific scope, terms and conditions of
an exemption as it applies to you, as an investor, before relying on that
exemption's availability.
CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES. The following
exemptions may apply to a purchase or sale of securities between an ERISA plan,
a Keogh plan, an IRA or related investment vehicle, on the one hand, and a party
in interest or disqualified person, on the other hand:
o PTCE 84-14, which exempts certain transactions approved on behalf of
the plan by a qualified professional asset manager, or QPAM.
o PTCE 86-128, which exempts certain transactions between a plan and
certain broker-dealers.
o PTCE 90-1, which exempts certain transactions entered into by insurance
company pooled separate accounts in which plans have made investments.
o PTCE 91-38, which exempts certain transactions entered into by bank
collective investment funds in which plans have made investments.
o PTCE 96-23, which exempts certain transaction approved on behalf of a
plan by an in-house investment manager, or INHAM.
These exemptions do not expressly address prohibited transactions that
might result from transactions incidental to the operation of a trust. We cannot
assure you that a purchase or sale of securities in reliance on one of these
exemptions will not give rise to indirect, non-exempt prohibited transactions.
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CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES AND TRANSACTIONS
INCIDENTAL TO THE OPERATION OF THE TRUST. The following exemptions may apply to
a purchase or sale of securities between an ERISA plan, a Keogh plan, an IRA or
related investment vehicle, on the one hand, and a party in interest or
disqualified person, on the other hand, and may also apply to prohibited
transactions that may result from transactions incident to the operation of the
trust:
o PTCE 95-60, which exempts certain transactions involving insurance
company general accounts.
o PTCE 83-1, which exempts certain transactions involving the purchase of
pass- through certificates in mortgage pool investment trusts from, and
the sale of such certificates to, the pool sponsor, as well as
transactions in connection with the servicing and operation of the
pool.
ADMINISTRATIVE EXEMPTION FOR OFFERINGS MANAGED BY CERTAIN UNDERWRITERS. The
DOL has also issued exemptions to several underwriters of securities, for
specific offerings in which that underwriter or any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with that underwriter is an underwriter, placement agent or
a manager or co-manager of the underwriting syndicate or selling group where the
trust and the offered certificates meet specified conditions. This is called the
Underwriters' Exemption. Amendments to the Underwriters' Exemptions may be found
at 62 Fed. Reg. 39021 (July 21, 1997) and 65 Fed. Reg. 67765 (November 13,
2000). The Underwriters' Exemptions, as amended, provides a partial exemption
for transactions involving certificates representing a beneficial interest in a
trust and entitling the holder to pass-through payments of principal, interest
and/or other payments with respect to the trust's assets or a debt instrument
issued by the trust. These certificates and debt instruments are referred to in
this prospectus as"Securities." When applicable, the Underwriters' Exemptions
applies to the initial purchase, holding and subsequent resale of Securities,
and certain transactions incidental to the servicing and operation of the assets
of such a trust.
In order for the Underwriters' Exemptions to be available to a purchase of
securities, the trust's assets must consist solely of certain types of assets,
including obligations that bear interest or are purchased at a discount and
which are secured by single-family residential, multi-family residential and
commercial property (including certain obligations secured by leasehold
interests on commercial property); fractional undivided interests in any of
these obligations; property which had secured any of these obligations;
undistributed cash; rights under any insurance policies, third-party guarantees,
contracts of suretyship or other credit support arrangements including certain
swaps and yield maintenance agreements with respect to any of the these
obligations; and a pre-funding account.
CONDITIONS FOR PRE-FUNDING ACCOUNTS. If the trust includes a pre-funding
account, the following conditions also apply:
o The ratio of the amount allocated to the pre-funding account to the
total principal amount of the securities being offered must be less
than or equal to 25%.
o All additional obligations transferred to the trust after the closing
date of the offering of securities must meet the same terms and
conditions of eligibility for inclusion in the trust as the obligations
placed in the trust at or prior to the closing date, and these terms
and conditions must have been approved by Standard & Poor's Rating
Services, Inc., Moody's Investors Service, Inc. or Fitch Ratings,
called the Exemption Rating Agencies. These terms and conditions may be
changed if the changes receive prior approval of either an Exemption
Rating Agency or a majority vote of outstanding certificateholders.
