PROSPECTUS SUPPLEMENT dated June 23, 2003 (to Prospectus dated June 23, 2003)
$867,902,000 (APPROXIMATE)
FIRST FRANKLIN MORTGAGE LOAN TRUST 2003-FF2
ASSET-BACKED CERTIFICATES, SERIES 2003-FF2
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
CHASE MANHATTAN MORTGAGE CORPORATION
SERVICER
________________________ Only the ten classes of certificates identified below are being offered
CONSIDER CAREFULLY THE by this prospectus supplement and the accompanying prospectus.
RISK FACTORS BEGINNING
ON PAGE S- 10 IN THIS THE OFFERED CERTIFICATES
PROSPECTUS SUPPLEMENT
AND ON PAGE 6 IN THE o Represent ownership interests in a trust consisting of a pool of first
PROSPECTUS. lien fixed-rate and adjustable-rate residential mortgage loans. The
mortgage loans will be segregated into two groups, one consisting of
The certificates mortgage loans with principal balances that conform to Fannie Mae and
represent obligations Freddie Mac loan limits and one consisting of mortgage loans with
of the trust only and principal balances that may or may not conform to Fannie Mae and
do not represent an Freddie Mac loan limits.
interest in or
obligation of o The Class A-1 Certificates, the Class A-2 Certificates and the Class
Financial Asset M-1 Certificates will accrue interest at a fixed pass-through rate for
Securities Corp., the first 24 months following the closing date and then will accrue
Chase Manhattan interest at a rate equal to one-month LIBOR plus the related fixed
Mortgage Corporation margin, subject to certain limitations described in this prospectus
or any of their supplement.
affiliates. This
prospectus supplement o The Class M-2 Certificates, the Class M-3A Certificates, the Class
may be used to offer M-4A Certificates and the Class M- 5A Certificates will accrue
and sell the interest at a rate equal to one-month LIBOR plus the related fixed
certificates only if margin, subject to certain limitations described in this prospectus
accompanied by the supplement.
prospectus.
________________________ o The Class M-3F Certificates, the Class M-4F Certificates and the Class
M-5F Certificates will accrue interest at the fixed rate set forth in
this prospectus supplement, subject to certain limitations described
in this prospectus supplement.
CREDIT ENHANCEMENT
o Subordination as described in this prospectus supplement under
"Description of the Certificates--Credit Enhancement."
o Excess Interest as described in this prospectus supplement under
"Description of the Certificates--Overcollateralization Provisions."
o Overcollateralization as described in this prospectus supplement under
"Description of the Certificates--Overcollateralization Provisions."
ORIGINAL CERTIFICATE PASS-THROUGH UNDERWRITING PROCEEDS TO THE
CLASS PRINCIPAL BALANCE RATE(1) PRICE TO PUBLIC DISCOUNT DEPOSITOR(3)
- --------------- -------------------- ------------ --------------- ------------ ---------------
Class A-1...... $528,290,000 2.57%(2) 100.0000% 0.2500% 99.7500%
Class A-2...... $234,676,000 2.47%(2) 100.0000% 0.2500% 99.7500%
Class M-1...... $ 39,351,000 2.90%(2) 100.0000% 0.2500% 99.7500%
Class M-2...... $ 34,978,000 Variable(3) 100.0000% 0.2500% 99.7500%
Class M-3A..... $ 4,968,000 Variable(3) 100.0000% 0.2500% 99.7500%
Class M-3F..... $ 5,963,000 4.27% 100.0000% 0.2500% 99.7500%
Class M-4A..... $ 3,745,000 Variable(3) 100.0000% 0.2500% 99.7500%
Class M-4F..... $ 5,000,000 4.81% 100.0000% 0.2500% 99.7500%
Class M-5A..... $ 3,468,000 Variable(3) 100.0000% 0.2500% 99.7500%
Class M-5F..... $ 7,463,000 5.34% 100.0000% 0.2500% 99.7500%
________________
(1) The pass-through rate on each class of offered certificates is subject to
increase after the optional termination date and subject to certain
limitation as set forth in this prospectus supplement.
(2) Following the 24th distribution date, the pass-through rate on the Class
A-1 Certificates, the Class A-2 Certificates and the Class M-1 Certificates
will be a variable rate as provided herein.
(3) Determined as provided herein.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Delivery of the offered certificates will be made in book-entry form through the
facilities of The Depository Trust Company, and upon request through the
facilities of Clearstream Banking Luxembourg and the Euroclear System on or
about June 25, 2003.
[GRAPHIC OMITTED]
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
SUMMARY OF TERMS.............................................................S-3
RISK FACTORS................................................................S-10
THE MORTGAGE POOL...........................................................S-18
FIRST FRANKLIN FINANCIAL CORPORATION........................................S-36
THE SELLER..................................................................S-40
THE POOLING AGREEMENT.......................................................S-40
DESCRIPTION OF THE CERTIFICATES.............................................S-47
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS...............................S-65
USE OF PROCEEDS.............................................................S-78
FEDERAL INCOME TAX CONSEQUENCES.............................................S-78
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS...................................S-81
LEGAL INVESTMENT CONSIDERATIONS.............................................S-82
METHOD OF DISTRIBUTION......................................................S-82
LEGAL MATTERS...............................................................S-83
RATINGS.....................................................................S-83
INDEX OF DEFINED TERMS......................................................S-84
ANNEX I......................................................................I-1
S-2
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED
BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL
ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED
RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE
BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
OFFERED CERTIFICATES
On the Closing Date, First Franklin Mortgage Loan Trust 2003-FF2 will issue
thirteen classes of certificates, ten of which are being offered by this
prospectus supplement and the accompanying prospectus. The assets of the trust
that will support the certificates will consist of a pool of fixed-rate and
adjustable-rate, first lien mortgage loans having the characteristics described
in this prospectus supplement. The Class A-1 Certificates, the Class A-2
Certificates, the Class M-1 Certificates, the Class M-2 Certificates, the Class
M-3A Certificates, the Class M-3F Certificates, the Class M-4A Certificates, the
Class M- 4F Certificates, the Class M-5A Certificates and the Class M-5F
Certificates are the only classes of offered certificates.
The offered certificates will be book-entry securities clearing through The
Depository Trust Company (in the United States) or upon request through
Clearstream Banking Luxembourg and the Euroclear System (in Europe) in minimum
denominations of $50,000.
OTHER CERTIFICATES
The trust will issue three additional classes of certificates. These
certificates will be designated as the Class C Certificates, the Class P
Certificates and the Class R Certificates and are not being offered to the
public by this prospectus supplement and the prospectus.
The Class C Certificates will have an initial certificate principal balance of
approximately $6,558,153, which is approximately equal to the initial
overcollateralization required by the pooling agreement. The Class C
Certificates initially evidence an interest of approximately 0.75% in the trust.
The Class C Certificates will be delivered to the Seller or its designee as
partial consideration for the mortgage loans.
The Class P Certificates will have an original principal balance of $100 and
will not be entitled to distributions in respect of interest. The Class P
Certificates will be entitled to all prepayment charges received in respect of
the mortgage loans. The Class P Certificates will be delivered to the Seller or
its designee as partial consideration for the mortgage loans.
The Class R Certificates will not have an original principal balance and are the
class of certificates representing the residual interests in the trust. The
Class R Certificates will be delivered to the Seller or its designee as partial
consideration for the mortgage loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES-- GENERAL," "--BOOK-ENTRY
CERTIFICATES" AND "THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
CUT-OFF DATE
June 1, 2003.
CLOSING DATE
On or about June 25, 2003.
THE DEPOSITOR
Financial Asset Securities Corp., a Delaware corporation and an affiliate of
Greenwich Capital Markets, Inc. WE REFER YOU TO "THE DEPOSITOR" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
S-3
SERVICER
Chase Manhattan Mortgage Corporation, a New Jersey corporation. Any obligation
specified to be performed by the master servicer in the prospectus is an
obligation to be performed by the servicer with respect to the Mortgage Loans.
WE REFER YOU TO "THE POOLING AGREEMENT--THE SERVICER" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL INFORMATION.
ORIGINATOR
First Franklin Financial Corporation, a Delaware corporation, originated or
acquired the mortgage loans. WE REFER YOU TO "FIRST FRANKLIN FINANCIAL
CORPORATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
SELLER
Greenwich Capital Financial Products, Inc., a Delaware corporation. WE REFER YOU
TO "THE SELLER" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
TRUSTEE
Wells Fargo Bank Minnesota, National Association, a national banking
association. WE REFER YOU TO "THE POOLING AGREEMENT--THE TRUSTEE" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o OFFERED CERTIFICATES
Class A Certificates and Mezzanine Certificates.
o GROUP I CERTIFICATES
Class A-1 Certificates. Except under the circumstances described under
"Description of the Certificates--Allocation of Available Funds," the Group
I Certificates receive their distributions from Loan Group I.
o GROUP II CERTIFICATES
Class A-2 Certificates. Except under the circumstances described under
"Description of the Certificates--Allocation of Available Funds," the Group
II Certificates receive their distributions from Loan Group II.
o CLASS A CERTIFICATES
Class A-1 Certificates and Class A-2 Certificates.
o MEZZANINE CERTIFICATES
Class M-1 Certificates, Class M-2 Certificates, Class M-3A Certificates,
Class M-3F Certificates, Class M-4A Certificates, Class M-4F Certificates,
Class M-5A Certificates and Class M-5F Certificates.
o CLASS M-3 CERTIFICATES
Class M-3A Certificates and Class M-3F Certificates.
o CLASS M-4 CERTIFICATES
Class M-4A Certificates and Class M-4F Certificates.
o CLASS M-5 CERTIFICATES
Class M-5A Certificates and Class M-5F Certificates.
o SUBORDINATE CERTIFICATES
Mezzanine Certificates and Class C Certificates.
o RESIDUAL CERTIFICATES
Class R Certificates.
o HYBRID CERTIFICATES
Class A Certificates and Class M-1 Certificates.
o FLOATING RATE CERTIFICATES
Class M-2 Certificates, Class M-3A Certificates, Class M-4A Certificates
and Class M-5A Certificates.
o FIXED RATE CERTIFICATES
Class M-3F Certificates, Class M-4F Certificates and Class M-5F
Certificates.
S-4
MORTGAGE LOANS
On the Closing Date the trust will acquire a pool of first lien, fixed-rate and
adjustable-rate mortgage loans that will be divided into two loan groups, Loan
Group I and Loan Group II (each, a "Loan Group"). Loan Group I will consist of
fixed-rate and adjustable-rate mortgage loans with principal balances that
conform to Fannie Mae and Freddie Mac guidelines and Loan Group II will consist
of fixed-rate and adjustable-rate mortgage loans with principal balances that
may or may not conform to Fannie Mae and Freddie Mac guidelines.
The Group I Mortgage Loans will consist of approximately 3,856 mortgage loans
having an aggregate principal balance as of the Cut-off Date of approximately
$605,490,296 (the "Group I Mortgage Loans").
The Group II Mortgage Loans will consist of approximately 604 mortgage loans
having an aggregate principal balance as of the Cut-off Date of approximately
$268,969,957 (the "Group II Mortgage Loans").
The statistical information in this prospectus supplement reflects the
characteristics of the Mortgage Loans as of the Cut-off Date. After the date of
this prospectus supplement and prior to the Closing Date, some mortgage loans
may be added to the mortgage pool and some mortgage loans may be removed from
the mortgage pool, as described under "The Mortgage Pool" in this prospectus
supplement. The Depositor believes that the information set forth in this
prospectus supplement is representative of the characteristics of the mortgage
pool as it will be constituted at the Closing Date, although certain
characteristics of the Mortgage Loans may vary.
The Group I Mortgage Loans have the following characteristics (with all figures
being approximate and all percentages and weighted averages being based on
scheduled principal balances as of the Cut-off Date):
Mortgage Loans with Prepayment
Charges: 93.07%
Fixed-Rate Mortgage Loans: 7.75%
60 Month Interest Only Mortgage Loans: 56.17%
Range of Remaining Term
to Stated Maturities: 175 months to
358 months
Weighted Average Remaining Term to
Stated Maturity: 356 months
Range of Original Principal Balances: $26,600 to $568,000
Average Original Principal Balance: $157,193
Range of Outstanding Principal
Balances: $22,900 to $568,000
Average Outstanding Principal
Balance: $157,025
Range of Current Mortgage Rates: 4.375% to 10.750%
Weighted Average Current Mortgage Rate: 7.103%
Weighted Average Gross Margin of
the Adjustable-Rate Mortgage Loans: 4.802%
Weighted Average Maximum Mortgage
Rate of the Adjustable-Rate
Mortgage Loans: 13.024%
Weighted Average Minimum Mortgage Rate
of the Adjustable-Rate Mortgage Loans: 7.024%
Weighted Average Initial Rate Adjustment
Cap of the Adjustable-Rate Mortgage Loans: 2.996%
Weighted Average Periodic Rate Adjustment
Cap of the Adjustable-Rate Mortgage Loans: 1.000%
Weighted Average Time Until Next Adjustment
Date for the Adjustable-Rate Mortgage Loans: 24 months
Balloon Loans: 0.05%
Geographic Concentration in Excess of 5%:
California 47.71%
Florida 5.87%
The Group II Mortgage Loans have the following characteristics (with all figures
being approximate and all percentages and weighted averages being based on
scheduled principal balances as of the Cut-off Date):
Mortgage Loans with Prepayment Charges: 93.44%
Fixed-Rate Mortgage Loans: 8.38%
60 Month Interest Only Mortgage Loans: 64.72%
Range of Remaining Term 178 months to
to Stated Maturities: 358 months
Weighted Average Remaining Term to
Stated Maturity: 357 months
S-5
Average Original Principal Balance: $445,731
Range of Original Principal Balances: $26,000 to $1,012,500
Range of Outstanding PrincipalBalances: $26,000 to $1,006,648
Average Outstanding Principal Balance: $445,314
Range of Current Mortgage Rates: 4.750% to 9.625%
Weighted Average Current Mortgage Rate: 6.565%
Weighted Average Gross Margin of
the Adjustable-Rate Mortgage Loans: 4.183%
Weighted Average Maximum Mortgage Rate
of the Adjustable-Rate Mortgage Loans: 12.523%
Weighted Average Minimum Mortgage Rate
of the Adjustable-Rate Mortgage Loans: 6.523%
Weighted Average Initial Rate Adjustment
Cap of the Adjustable-Rate Mortgage Loans: 2.979%
Weighted Average Periodic Rate Adjustment
Cap of the Adjustable-Rate Mortgage Loans: 1.000%
Weighted Average Time Until Next Adjustment
Date for the Adjustable-Rate Mortgage Loans: 26 months
Geographic Concentration in Excess of 5%:
California: 75.81%
DISTRIBUTION DATES
The Trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in July 2003 (each, a "Distribution Date") (i) to the
holder of record of the certificates as of the business day preceding such date
of distribution, in the case of the Floating Rate Certificates if held in
book-entry form, or (ii) to the holder of record of the certificates as of the
last business day of the month immediately preceding the month in which the
distribution occurs, in the case of the Hybrid Certificates and the Fixed Rate
Certificates or in the case of the Floating Rate Certificates if held in
registered, certificated form. If the 25th day of a month is not a business day,
then the distribution will be made on the next business day.