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o After the transfer of additional obligations to the trust, the
securities must have a credit rating from one of the Exemption Rating
Agencies at least a high as the rating assigned at the time of the
initial issuance of the securities.
o The use of pre-funding does not, in and of itself, cause a reduction of
100 basis points or more in the weighted average annual percentage
interest rate of all of the obligations included in the trust between
the time of initial issuance of the securities and the end of the
pre-funding period.
o Either the characteristics of the obligations added to the trust during
the pre- funding period must be monitored by an independent insurer or
other independent credit support provider, or an independent accountant
must furnish a letter, prepared using the same type of procedures as
were applicable to the obligations which were transferred to the trust
as of the closing date of the initial offering of securities, stating
whether or not the characteristics of the additional obligations
conform to the characteristics described in the prospectus or
prospectus supplement.
o The pre-funding period must end no later than three months, or 90 days
if later, after the closing date of the initial issuance of securities,
or earlier in certain circumstances if the unused balance in the
pre-funding account falls below a specified minimum level 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 investments which are described in the pooling and
servicing agreement, are permitted by the Exemption Rating Agencies
rating the securities and have been rated, or the obligor has been
rated, in one of the three highest generic rating categories by one of
the Exemption Rating Agencies or else are either direct obligations of,
or obligations fully guaranteed as to timely payment of principal and
interest by, the United States or any agency or instrumentality
thereof, provided that such obligations are backed by the full faith
and credit of the United States.
o The prospectus or prospectus supplement must describe the duration of
the pre-funding period.
o The trustee, or any agent with which the trustee contracts to provide
trust services, must be a substantial financial institution or trust
company experienced in trust activities and familiar with its duties,
responsibilities and liabilities with ERISA and the trustee, as legal
owner of the assets of the trust, must enforce all the rights created
in favor of Securityholders of the trust, including ERISA plans.
ADDITIONAL CONDITIONS FOR THE UNDERWRITERS' EXEMPTION. If the requirements
applicable to the trust and pre-funding account are met, the Underwriters'
Exemption will apply to a particular transaction only if the transaction meets
the following additional conditions:
o The acquisition of securities by an ERISA Plan, a Keogh Plan, an IRA or
a related investment vehicle is on terms, including price, that are at
least as favorable to the buyer as they would be in an arm's-length
transaction with an unrelated party.
o The rights and interests evidenced by the securities acquired by the
ERISA Plan, Keogh Plan, IRA or related investment vehicle are not
subordinated to the rights and interests evidenced by other securities
of the same trust unless none of the mortgage loans or other assets has
a loan-to-value ratio that exceeds 100% as of the date of the issuance
of the securities.
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o The securities acquired by the ERISA Plan, Keogh Plan, IRA or related
investment vehicle have received a rating that is in one of four
highest generic rating categories from the Exemption Rating Agencies.
The securities must be rated in one of the two highest generic
categories by the Exemption Rating Agencies if the loan-to-value ratio
of any one-to-four-family residential mortgage loan or home equity loan
held in the trust exceeds 100% at the date of issuance of the
securities. However, in that case the Underwriters' Exemptions will not
apply (a) to any of the securities if (x) any mortgage loan or other
asset held in the trust (other than a one- to four-family residential
mortgage loan or home equity loan) has a loan-to-value ratio that
exceeds 100% at the date of issuance of the securities or (y) any one-
to four-family residential mortgage loan or home equity loan has a
loan-to-value ratio that exceeds 125% at the date of the issuance of
the securities or (b) to any subordinate securities.
o The trustee of the trust is not an affiliate of the trust sponsor, any
servicer, any underwriter, any insurer, any swap counterparty or any
obligor with respect to obligations or receivables constituting more
than 5% of the aggregate unamortized principal balance of the assets in
the trust, determined on the date of initial issuance of securities, or
any affiliate of any of these entities.
o The sum of all payments made to and retained by the underwriter(s) or
selling agents must represent not more than reasonable compensation for
underwriting the securities; the sum of all payments made to and
retained by the sponsor pursuant to the assignment of the assets to the
trust must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by all
servicers must represent not more than reasonable compensation for such
persons' services and reimbursement of such person's reasonable
expenses in connection with such services.
o The investing ERISA plan, Keogh plan, IRA or related investment vehicle
must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act of 1933, as
amended.
o In the case of certain types of issuers, the pooling and servicing
agreement contains restrictions necessary to ensure that the assets of
the trust may not be reached by creditors of the depositor in the event
of its bankruptcy or insolvency and prohibits all parties from filing
an involuntary bankruptcy or insolvency petition against the trust, and
a true sale opinion is issued in connection with the transfer of assets
to the trust.