DISTRIBUTIONS ON THE CERTIFICATES
INTEREST DISTRIBUTIONS
The initial pass-through rate for the Hybrid Certificates for the first 24
Distribution Dates will be the fixed per annum rate set forth below. Following
the 24th Distribution Date, the pass-through rate for the Hybrid Certificates
will be calculated at the per annum rate of One-Month LIBOR plus the related
margin as set forth below, subject to the limitations set forth in this
prospectus supplement.
Initial Fixed Rate Margin
------------------ --------------------
Class (1) (2) (3)
- --------- ------------------ ------ ------
A-1 2.570% per annum 0.750% 1.125%
A-2 2.470% per annum 0.750% 1.125%
M-1 2.900% per annum 1.200% 1.800%
__________
(1) For the first 24 Distribution Dates only.
(2) For each Distribution Date after June 2005 up to and including the Optional
Termination Date, as defined in this prospectus supplement under "Pooling
and Servicing Agreement--Termination."
(3) On each Distribution Date after the Optional Termination Date.
The pass-through rate for the Floating Rate Certificates will be calculated at
the per annum rate of One-Month LIBOR plus the related margin as set forth
below, subject to the limitations set forth in this prospectus supplement.
Margin
-------------------------
Class (1) (2)
-------- --------- -----------
M-2 1.650% 2.475%
M-3A 2.000% 3.000%
M-4A 3.000% 4.500%
M-5A 3.600% 5.400%
__________
(1) For each Distribution Date up to and including the Optional Termination
Date, as defined in this prospectus supplement under "Pooling and Servicing
Agreement--Termination."
(2) On each Distribution Date after the Optional Termination Date.
The pass-through rate for the Fixed Rate Certificates will be the fixed per
annum rate set forth below, subject to the limitations set forth in this
prospectus supplement
Fixed Rate
------------------------------------
Class (1) (2)
--------- ---------------- ----------------
M-3F 4.270% per annum 4.770% per annum
M-4F 4.810% per annum 5.310% per annum
M-5F 5.340% per annum 5.840% per annum
__________
(1) For each Distribution Date up to and including the Optional Termination
Date, as defined in this prospectus supplement under "Pooling and Servicing
Agreement--Termination."
(2) On each Distribution Date after the Optional Termination Date.
S-6
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PASS- THROUGH RATES" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
Interest distributable on the certificates accrues during an accrual period. The
accrual period for the Hybrid Certificates and the Fixed Rate Certificates for
any Distribution Date is the calendar month preceding the month in which such
Distribution Date occurs. Interest will be calculated for the Hybrid
Certificates and the Fixed Rate Certificates on the basis of a 360-day year
consisting of twelve 30-day months. The accrual period for the Floating Rate
Certificates for any Distribution Date is the period from the previous
Distribution Date (or, in the case of the first accrual period from the Closing
Date) to the day prior to the current Distribution Date. Interest will be
calculated for the Floating Rate Certificates on the basis of the actual number
of days in the accrual period, based on a 360- day year.
The Offered Certificates will accrue interest on their certificate principal
balance outstanding immediately prior to each Distribution Date.
The Class C Certificates will accrue interest as provided in the pooling
agreement. The Class P Certificates and the Residual Certificates will not
accrue interest.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
PRINCIPAL DISTRIBUTIONS
Principal will be distributed to the holders of each class of Offered
Certificates on each Distribution Date in the amounts described herein under
"Description of the Certificates--Allocation of Available Funds."
DISTRIBUTION PRIORITIES
Group I Certificates
In general, on any Distribution Date, funds available for distribution from
payments and other amounts received on the Group I Mortgage Loans will be
distributed as follows:
INTEREST DISTRIBUTIONS
to distribute interest on the Class A-1 Certificates; and
PRINCIPAL DISTRIBUTIONS
to distribute principal on the Class A-1 Certificates, but only in the amounts
and to the extent described under "Description of the Certificates--Allocation
of Available Funds" in this prospectus supplement.
Group II Certificates
In general, on any Distribution Date, funds available for distribution from
payments and other amounts received on the Group II Mortgage Loans will be
distributed as follows:
INTEREST DISTRIBUTIONS
to distribute interest on the Class A-2 Certificates; and
PRINCIPAL DISTRIBUTIONS
to distribute principal on the Class A-2 Certificates, but only in the amounts
and to the extent described under "Description of the Certificates--Allocation
of Available Funds" in this prospectus supplement.
Mezzanine Certificates
In general, on any Distribution Date, funds available for distribution from
payments and other amounts received on the Group I Mortgage Loans and the Group
II Mortgage Loans, after the distributions on the Class A Certificates described
above will be distributed as follows:
INTEREST DISTRIBUTIONS
to distribute interest on the Mezzanine Certificates, but
only in the order of priority, amounts and to the extent
described herein; and
PRINCIPAL DISTRIBUTIONS
to distribute principal on the Mezzanine Certificates, but only in the order of
priority, amounts and to the extent described herein.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
Crosscollateralization
In certain circumstances, payments on the Group I Mortgage Loans may be used to
make certain distributions to the holders of the Group II Certificates and
payments on the Group II Mortgage Loans may be used to make certain
distributions to the holders of the Group I Certificates.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
S-7
ADVANCES
The Servicer will make cash advances to cover delinquent payments of principal
and interest on each Mortgage Loan to the extent it reasonably believes that the
cash advances are recoverable from future payments on such related Mortgage
Loan. Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not intended to guarantee or
insure against losses.
WE REFER YOU TO "THE POOLING AGREEMENT--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT
AND "DESCRIPTION OF THE SECURITIES--ADVANCES" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
OPTIONAL TERMINATION
The party designated in the pooling agreement may purchase all of the Mortgage
Loans and any REO Properties and retire the certificates when the aggregate
current principal balance of the Mortgage Loans and REO Properties is equal to
or less than 10% of the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date.
WE REFER YOU TO "THE POOLING AGREEMENT --TERMINATION" AND "DESCRIPTION OF THE
CERTIFICATES--PASS-THROUGH RATES" IN THIS PROSPECTUS SUPPLEMENT AND "THE
AGREEMENTS--TERMINATION; OPTIONAL TERMINATION" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
CREDIT ENHANCEMENT
1. SUBORDINATION
The rights of the holders of the Subordinate 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 will be subordinated to
the rights of the holders of the Mezzanine Certificates with lower numerical
class designations, and the rights of the holders of the Class C Certificates to
receive distributions will be subordinated to the rights of the holders of the
Mezzanine Certificates, in each case to the extent described in this prospectus
supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
such certificates protection against realized losses on the Mortgage Loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CREDIT ENHANCEMENT" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
2. EXCESS INTEREST
The Mortgage Loans bear interest each month that in the aggregate is expected to
exceed the amount needed to distribute monthly interest on the Offered
Certificates and to pay certain fees and expenses of the trust. The excess
interest from the Mortgage Loans each month will be available to absorb realized
losses on the Mortgage Loans and to maintain overcollateralization at required
levels as described in the pooling agreement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
AND "--OVERCOLLATERALIZATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
3. OVERCOLLATERALIZATION
As of the Closing Date, the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date will exceed the aggregate certificate principal balance of
the Offered Certificates and the Class P Certificates by approximately
$6,558,153, which is approximately equal to the initial certificate principal
balance of the Class C Certificates. Such amount represents approximately 0.75%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off Date
and is the approximate amount of initial overcollateralization required to be
provided under the pooling agreement. We cannot assure you that sufficient
interest will be generated by the Mortgage Loans to maintain the required level
of overcollateralization.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--OVERCOLLATERALIZATION
PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
4. ALLOCATION OF LOSSES
If, on any Distribution Date, there is not sufficient excess interest or
overcollateralization to absorb realized losses on the Mortgage Loans as
described under "Description of the Certificates-- Overcollateralization
Provisions" in this prospectus supplement, then realized losses on the Mortgage
Loans will be allocated first, to the Class M-5A Certificates and the Class M-5F
Certificates, on a PRO RATA basis based on the certificate principal balance of
each such
S-8
class, until the certificate principal balances thereof have been reduced to
zero, second, to the Class M-4A Certificates and the Class M-4F Certificates, on
a PRO RATA basis based on the certificate principal balance of each such class,
until the certificate principal balances thereof have been reduced to zero,
third, to the Class M-3A Certificates and the Class M-3F Certificates, on a PRO
RATA basis based on the certificate principal balance of each such class, until
the certificate principal balances thereof have been reduced to zero, fourth, to
the Class M-2 Certificates, until the certificate principal balance thereof has
been reduced to zero and fifth to the Class M-1 Certificates, until the
certificate principal balance thereof has been reduced to zero. The pooling
agreement does not permit the allocation of realized losses on the Mortgage
Loans to the Class A Certificates, the Class P Certificates or the Class R
Certificates; however investors in the Class A Certificates should realize that
under certain loss scenarios there will not be enough interest and principal on
the mortgage loans to distribute to the Class A Certificates all interest and
principal amounts to which such certificates are then entitled.
Once realized losses are allocated to the Mezzanine Certificates, such realized
losses will not be reinstated thereafter. However, the amount of any realized
losses allocated to the Mezzanine Certificates may be distributed to the holders
of these certificates according to the priorities set forth under "Description
of the Certificates--Overcollateralization Provisions" in this prospectus
supplement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES --ALLOCATION OF LOSSES;
SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
RATINGS
It is a condition of the issuance of the Offered Certificates that they be
assigned the following ratings by Moody's Investors Service, Inc. ("Moody's"),
Fitch Ratings ("Fitch") and Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"):
Moody's: Fitch S&P:
-------- ------- ------
A-1................ Aaa AAA AAA
A-2................ Aaa AAA AAA
M-1................ Aa2 AA AA
M-2................ A2 A A
M-3................ A3 A- A-
M-4................ Baa1 BBB+ BBB+
M-5................ Baa2 BBB BBB
A security rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by any of the rating agencies.
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "RATING" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
TAX STATUS
One or more elections will be made to treat designated portions of the trust
(exclusive of the Net WAC Rate Carryover Reserve Account as described more fully
herein) as real estate mortgage investment conduits for federal income tax
purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND "CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THE PROSPECTUS FOR
ADDITIONAL INFORMATION.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
It is expected that the Offered Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") so long as certain conditions are met. A fiduciary of an employee
benefit plan must determine that the purchase of a certificate is consistent
with its fiduciary duties under applicable law and does not result in a
nonexempt prohibited transaction under applicable law.
WE REFER YOU TO "CONSIDERATIONS FOR BENEFIT PLAN INVESTORS" IN THIS PROSPECTUS
SUPPLEMENT AND "ERISA CONSIDERATIONS" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than
the second highest rating category by one or more nationally recognized
statistical rating organizations and, as such, will be legal investments for
certain entities to the extent provided in SMMEA and applicable state laws.
The Class M-2 Certificates, the Class M-3 Certificates, the Class M-4
Certificates and the Class M-5 Certificates will not constitute "mortgage
related securities" for purposes of SMMEA.
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND "LEGAL INVESTMENT" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
S-9
RISK FACTORS
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth under
"Risk Factors" in the prospectus.
UNPREDICTABILITY OF PREPAYMENTS AND EFFECT ON YIELDS
Mortgagors may prepay their Mortgage Loans in whole or in part at any time.
We cannot predict the rate at which mortgagors will repay their Mortgage Loans.
A prepayment of a Mortgage Loan generally will result in a prepayment on the
certificates.
o If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the Mortgage Loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates decline
significantly below the mortgage rates on the fixed-rate Mortgage Loans,
the Mortgage Loans are more likely to prepay than if prevailing rates
remain above the mortgage rates on the Mortgage Loans. In addition, if
interest rates decline, adjustable-rate mortgage loan prepayments may
increase due to the availability of fixed-rate mortgage loans or other
adjustable-rate mortgage loans at lower interest rates. Conversely, if
prevailing interest rates rise significantly, the prepayments on fixed-rate
and adjustable- rate mortgage loans may decrease. Furthermore,
adjustable-rate mortgage loans may prepay at different rates and in
response to different factors than fixed-rate mortgage loans; the inclusion
of both types of mortgage loans in each Loan Group may increase the
difficulty in analyzing possible prepayment rates.
o Approximately 93.07% of the Group I Mortgage Loans and approximately 93.44%
of the Group II Mortgage Loans (in each case, by aggregate principal
balance of the related Loan Group as of the Cut-off Date) require the
mortgagor to pay a prepayment charge in certain instances if the mortgagor
prepays the Mortgage Loan during a stated period, which may be from one
year to five years after the Mortgage Loan was originated. A prepayment
charge may or may not discourage a mortgagor from prepaying the Mortgage
Loan during the applicable period.
o The Seller may be required to purchase Mortgage Loans from the trust in the
event certain breaches of representations and warranties occur and have not
been cured. In addition, the Servicer has the option to purchase Mortgage
Loans that become 90 days or more delinquent. These purchases will have the
same effect on the holders of the Offered Certificates as a prepayment of
the Mortgage Loans.
o The party designated in the pooling agreement may purchase all of the
Mortgage Loans when the aggregate principal balance of the Mortgage Loans
and REO Properties is equal to or less than 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date.
o If the rate of default and the amount of losses on the Mortgage Loans is
higher than you expect, then your yield may be lower than you expect.
o As a result of the absorption of realized losses on the Mortgage Loans by
excess interest and overcollateralization as described herein, liquidations
of defaulted Mortgage Loans, whether or not realized losses are incurred
upon such liquidations, will result in an earlier return of the principal
of the Offered Certificates and will influence the yield on the Offered
Certificates in a manner similar to the manner in which principal
prepayments on the Mortgage Loans will influence the yield on the Offered
Certificates.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the Offered
Certificates then entitled to principal distributions at any time that the
overcollateralization provided by the mortgage pool falls below the
required level. In addition, if the Class A
S-10
Certificates are entitled to distributions of principal at any time that
overcollateralization is required to be restored to the required level,
then the amounts available for such purpose will be allocated between the
Group I Certificates and the Group II Certificates on a PRO RATA basis
based on the amount of principal actually received on the Mortgage Loans in
the related Loan Group for the related Distribution Date. This, as well as
the relative sizes of the Loan Groups, may magnify the prepayment effect on
a Certificate Group caused by the relative rates of prepayments and
defaults experienced by the Loan Groups.