In addition, except as otherwise specified in the related prospectus
supplement, the exemptive relief afforded by the Underwriters' Exemptions may
not apply to any securities where the related trust contains a swap.
LIMITS ON SCOPE OF THE UNDERWRITERS' EXEMPTIONS. The Underwriters'
Exemptions will not provide complete exemptive relief even where a trust
satisfies all of the conditions applicable to the trust and all of the general
conditions are met. It does not provide relief for the purchase of securities
from, or the sale of securities to, a party in interest or disqualified person
where the party in interest or disqualified person is a fiduciary of the
purchaser or seller in which the fiduciary receives consideration for its
personal account from any party other than the purchaser or the seller.
The Underwriters' Exemptions also will not provide exemptive relief for the
purchase and holding of securities by a fiduciary on behalf of a plan sponsored
by the trust's sponsor, the trustee, any insurer, any servicer, any obligor with
respect to obligations or receivables included in the trust constituting more
than 5% of the aggregate unamortized principal balance of the assets in the
trust, determined on the date of initial
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issuance of the securities, and any affiliate of any of these entities. The
Underwriters' Exemptions generally provides exemptive relief in other cases for
the purchase of securities from, or the sale of securities to, a party in
interest or disqualified person where the party in interest or disqualified
person is a fiduciary of the purchaser or seller and is also an obligor with
respect to 5% or less of the fair market value of obligations or receivables
contained in the trust or an affiliate only when the following additional
conditions are met:
o The purchaser or seller is not an ERISA plan, an IRA or a Keogh plan
that is sponsored by an underwriter or selling agent, a trust's
sponsor, the trustee, any insurer, any servicer or any obligor with
respect to obligations or receivables included in the trust
constituting more than 5% of the aggregate unamortized principal
balance of the assets in the trust, determined on the date of initial
issuance of the securities, or any affiliate of any of these entities.
o Solely in the case of initial issuance of securities, at least 50% of
each class of securities issued by the trust is acquired by persons
independent of the underwriters or selling agents, the trust's sponsor,
the trustee, any insurer, any servicer, any obligor with respect to
obligations or receivables included in the trust constituting more than
5% of the aggregate unamortized principal balance of the assets in the
trust, determined on the date of initial issuance of the securities,
and any affiliate of any of these entities.
o The purchaser's investment in each class of securities issued by the
trust does not exceed 25% of all of the securities in such class
outstanding at the time of the issuance.
o Immediately after the acquisition, no more than 25% of the purchaser's
assets are invested in securities issued by trusts containing assets
sold or serviced by an entity that has discretionary authority over the
purchaser or renders investment advice to the purchaser for a fee.
The Underwriters' Exemptions provide relief for transactions in connection
with the servicing, operation and management of a trust only if:
o The transactions are carried out in accordance with the terms of a
binding pooling and servicing agreement.
o The pooling and servicing agreement is provided to, or fully described
in the prospectus or offering memorandum provided to, investing ERISA
plans, Keogh plans, IRAs and related investment vehicles before they
purchase securities issued by the trust.
STATUTORY EXEMPTION FOR INSURANCE COMPANY GENERAL ACCOUNTS. Insurance
companies contemplating the investment of general account assets in the
securities should consult with their legal advisors with respect to the
applicability of Section 401(c) of ERISA. The DOL issued final regulations under
Section 401(c) which were published in the Federal Register on January 5, 2000,
but these final regulations are generally not applicable until July 5, 2001.
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the securities or, even if all the conditions
specified therein were satisfied, that any such exemption would apply to
transactions involving the trust fund. Prospective Plan investors should consult
with their legal counsel concerning the impact of ERISA and the Code and the
potential consequences to their specific circumstances prior to making an
investment in the securities. Neither the Depositor, the Trustee, the Servicer
nor any of their respective affiliates will make any representation to the
effect that the securities satisfy all
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legal requirements with respect to the investment therein by Plans generally or
any particular Plan or to the effect that the securities are an appropriate
investment for Plans generally or any particular Plan.
GOVERNMENT PLANS
Government plans are generally not subject to the fiduciary standards of
ERISA or the prohibited transaction rules of ERISA or the Code. However, many
states have enacted laws which established standards of fiduciary conduct, legal
investment rules, or other requirements for investment transactions involving
the assets of government plans. If you are considering investing in securities
on behalf of a government plan, you should consult with your advisors regarding
the requirements of applicable state law.