SEE "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING
OF PREPAYMENTS ON THE MORTGAGE LOANS.
TERRORIST ATTACKS AND MILITARY ACTION COULD ADVERSELY AFFECT THE YIELD ON THE
OFFERED CERTIFICATES
The terrorist attacks in the United States on September 11, 2001 suggest
that there is an increased likelihood of future terrorist activity in the United
States. In addition, the military conflict with Iraq has resulted in a
significant deployment of United States military personnel in the region.
Investors should consider the possible effects of past and possible future
terrorist attacks and any resulting military response by the United States on
the delinquency, default and prepayment experience of the Mortgage Loans. In
accordance with the servicing standard set forth in the pooling agreement, the
Servicer may defer, reduce or forgive payments and delay foreclosure proceedings
in respect of Mortgage Loans to borrowers affected in some way by past and
possible future events.
In addition, the current deployment of United States military personnel in
the Middle East and the activation of a substantial number of United States
military reservists and members of the National Guard may significantly increase
the proportion of Mortgage Loans whose mortgage rates are reduced by the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"). See "Certain Legal Aspects of Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the prospectus. Shortfalls in interest
collections arising from the application of the Relief Act or any state law
providing for similar relief will not be covered by the Servicer or any
subservicer.
INTEREST ONLY MORTGAGE LOANS
Approximately 56.17% of the Group I Mortgage Loans and approximately 64.72%
of the Group II Mortgage Loans (in each case, by aggregate principal balance of
the related Loan Group as of the Cut-off Date), require the borrowers to make
monthly payments only of accrued interest for the first 60 months following
origination. After such interest-only period, the borrower's monthly payment
will be recalculated to cover both interest and principal so that the Mortgage
Loan will amortize fully prior to its final payment date. If the monthly payment
increases, the related borrower may not be able to pay the increased amount and
may default or may refinance the related Mortgage Loan to avoid the higher
payment. Because no principal payments may be made on such Mortgage Loans for 60
months following origination, the certificateholders will receive smaller
principal distributions during such period than they would have received if the
related borrowers were required to make monthly payments of interest and
principal for the entire lives of such Mortgage Loans. This slower rate of
principal distributions may reduce the return on an investment in the Offered
Certificates that are purchased at a discount.
SUBSTANTIALLY ALL OF THE MORTGAGE LOANS HAVE FIRST PAYMENTS DUE AFTER MAY 1,
2003
Approximately 0.10% of the Group I Mortgage Loans (by aggregate principal
balance of the Group I Mortgage Loans as of the Cut-off Date) and none of the
Group II Mortgage Loans, were 30 days or more but less than 59 days delinquent
in their monthly payments as of May 31, 2003. However, investors in the Mortgage
Loans should realize that approximately 48.04% of the Group I Mortgage Loans and
approximately 49.77% 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 May 1, 2003 and, therefore, such
Mortgage Loans could not have been 30 days or more delinquent as of May 31,
2003.
S-11
BALLOON LOAN RISK
Balloon loans pose a risk because a mortgagor must make a large lump sum
payment of principal at the end of the loan term. If the mortgagor is unable to
pay the lump sum or refinance such amount, you may suffer a loss. Approximately
0.05% of the Group I Mortgage Loans (by aggregate principal balance of the Group
I Mortgage Loans as of the Cut-off Date) are balloon loans. None of the Group II
Mortgage Loans are balloon loans.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE OFFERED CERTIFICATES
The credit enhancement features described in the summary of this prospectus
supplement are intended to enhance the likelihood that holders of the Class A
Certificates, and to a limited extent, the holders of the Mezzanine
Certificates, will receive regular distributions of interest and principal.
However, we cannot assure you that the applicable credit enhancement will
adequately cover any shortfalls in cash available to pay your certificates as a
result of delinquencies or defaults on the Mortgage Loans. If delinquencies or
defaults occur on the Mortgage Loans, neither the Servicer nor any other entity
will advance scheduled monthly payments of interest and principal on delinquent
or defaulted Mortgage Loans if such advances are not likely to be recovered.
If substantial losses occur as a result of defaults and delinquent payments
on the Mortgage Loans, you may suffer losses.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN
OVERCOLLATERALIZATION
The Mortgage Loans are expected to generate more interest than is needed to
distribute interest owed on the Offered Certificates and to pay certain fees and
expenses of the trust. Any remaining interest generated by the Mortgage Loans
will then be used to absorb losses that occur on the Mortgage Loans. After these
financial obligations of the trust are covered, the available excess interest
generated by the Mortgage Loans will be used to maintain overcollateralization.
We cannot assure you, however, that enough excess interest will be generated to
absorb losses that occur on the Mortgage Loans or maintain the required level of
overcollateralization. The factors described below will affect the amount of
excess interest that the Mortgage Loans will generate:
o Every time a Mortgage Loan is prepaid in full, liquidated or written off,
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 If the rates of delinquencies, defaults or losses on the Mortgage Loans
turn out to be higher than expected, excess interest will be reduced by the
amount necessary to compensate for any shortfalls in cash available to make
required distributions on the Offered Certificates.
o The fixed-rate Mortgage Loans have mortgage rates that are fixed and will
not adjust based on any index and the adjustable-rate Mortgage Loans have
mortgage rates that adjust based on an index that is different from the
index used to determine the pass-through rates on the Floating Rate
Certificates (and the Hybrid Certificates for each Distribution Date after
June 2005). In addition, (i) the first adjustment of the rates for
approximately 0.03% of the adjustable-rate Group I Mortgage Loans (by
aggregate principal balance of the adjustable-rate Group I Mortgage Loans
as of the Cut-off Date) will not occur until one year after the date of
origination, (ii) the first adjustment of the rates for approximately
93.15% of the adjustable-rate Group I Mortgage Loans and approximately
84.92% of the adjustable-rate Group II Mortgage Loans, (in each case, by
aggregate principal balance of the adjustable-rate Mortgage Loans in the
related Loan Group as of the Cut-off Date) will not occur until two years
after the date of origination, (iii) the first adjustment of the rates for
approximately 1.01% of the adjustable-rate Group I Mortgage Loans and
approximately 1.39% of the adjustable-rate Group II Mortgage Loans (in each
case, by aggregate principal balance of the adjustable-rate Mortgage Loans
in the related Loan Group as of the Cut-off Date) will not occur until
three years after the date of origination and (iv) the first adjustment of
the rates for approximately 5.64% of the adjustable-rate Group I Mortgage
Loans and approximately 12.64% of the adjustable-rate Group II Mortgage
Loans (in each case, by aggregate principal balance of the adjustable-rate
Mortgage Loans in the related Loan Group as of the Cut-off Date) will not
occur until five years after the date of origination. As a result, the
pass-through rate on the Floating Rate Certificates (and the Hybrid
Certificates for each Distribution Date after June 2005) may increase
relative to the mortgage
S-12
rates on the Mortgage Loans, or may remain constant as the mortgage rates
on the adjustable-rate Mortgage Loans decline. In either case, increases in
the pass-through rates on the Offered Certificates would require that more
of the interest generated by the Mortgage Loans be applied to cover
interest on the Offered Certificates.
o If prepayments, defaults and liquidations occur more rapidly on the
Mortgage Loans with relatively higher mortgage rates than on the Mortgage
Loans with relatively lower mortgage rates, the amount of excess interest
generated by the Mortgage Loans will be less than would otherwise be the
case.