REQUIRED DEEMED REPRESENTATIONS OF INVESTORS
If so provided in the prospectus supplement for a series, a purchaser of
the one or more classes of the related securities may be required to represent
or may be deemed to have represented that either (a) it is not an ERISA Plan, an
IRA or a Keogh Plan and is not purchasing such securities by or on behalf of or
with plan assets of an ERISA Plan, an IRA or a Keogh Plan or (b) the purchase of
any such securities by or on behalf of or with plan assets of an ERISA Plan, an
IRA or a Keogh Plan is permissible under applicable law, will not result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Code and
will not subject the Servicer, the Depositor or the Trustee to any obligation in
addition to those undertaken in the related Agreement. A fiduciary of a Plan or
any person investing plan assets to purchase securities must make its own
determination that the conditions for purchase will be satisfied with respect to
such securities.
THIS DISCUSSION IS A GENERAL DISCUSSION OF SOME OF THE RULES WHICH APPLY TO
ERISA PLANS, KEOGH PLANS, IRAS, GOVERNMENT PLANS AND THEIR RELATED INVESTMENT
VEHICLES. PRIOR TO MAKING AN INVESTMENT IN SECURITIES, PROSPECTIVE PLAN
INVESTORS SHOULD CONSULT WITH THEIR LEGAL AND OTHER ADVISORS CONCERNING THE
IMPACT OF ERISA AND THE CODE AND, PARTICULARLY IN THE CASE OF GOVERNMENT PLANS
AND RELATED INVESTMENT VEHICLES, ANY ADDITIONAL STATE LAW CONSIDERATIONS, AND
THE POTENTIAL CONSEQUENCES IN THEIR SPECIFIC CIRCUMSTANCES.
LEGAL INVESTMENT
The prospectus supplement for each series of securities will specify which
classes of securities of the series, if any, will constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984. Any class of securities that is not rated in one of the two highest rating
categories by one or more nationally recognized statistical rating agencies or
that represents an interest in a trust fund that includes junior mortgage loans
will not constitute mortgage related securities for purposes of SMMEA Mortgage
related securities are legal investments to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities, including depository institutions,
insurance companies and pension funds created pursuant to or existing under the
laws of the United States or of any state, the authorized investments of which
are subject to state regulation. Under SMMEA, if a state enacted legislation
prior to October 3, 1991 specifically limiting the legal investment authority of
any entities with respect to mortgage related securities, the securities would
constitute legal investments for entities subject to that legislation only to
the extent provided in that legislation. SMMEA provides, however, that in no
event will the enactment of any legislation of this kind affect the validity of
any contractual commitment to purchase, hold or invest in
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mortgage related securities, or require the sale or other disposition of such
securities, so long as that contractual commitment was made or the securities
were acquired prior to the enactment of that legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in those securities, and
national banks may purchase those securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to regulations as the
applicable federal regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination Council
issued a revised supervisory policy statement applicable to all depository
institutions, setting forth guidelines for investments in high-risk mortgage
securities. The 1998 policy statement has been adopted by the Federal Reserve
Board, the Office of the Comptroller of the Currency, the FDIC, the National
Credit Union Administration and the Office of Thrift Supervision with an
effective date of May 26, 1998. The 1998 policy statement rescinds a 1992 policy
statement that had required, prior to purchase, a depository institution to
determine whether a mortgage derivative product that it is considering acquiring
is high-risk, and, if so, that the proposed acquisition would reduce the
institution's overall interest rate risk. The 1998 policy statement eliminates
former constraints on investing in certain high-risk mortgage derivative
products and substitutes broader guidelines for evaluating and monitoring
investment risk.
The Office of Thrift Supervision (the "OTS") has issued Thrift Bulletins
73a, entitled "Investing in Complex Securities" ("TB 73a"), which is effective
as of December 18, 2001 and applies to savings associations regulated by the
OTS, and 13a, entitled "Management of Interest Rate Risk, Investment Securities,
and Derivatives Activities" ("TB 13a"), which is effective as of December 1,
1998, and applies to thrift institutions regulated by the OTS.
One of the primary purposes of TB 73a is to require savings associations,
prior to taking any investment position, to determine that the investment
position meets applicable regulatory and policy requirements (including those
set forth TB 13a (see below)) and internal guidelines, is suitable for the
institution, and is safe and sound. OTS recommends, with respect to purchases of
specific securities, additional analysis, including, among others, analysis of
repayment terms, legal structure, expected performance of the issuer and any
underlying assets as well as analysis of the effects of payment priority, with
respect to a security which is divided into separate tranches with unequal
payments, and collateral investment parameters, with respect to a security that
is prefunded or involves a revolving period. TB 73a reiterates OTS's due
diligence requirements for investing in all securities and warns that if a
savings association makes an investment that does not meet the applicable
regulatory requirements, the savings association's investment practices will be
subject to criticism, and OTS may require divestiture of such securities. OTS
also recommends, with respect to an investment in any "complex securities," that
savings associations should take into account quality and suitability, interest
rate risk, and classification factors. For the purposes of each of TB 73a and TB
13a, "complex security" includes among other things any collateralized mortgage
obligation or real estate mortgage investment conduit security, other than any
"plain vanilla" mortgage pass-through security (that is, securities that are
part of a single class of securities in the related pool that are non-callable
and do not have any special features). Accordingly, all Classes of the Offered
Certificates would likely be viewed as "complex securities." With respect to
quality and suitability factors, TB 73a warns (i) that a savings association's
sole reliance on outside ratings for material purchases of complex securities is
an unsafe and unsound practice, (ii) that a savings association should only use
ratings and analyses from nationally recognized rating agencies in conjunction
with, and in validation of, its own underwriting processes, and (iii) that it
should not use ratings as a substitute for its own thorough underwriting
analyses. With respect the
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interest rate risk factor, TB 73a recommends that savings associations should
follow the guidance set forth in TB 13a. With respect to collateralized loan or
bond obligations, TB 73a also requires that the savings associations meet
similar requirements with respect to the underlying collateral, and warns that
investments that are not fully rated as to both principal and interest do not
meet OTS regulatory requirements.
One of the primary purposes of TB 13a is to require thrift institutions,
prior to taking any investment position, to (i) conduct a pre-purchase portfolio
sensitivity analysis for any "significant transaction" involving securities or
financial derivatives, and (ii) conduct a pre-purchase price sensitivity
analysis of any "complex security" or financial derivative. The OTS recommends
that while a thrift institution should conduct its own in-house pre-acquisition
analysis, it may rely on an analysis conducted by an independent third-party as
long as management understands the analysis and its key assumptions. Further, TB
13a recommends that the use of "complex securities with high price sensitivity"
be limited to transactions and strategies that lower a thrift institution's
portfolio interest rate risk. TB 13a warns that investment in complex securities
by thrift institutions that do not have adequate risk measurement, monitoring
and control systems may be viewed by OTS examiners as an unsafe and unsound
practice.
Prospective investors in the securities, including in particular the
classes of securities that do not constitute mortgage related securities for
purposes of SMMEA should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR THOSE
INVESTORS OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER RESTRICTIONS, AND, IF
APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY JURISDICTION RELEVANT TO
THAT INVESTOR.
METHODS OF DISTRIBUTION
The securities offered hereby and by the related prospectus supplements
will be offered in series through one or more of the methods described in the
paragraph below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the depositor from the sale.
The depositor intends that securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of the securities of a
particular series may be made through a combination of two or more of these
methods. These methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
2. By placements by the depositor with institutional investors through
dealers; and
3. By direct placements by the depositor with institutional investors.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, the securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at fixed
public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. The
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underwriters may be broker-dealers affiliated with the depositor whose
identities and relationships to the depositor will be as set forth in the
related prospectus supplement. The managing underwriter or underwriters with
respect to the offer and sale of the securities of a particular series will be
set forth on the cover of the prospectus supplement relating to the series and
the members of the underwriting syndicate, if any, will be named in the
prospectus supplement.
In connection with the sale of the securities offered, underwriters may
receive compensation from the depositor or from purchasers of such securities in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the securities may be deemed to be
underwriters in connection with the securities, and any discounts or commissions
received by them from the depositor and any profit on the resale of offered
securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
offered securities of any series will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters will
be obligated to purchase all the securities if any are purchased, other than in
connection with an underwriting on a best efforts basis, and that, in limited
circumstances, the depositor will indemnify the several underwriters and the
underwriters will indemnify the depositor against certain civil liabilities,
including liabilities under the Securities Act of 1933 or will contribute to
payments required to be made in respect thereof.
The prospectus supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of the offering
and any agreements to be entered into between the depositor and purchasers of
offered securities of the series.
The depositor anticipates that the securities offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of offered securities, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be underwriters
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of the offered securities. Holders of offered securities should
consult with their legal advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters in connection with the securities will be passed upon
for the depositor by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
The depositor has determined that its financial statements are not material
to the offering made hereby. Any prospective purchaser that desires to review
financial information concerning the depositor will be provided by the depositor
on request with a copy of the most recent financial statements of the depositor.