EFFECT OF MORTGAGE RATES ON THE OFFERED CERTIFICATES
The Floating Rate Certificates (and the Hybrid Certificates for each
Distribution Date after June 2005) accrue interest at pass-through rates based
on the one-month LIBOR index plus specified margins, but are subject to a limit.
The Hybrid Certificates accrue interest for each Distribution Date through June
2005 at a fixed pass-through rate, subject to limitations as described herein.
The Fixed Rate Certificates accrue interest for each Distribution Date at a
fixed pass- through rate, subject to limitations as described herein. The limit
on the pass-through rates on the Offered Certificates is based on the weighted
average of the mortgage rates on the Mortgage Loans net of certain fees and
expenses of the trust. These fees and expenses of the trust will include
servicing fees, trustee fees and amounts retained by the trust to pay contingent
obligations of the trust to mortgagors under Dividend Mortgage Loans as
described under "The Mortgage Pool" in this prospectus supplement.
The adjustable-rate Mortgage Loans have mortgage rates that adjust based on
a six-month LIBOR index. The adjustable-rate Mortgage Loans have periodic and
maximum limitations on adjustments to their mortgage rates, and substantially
all of the adjustable-rate Mortgage Loans will have the first adjustment to
their mortgage rates generally one year, two years, three years or five years
after the origination thereof. The fixed-rate Mortgage Loans have mortgage rates
that will not adjust. As a result of the limit on the pass-through rates on the
Offered Certificates, such certificates may accrue less interest than they would
accrue if their pass-through rates were based solely on the one-month LIBOR
index plus the specified margin or the fixed pass-through rate, as applicable.
A variety of factors could limit the pass-through rates on the Offered
Certificates. Some of these factors are described below:
o The pass-through rates for the Floating Rate Certificates (and the Hybrid
Certificates for each Distribution Date after June 2005) adjust monthly
while the mortgage rates on the adjustable-rate Mortgage Loans adjust less
frequently and the mortgage rates on the fixed-rate Mortgage Loans do not
adjust. Furthermore, substantially all of the adjustable-rate Mortgage
Loans will have the first adjustment to their mortgage rates one year, two
years, three years or five years following their origination. Consequently,
the limit on the pass-through rates on the Offered Certificates may prevent
any increases in the pass-through rates on such certificates for extended
periods in a rising interest rate environment.
o If prepayments, defaults and liquidations occur more rapidly on the
Mortgage Loans with relatively higher mortgage rates than on the Mortgage
Loans with relatively lower mortgage rates, the pass-through rates on the
Offered Certificates are more likely to be limited.
o With respect to the Floating Rate Certificates (and the Hybrid Certificates
for each Distribution Date after June 2005), the index used to determine
the mortgage rates on the adjustable-rate Mortgage Loans may respond to
different economic and market factors than does one-month LIBOR. It is
possible that the mortgage rates on certain of the adjustable-rate Mortgage
Loans may decline while the pass-through rates on the Offered Certificates
that are subject to adjustment are stable or rising. It is also possible
that the mortgage rates on the adjustable-rate Mortgage Loans and the
pass-through rates on the Offered Certificates that are subject to
adjustment may both decline or increase during the same period, but that
the pass-through rates on such Offered Certificates may decline more slowly
or increase more rapidly.
If the pass-through rates on the Offered Certificates are limited for any
Distribution Date, the resulting basis risk shortfalls may be recovered by the
holders of these certificates on such Distribution Date or future Distribution
Dates to the extent that on such Distribution Date or future Distribution Dates
there are available funds remaining after certain other distributions on the
Offered Certificates and the payment of certain fees and expenses of the trust.
S-13
RISKS ASSOCIATED WITH THE MEZZANINE CERTIFICATES
The weighted average lives of, and the yields to maturity on, the Mezzanine
Certificates will be progressively more sensitive, in increasing order of their
numerical class designations, to the rate and timing of mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those assumed by an
investor in such certificates, the actual yield to maturity of such certificates
may be lower than the yield anticipated by such holder based on such assumption.
The timing of losses on the Mortgage Loans will also affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Mortgage Loans in both Loan Groups 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
such reductions, less interest will accrue on such class of Mezzanine
Certificates than would otherwise be the case. Once a realized loss is allocated
to a Mezzanine Certificate, no principal or interest will be distributable with
respect to such written down amount. However, the amount of any realized losses
allocated to the Mezzanine Certificates may be distributed to the holders of the
Mezzanine Certificates according to the priorities set forth under "Description
of the Certificates--Overcollateralization Provisions" in this prospectus
supplement.
Unless the certificate principal balance of the Class A Certificates has
been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until at least July 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. As a result, the
weighted average lives of the Mezzanine Certificates will be longer than would
otherwise be the case if distributions of principal were allocated among all of
the certificates at the same time. As a result of the longer weighted average
lives of the Mezzanine Certificates, the holders of such certificates have a
greater risk of suffering a loss on their investments. Further, because such
certificates might not receive any principal if certain delinquency levels
occur, it is possible for such certificates to receive no principal
distributions even if no losses have occurred on the Mortgage Loans.
In addition, the multiple class structure of the Mezzanine Certificates
causes the yield of such classes to be particularly sensitive to changes in the
rates of prepayment of the Mortgage Loans. Because distributions of principal
will be made to the holders of such certificates according to the priorities
described in this prospectus supplement, the yield to maturity on such classes
of certificates will be sensitive to the rates of prepayment on the Mortgage
Loans experienced both before and after the commencement of principal
distributions on such classes. The yield to maturity on such classes of
certificates will also be extremely sensitive to losses due to defaults on the
Mortgage Loans (and the timing thereof), to the extent such losses are not
covered by excess interest, overcollateralization or a class of Mezzanine
Certificates with a higher numerical class designation. Furthermore, as
described in this prospectus supplement, the timing of receipt of principal and
interest by the Mezzanine Certificates may be adversely affected by losses even
if such classes of certificates do not ultimately bear such loss.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS
When a Mortgage Loan is prepaid, the mortgagor is charged interest on the
amount prepaid only up to the date on which the prepayment is made, rather than
for an entire month. This may result in a shortfall in interest collections
available for distribution on the next Distribution Date. The Servicer is
required to cover a portion of the shortfall in interest collections that are
attributable to prepayments, but only up to the amount of the Servicer's
servicing fee. In addition, certain shortfalls in interest collections arising
from the application of the Relief Act will not be covered by the 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 Servicer will be allocated, first, to the
interest distribution amount with respect to the Class C Certificates, and
thereafter, to the Monthly Interest Distributable Amounts with respect to the
Offered Certificates on a PRO RATA basis based on the respective amounts of
interest accrued on such certificates for such Distribution Date. THE HOLDERS OF
THE OFFERED CERTIFICATES WILL NOT BE ENTITLED TO REIMBURSEMENT FOR ANY INTEREST
SHORTFALLS RESULTING FROM THE APPLICATION OF THE RELIEF ACT OR ANY PREPAYMENT
S-14
INTEREST SHORTFALLS. IF THESE SHORTFALLS ARE ALLOCATED TO THE OFFERED
CERTIFICATES, SUCH SHORTFALLS WILL BE ALLOCATED TO THE OFFERED CERTIFICATES ON A
PRO RATA BASIS, ADVERSELY AFFECTING THE YIELD ON YOUR INVESTMENT.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
PRINCIPAL BALANCE OF MORTGAGE LOANS
Substantial delays could be encountered in connection with the liquidation
of delinquent Mortgage Loans. Further, reimbursement of advances made on a
Mortgage Loan, liquidation expenses such as legal fees, real estate taxes,
hazard insurance and maintenance and preservation expenses may reduce the
portion of liquidation proceeds distributable to you. If a mortgaged property
fails to provide adequate security for the Mortgage Loan, you will incur a loss
on your investment if the credit enhancements are insufficient to cover the
loss.
HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Mortgage loans with higher loan-to-value ratios may present a greater risk
of loss than mortgage loans with loan- to-value ratios of 80.00% or below.
Approximately 29.08% of the Group I Mortgage Loans and approximately 14.02% of
the Group II Mortgage Loans (in each case, based on the aggregate principal
balance of the related Loan Group as of the Cut-off Date) had loan-to-value
ratios in excess of 80.00%, but no more than 100.00% at origination.
Additionally, the Originator's determination of the value of a mortgaged
property used in the calculation of the loan-to- value ratios of the Mortgage
Loans may differ from the appraised value of such mortgaged properties. See
"First Franklin Financial Corporation--Underwriting Standards" herein.
SIMULTANEOUS SECOND LIEN RISK
With respect to approximately 46.14% of the Group I Mortgage Loans and
approximately 69.34% of the Group II Mortgage Loans (in each case, based on the
aggregate principal balance of the related Loan Group as of the Cut-off Date),
at the time of origination of the first lien Mortgage Loan, the Originator also
originated a second lien mortgage loan which will not be included in the trust.
The weighted average loan-to-value ratio of such Mortgage Loans is approximately
79.90%, with respect to such Group I Mortgage Loans and approximately 78.60%,
with respect to such Group II Mortgage Loans and the weighted average combined
loan-to-value ratio of such Mortgage Loans (including the second lien) is
approximately 99.48%, with respect to such Group I Mortgage Loans and
approximately 96.54%, with respect to such Group II Mortgage Loans. With respect
to such Mortgage Loans, foreclosure frequency may be increased relative to
Mortgage Loans that were originated without a simultaneous second lien since
mortgagors have less equity in the mortgaged property. Investors should also
note that any mortgagor may obtain secondary financing at any time subsequent to
the date of origination of their mortgage loan from the Originator or from any
other lender.
GEOGRAPHIC CONCENTRATION
The chart presented under "Summary of Terms--Mortgage Loans" lists the
states with the highest concentrations of Mortgage Loans. Mortgaged properties
in California may be particularly susceptible to certain types of uninsurable
hazards, such as earthquakes, floods, mudslides and other natural disasters for
which there may or may not be insurance.
In addition, the conditions below will have a disproportionate impact on
the Mortgage Loans in general:
o Economic conditions in states with high concentrations of Mortgage Loans
may affect the ability of mortgagors to repay their loans on time even if
such conditions do not affect real property values.
o Declines in the residential real estate markets in the states with high
concentrations of Mortgage Loans may reduce the values of properties
located in those states, which would result in an increase in loan-to-value
ratios.
o Any increase in the market value of properties located in the states with
high concentrations of Mortgage Loans would reduce loan-to-value ratios and
could, therefore, make alternative sources of financing available to
mortgagors at lower interest rates, which could result in an increased rate
of prepayment of the Mortgage Loans.
S-15
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Originator. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder,
which require certain disclosures to the mortgagors regarding the terms of
the Mortgage Loans;
o the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or
the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the trust to damages and
administrative enforcement and could result in the borrowers rescinding such
Mortgage Loans against either the trust or subsequent holders of the Mortgage
Loans.
The Seller will represent that as of the Closing Date, each Mortgage Loan
originated by the Originator is in compliance with applicable federal, state and
local laws and regulations. In the event of a breach of such representation, the
Seller will be obligated to cure such breach or repurchase or replace the
affected Mortgage Loan in the manner described under "The Pooling
Agreement--Assignment of the Mortgage Loans" in this prospectus supplement.
HIGH COST LOANS
None of the Mortgage Loans are "High Cost Loans" within the meaning of the
federal Truth-in-Lending Act by the Home Ownership and Equity Protection Act of
1994 (the "Homeownership Act"). See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders; Federal
Laws Limiting Collections on Mortgage Loans" in the prospectus.
In addition to the Homeownership Act, however, a number of legislative
proposals have been introduced at both the federal and state 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 subject to the provisions of the Georgia
Fair Lending Act (the "Georgia Act") effective from October 1, 2002 to March 6,
2003.
See "Material Aspects of the Loans--Anti-Deficiency Legislation and Other
Limitations on Lenders" in the prospectus.
S-16
TRANSFER OF SERVICING MAY RESULT IN HIGHER DELINQUENCIES AND DEFAULTS
Chase Manhattan Mortgage Corporation will be the Servicer under the pooling
agreement. However, National City Home Loan Services, Inc. serviced the Mortgage
Loans prior to Chase Manhattan Mortgage Corporation. Although the transfer of
servicing with respect to the mortgage loans is expected to have been completed
in June 2003, all transfers of servicing involve the risk of disruption in
collections due to data input errors, misapplied or misdirected payments, system
incompatibilities and other reasons. As a result, the rate of delinquencies and
defaults are likely to increase at least for a period of time. There can be no
assurance as to the extent or duration of any disruptions associated with the
transfer of servicing or as to the resulting effects on the yield on the Offered
Certificates.
THE OFFERED CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The Offered Certificates will not represent an interest in or obligation of
the Depositor, the Servicer, the Originator, the Seller, the Trustee, the
Underwriter or any of their respective affiliates. Neither the Offered
Certificates nor the underlying Mortgage Loans will be guaranteed or insured by
any governmental agency or instrumentality, or by the Depositor, the Servicer,
the Trustee, the Underwriter or any of their respective affiliates. Proceeds of
the assets included in the trust and proceeds from the Net WAC Rate Carryover
Account will be the sole source of distributions on the Offered Certificates,
and there will be no recourse to the Depositor, the Servicer, the Originator,
the Seller, the Trustee, the Underwriter or any other entity in the event that
such proceeds are insufficient or otherwise unavailable to make all
distributions provided for under the Offered Certificates.
LACK OF LIQUIDITY
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the Offered Certificates but has no obligation to do so.
There is no assurance that such a secondary market will develop or, if it
develops, that it will continue. Consequently, you may not be able to sell your
certificates readily or at prices that will enable you to realize your desired
yield. The market values of the certificates are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary markets for asset-backed securities have experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity can have
a severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit, or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
NATURE OF THE MORTGAGE LOANS
Substantially all of the Mortgage Loans in the trust are loans that do not
meet the customary credit standards of Fannie Mae or Freddie Mac. As a result,
delinquencies and liquidation proceedings are more likely with these Mortgage
Loans than with mortgage loans that satisfy such credit standards. In the event
the Mortgage Loans do become delinquent or subject to liquidation, you may face
delays in receiving distributions and losses if the credit enhancement features
of the trust are insufficient to cover the delays and losses.
REDUCTION OR WITHDRAWAL OF RATINGS
Each rating agency rating the Offered Certificates may change or withdraw
its initial ratings at any time in the future if, in its judgment, circumstances
warrant a change. No rating agency is obligated to maintain the ratings at their
initial levels. If a rating agency reduces or withdraws its rating on one or
more classes of the Offered Certificates, the liquidity and market value of the
affected certificates is likely to be reduced.
SUITABILITY OF THE OFFERED CERTIFICATES AS INVESTMENTS
The Offered Certificates are not suitable investments for any investor that
requires a regular or predictable schedule of monthly distributions or
distribution on any specific date. The Offered Certificates are complex
investments that should be considered only by investors who, either alone or
with their financial, tax and legal advisors, have the expertise to analyze the
prepayment, reinvestment, default and market risk, the tax consequences of an
investment and the interaction of these factors.