RATING
It is a condition to the issuance of any class of securities that they
shall have been rated not lower than investment grade, that is, in one of the
four highest rating categories, by at least one nationally recognized
statistical rating organization.
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Any ratings on the securities address the likelihood of receipt by the
holders thereof of all collections on the underlying mortgage assets to which
such holders are entitled. These ratings address the structural, legal and
issuer-related aspects associated with the securities, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any. The
ratings do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which prepayments might differ from
those originally anticipated. As a result, securityholders might suffer a lower
than anticipated yield, and, in addition, holders of Strip Securities in extreme
cases might fail to recoup their initial investments.
AVAILABLE INFORMATION
The depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission. Reports and other
information filed by the depositor can be inspected and copied at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional
Offices located as follows: Chicago Regional Office, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of this material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's Web site (http:\\www.sec.gov). The depositor does not intend to
send any financial reports to securityholders.
This prospectus does not contain all of the information set forth in the
registration statement, of which this prospectus forms a part, and exhibits
thereto which the depositor has filed with the Commission under the securities
Act of 1933 and to which reference is hereby made.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated into this prospectus by reference all documents and
reports filed or caused to be filed by the depositor with respect to a trust
fund under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, prior to the termination of the offering of securities offered hereby
evidencing interest in a trust fund. The depositor will provide or cause to be
provided without charge to each person to whom this prospectus is delivered in
connection with the offering of one or more classes of securities offered
hereby, a copy of any or all documents or reports incorporated herein by
reference, in each case to the extent those documents or reports relate to one
or more of the classes of those offered securities, other than the exhibits to
those documents (unless the exhibits are specifically incorporated by reference
in the documents). Requests to the depositor should be directed in writing to
its principal executive office at 1100 Town & Country Road, Orange, California
92868, Attention: Secretary, or by telephone at (714) 541-9960. The depositor
has determined that its financial statements are not material to the offering of
any securities offered hereby.
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GLOSSARY
ACCRUAL SECURITIES: A class of securities as to which accrued interest or a
portion thereof will not be distributed but rather will be added to the
principal balance of the security on each distribution date in the manner
described in the related prospectus supplement.
APPLICABLE FEDERAL RATE: A rate based on the average of current yields on
Treasury securities, which rate is computed and published monthly by the IRS.
ARM LOAN: A mortgage loan with an interest rate that adjusts periodically, with
a corresponding adjustment in the amount of the monthly payment, to equal the
sum of a fixed percentage amount and an index.
CALL CLASS: The holder of a non-offered class of securities that has the right,
at its discretion, to terminate the related trust fund on and effect early
retirement of the securities of such series in the manner described under
"Description of the Securities--Termination" in this prospectus.
CERCLA: The Comprehensive Environmental Response, Compensation and Liability
Act, as amended.
CLEAN-UP CALL: The right of the party entitled to effect a termination of a
trust fund upon the aggregate principal balance of the outstanding trust fund
assets for the series at that time being less than the percentage, as specified
in the related prospectus supplement, of the aggregate principal balance of the
trust fund assets at the cut-off date for that series and which percentage will
be between 25% and 0%.
CLOSING DATE: With respect to any series of securities, the date on which the
securities are issued.
CODE: The Internal Revenue Code of 1986, as amended.
COMMISSION: The Securities and Exchange Commission.
COMMITTEE REPORT: The conference committee report accompanying the Tax Reform
Act of 1986.
CPR: The Constant Prepayment Rate model, which assumes that the outstanding
principal balance of a pool of mortgage loans prepays at a specified constant
annual rate. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate.
CRIME CONTROL ACT: The Comprehensive Crime Control Act of 1984.
DIDMC: The Depository Institutions Deregulation and Monetary Control Act of
1980.
DOL: The U.S. Department of Labor.
DOL REGULATIONS: The regulations promulgated by the U.S. Department of Labor at
29 C.F.R. ss.2510. 3-101
DUE PERIOD: The second day of the month immediately preceding the month in which
the distribution date occurs, or the day after the cut-off date in the case of
the first Due Period, and ending on the first day of the month of the related
distribution date, unless the prospectus supplement specifies otherwise.
EQUITY CERTIFICATES: Where the issuer is an owner trust, the certificates
evidencing ownership of the trust fund.
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ERISA PERMITTED INVESTMENTS: The types of investments permitted by the rating
agencies named in the Underwriter's Exemption issued by the DOL in which funds
in a pre-funding account may be invested.
FASIT: A financial asset securitization investment trust as defined in Sections
860H through 860L of the Code.
FASIT PROVISIONS: Sections 860H through 860L of the Code.
FASIT SECURITIES: Securities evidencing interests in a trust fund as to which a
FASIT election has been made.
FTC RULE: The "Holder in the Due Course" Rule of the Federal Trade Commission.
GARN-ST. GERMAIN ACT: The Garn-St. Germain Depositor Institutions Act of 1982.
GRANTOR TRUST CERTIFICATE: A certificate representing an interest in a Grantor
Trust Fund.
GRANTOR TRUST FRACTIONAL CERTIFICATE: A Grantor Trust Certificate representing
an undivided equitable ownership interest in the principal of the mortgage loans
constituting the related Grantor Trust Fund, together with interest on the
Grantor Trust Certificates at a pass-through rate.
GRANTOR TRUST STRIP CERTIFICATE: A certificate representing ownership of all or
a portion of the difference between interest paid on the mortgage loans
constituting the related Grantor Trust Fund (net of normal administration fees
and any retained interest of the depositor) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to the
Grantor Trust Fund. A Grantor Trust Strip Certificate may also evidence a
nominal ownership interest in the principal of the mortgage loans constituting
the related Grantor Trust Fund.
GRANTOR TRUST FUND: A trust fund as to which no REMIC election will be made and
which qualifies as a grantor trust within the meaning of Subpart E, part I,
subchapter J of Chapter 1 of the Code.
HIGH COST LOAN: A mortgage loan subject to the Home Ownership and Equity
Protection Act of 1994.
HIGH LTV LOAN: Mortgage loans with loan-to-value ratios in excess of 80% and as
high as 150% and which are not insured by a primary insurance policy.
HOMEOWNERSHIP ACT: The Home Ownership and Equity Protection Act of 1994.
INSURANCE PROCEEDS: Proceeds received with respect to a mortgage loan under any
hazard insurance policy, special insurance policy, primary insurance policy, FHA
insurance policy, VA guarantee, bankruptcy bond or mortgage pool insurance
policy, to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with normal servicing
procedures.
LIQUIDATED LOAN: A defaulted mortgage loan that is finally liquidated, through
foreclosure sale or otherwise.
LIQUIDATION PROCEEDS: All amounts, other than Insurance Proceeds, received and
retained in connection with the liquidation of a defaulted mortgage loan, by
foreclosure or otherwise.
LOCKOUT DATE: The date of expiration of the Lockout Period with respect to a
mortgage loan.
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LOCKOUT PERIOD: The period specified in a mortgage note during which prepayment
of the mortgage loan is prohibited.
MORTGAGE: The mortgage, deed of trust or similar instrument securing a mortgage
loan.
NBRC: The National Bankruptcy Review Commission.
NCUA: The National Credit Union Administration.
NONRECOVERABLE ADVANCE: An advance made or to be made with respect to a mortgage
loan which the master servicer determines is not ultimately recoverable from
Related Proceeds.
OID REGULATIONS: The rules governing original issue discount that are set forth
in Sections 1271-1273 and 1275 of the Code and in the related Treasury
regulations.
PARTNERSHIP CERTIFICATE: A certificate representing an interest in a Partnership
Trust Fund.
PARTNERSHIP TRUST FUND: A trust fund as to which no REMIC election will be made
and which qualifies as a partnership within the meaning of subchapter K of
Chapter 1 of the Code.
PLANS: Employee pension and welfare benefit plans subject to ERISA and
tax-qualified retirement plans described in Section 401(a) of the Code or
Individual Retirement Accounts described in Section 408 of the Code.
PREPAYMENT ASSUMPTION: With respect to a REMIC Regular Certificate or a Grantor
Trust Certificate, the assumption as to the rate of prepayments of the principal
balances of mortgage loans held by the trust fund used in pricing the initial
offering of that security.
PREPAYMENT PERIOD: The calendar month immediately preceding the month in which
the distribution date occurs, unless the prospectus supplement specifies
otherwise.
PTCE: Prohibited Transaction Class Exemption
PURCHASE PRICE: As to any mortgage loan, an amount equal to the sum of (1) the
unpaid principal balance of the mortgage loan, (2) unpaid accrued interest on
the Stated Principal Balance at the rate at which interest accrues on the
mortgage loan, net of the servicing fee and any retained interest, from the date
as to which interest was last paid to the calendar month in which the relevant
purchase is to occur, (3) any unpaid servicing fees and unreimbursed servicing
expenses payable or reimbursable to the master servicer with respect to that
mortgage loan, (4) any unpaid retained interest with respect to that mortgage
loan, (5) any realized losses incurred with respect to that mortgage loan and
(6) if applicable, any expenses reasonably incurred or to be incurred by the
master servicer or the trustee in respect of the breach or defect giving rise to
a purchase obligation.
RECORD DATE: The last business day of the month preceding the month in which a
distribution date occurs, unless the prospectus supplement specifies otherwise.
RELATED PROCEEDS: Recoveries on a mortgage loan related to amounts which the
master servicer has previously advanced to the related trust fund.
RELIEF ACT: The Soldiers' and Sailors' Civil Relief Act of 1940.
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REMIC: A real estate mortgage investment conduit as defined in Sections 860A
through 860G of the Code.
REMIC CERTIFICATES: Certificates evidencing interests in a trust fund as to
which a REMIC election has been made.
REMIC PROVISIONS: Sections 860A through 860G of the Code.
REMIC REGULAR CERTIFICATE: A REMIC Certificate designated as a regular interest
in the related REMIC.
REMIC RESIDUAL CERTIFICATE: A REMIC Certificate designated as a residual
interest in the related REMIC.
REMIC PROVISIONS: The REMIC Provisions and the related Treasury regulations.
RETAINED INTEREST: A portion of the interest payments on a trust fund asset that
may be retained by the depositor or any previous owner of the asset.
RICO: The Racketeer Influenced and Corrupt Organizations statute.
SAIF: The Savings Association Insurance Fund.
SCHEDULED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, the unpaid principal balance thereof as of the date of determination,
reduced by the principal portion of all monthly payments due but unpaid as of
the date of determination.
SENIOR/SUBORDINATE SERIES: A series of securities of which one or more classes
is senior in right of payment to one or more other classes to the extent
described in the related prospectus supplement.
SINGLE FAMILY PROPERTIES: One- to four-family residential properties including
detached and attached dwellings, townhouses, rowhouses, individual condominium
units, individual units in planned-unit developments and individual units in DE
MINIMIS planned-unit developments.
SPECIAL HAZARD SUBORDINATION AMOUNT: The amount of any Special Hazard Realized
Loss that is allocated to the subordinate securities of a series.
STATED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, the principal balance of the mortgage loan or manufactured housing
contract as of the cut-off date, after application of all scheduled principal
payments due on or before the cut-off date, whether or not received, reduced by
all amounts, including advances by the master servicer, allocable to principal
that are distributed to securityholders on or before the date of determination,
and as further reduced to the extent that any realized loss thereon has been, or
had it not been covered by a form of credit support, would have been, allocated
to one or more classes of securities on or before the determination date.
STRIP SECURITIES: A class of securities which are entitled to (a) principal
distributions, with disproportionate, nominal or no interest distributions, or
(b) interest distributions, with disproportionate, nominal or no principal
distributions.
STRIPPED INTEREST: The distributions of interest on a Strip Security with no or
a nominal principal balance.
UNITED STATES PERSON: A citizen or resident of the United States; a corporation
or partnership, including an entity treated as a corporation or partnership for
federal income tax purposes, created or organized in, or
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under the laws of, the United States or any state thereof or the District of
Columbia, except, in the case of a partnership, to the extent provided in
Treasury regulations; an estate whose income is subject to United States federal
income tax regardless of its source; or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. To the extent prescribed in regulations by
the Secretary of the Treasury, which have not yet been issued, a trust which was
in existence on August 20, 1996, other than a trust treated as owned by the
grantor under subpart E of part I of subchapter J of chapter 1 of the Code, and
which was treated as a United States person on August 20, 1996 may elect to
continue to be treated as a United States person notwithstanding the previous
sentence.
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$394,005,000 (APPROXIMATE)
ASSET-BACKED PASS-THROUGH CERTIFICATES,
SERIES 2003-AR1
AMERIQUEST MORTGAGE SECURITIES INC.
DEPOSITOR
AMERIQUEST MORTGAGE COMPANY
ORIGINATOR AND MASTER SERVICER
____________________
PROSPECTUS SUPPLEMENT
____________________
UBS WARBURG
DEUTSCHE BANK SECURITIES MORGAN STANLEY
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Asset-Backed Pass-Through Certificates, Series 2003-AR1
in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Asset-Backed Pass- Through Certificates, Series 2003-AR1 and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Asset-Backed Pass-Through Certificates, Series 2003-AR1 will
be required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
January 15, 2003