S-17
THE MORTGAGE POOL
The information set forth in the following paragraphs is based on servicing
records and representations about the Mortgage Loans that were made by First
Franklin Financial Corporation at the time it sold the Mortgage Loans. Neither
the Underwriters nor the Trustee or any of their respective affiliates have made
or will make any representation as to the accuracy or completeness of such
information.
The statistical information presented in this prospectus supplement relates
to the Mortgage Loans and related Mortgaged Properties in each Loan Group 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 one or both Loan Groups as a
result of incomplete documentation or otherwise if the Depositor deems such
removal necessary or desirable, and may be prepaid at any time. A limited number
of other Mortgage Loans may be included in each Loan Group prior to the issuance
of the Certificates unless including such Mortgage Loans would materially alter
the characteristics of the Mortgage Loans in such Loan Group 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 each
Loan Group will be representative of the characteristics of each such Loan Group
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 in a Loan Group may vary.
Unless otherwise noted, all statistical percentages or weighted averages
set forth in this prospectus supplement are measured as a percentage of the
aggregate Principal Balance as of the Cut-off Date of the Mortgage Loans in the
related Loan Group (the "Cut-off Date Principal Balance"). The "Principal
Balance" of a Mortgage Loan as of any date is equal to the principal balance of
such Mortgage Loan at its origination, less the sum of scheduled and unscheduled
payments in respect of principal made on such Mortgage Loan. The "Pool Balance"
as of any date is equal to the aggregate of the Principal Balances of the
Mortgage Loans in both Loan Groups.
GENERAL
First Franklin Mortgage Loan Trust 2003-FF2 (the "Trust") will consist of a
pool of residential mortgage loans (the "Mortgage Loans" or the "Mortgage Pool")
which will consist of a group of fixed-rate and adjustable-rate, first lien,
fully-amortizing and balloon payment mortgage loans with principal balances that
conform to Fannie Mae and Freddie Mac loan limits (the "Group I Mortgage Loans")
and a group of fixed-rate and adjustable-rate, first lien, fully-amortizing and
balloon payment Mortgage Loans with principal balances that may or may not
conform to Fannie Mae and Freddie Mac loan limits (the "Group II Mortgage
Loans").
The Group I Mortgage Loans consist of approximately 3,856 Mortgage Loans
with a Cut-off Date Principal Balance of approximately $605,490,296. The Group
II Mortgage Loans consist of approximately 604 Mortgage Loans with a Cut-off
Date Principal Balance of approximately $268,969,957.
All of the Mortgage Loans will be secured by first mortgages or deeds of
trust or other similar security instruments (each, a "Mortgage"). The Mortgages
create first liens on one- to four-family residential properties consisting of
attached or detached one- to four-family dwelling units and individual
condominium units (each, a "Mortgaged Property").
The Depositor will purchase the Mortgage Loans from the Seller pursuant to
the Mortgage Loan Purchase Agreement, dated as of June 23, 2003 (the "Mortgage
Loan Purchase Agreement"), between the Seller and the Depositor. Pursuant to the
Pooling and Servicing Agreement, dated as of June 1, 2003 (the "Pooling
Agreement"), among the Depositor, the Servicer and the Trustee, the Depositor
will cause the Mortgage Loans and the Depositor's rights under the Mortgage Loan
Purchase Agreement to be assigned to the Trustee for the benefit of the
Certificateholders. See "The Pooling Agreement" herein and "The Agreements" in
the prospectus.
Each of the Mortgage Loans was selected from the Seller's portfolio of
mortgage loans. The Mortgage Loans were originated by the Originator or acquired
by the Originator in the secondary market in the ordinary course of its business
and were underwritten or re-underwritten by the Originator in accordance with
its underwriting standards as described under "First Franklin Financial
Corporation--Underwriting Standards" in this prospectus supplement.
S-18
Under the Mortgage Loan Purchase Agreement, the Seller will make certain
representations and warranties to the Depositor relating to, among other things,
the due execution and enforceability of the Mortgage Loan Purchase Agreement and
certain characteristics of the Mortgage Loans. Subject to certain limitations,
the Seller will be obligated to repurchase or substitute a similar mortgage loan
for any Mortgage Loan as to which there exists deficient documentation or an
uncured breach of any such representation or warranty, if such breach of any
such representation or warranty materially and adversely affects the
Certificateholders' interests in such Mortgage Loan. The Seller is selling the
Mortgage Loans without recourse and will have no obligation with respect to the
Certificates in its capacity as Seller, other than the repurchase or
substitution obligations described above. The Originator will have no obligation
with respect to the Certificates in its capacity as Originator.
The Mortgage Loans are subject to the "due-on-sale" provisions included
therein which provide that the Mortgage Loan is assumable by a creditworthy
purchaser of the related Mortgaged Property.
Each Mortgage Loan will accrue interest at the adjustable-rate or
fixed-rate calculated as specified under the terms of the related mortgage note
(each such rate, a "Mortgage Rate"). Approximately 92.25% of the Group I
Mortgage Loans are adjustable-rate Mortgage Loans (the "Adjustable-Rate Group I
Mortgage Loans") and approximately 7.75% of the Group I Mortgage Loans are
fixed-rate Mortgage Loans (the "Fixed-Rate Group I Mortgage Loans").
Approximately 91.62% of the Group II Mortgage Loans are adjustable-rate Mortgage
Loans (the "Adjustable-Rate Group II Mortgage Loans") and approximately 8.38% of
the Group II Mortgage Loans are fixed-rate Mortgage Loans (the "Fixed-Rate Group
II Mortgage Loans").
Each fixed-rate Mortgage Loan has a Mortgage Rate that is fixed for the
life of such Mortgage Loan.
Substantially all of the adjustable-rate Mortgage Loans accrue interest at
a Mortgage Rate that is adjustable following an initial period of one year, two
years, three years or five years following origination. Generally, the
adjustable-rate Mortgage Loans provide for semi-annual adjustment to the
mortgage rate (the "Mortgage Rate") thereon and for corresponding adjustments to
the monthly payment amount due thereon, in each case on each adjustment date
applicable thereto (each such date, an "Adjustment Date"); provided, that (i)
the first adjustment of the rates for approximately 0.03% of the adjustable-rate
Group I Mortgage Loans (by aggregate principal balance of the adjustable- rate
Group I Mortgage Loans as of the Cut-off Date) will not occur until one year
after the date of origination, (ii) the first adjustment of the rates for
approximately 93.15% of the adjustable-rate Group I Mortgage Loans and
approximately 84.92% of the adjustable-rate Group II Mortgage Loans, (in each
case, by aggregate principal balance of the adjustable- rate Mortgage Loans in
the related Loan Group as of the Cut-off Date) will not occur until two years
after the date of origination, (iii) the first adjustment of the rates for
approximately 1.01% of the adjustable-rate Group I Mortgage Loans and
approximately 1.39% of the adjustable-rate Group II Mortgage Loans (in each
case, by aggregate principal balance of the adjustable-rate Mortgage Loans in
the related Loan Group as of the Cut-off Date) will not occur until three years
after the date of origination and (iv) the first adjustment of the rates for
approximately 5.64% of the adjustable-rate Group I Mortgage Loans and
approximately 12.64% of the adjustable-rate Group II Mortgage Loans (in each
case, by aggregate principal balance of the adjustable-rate Mortgage Loans in
the related Loan Group as of the Cut-off Date) will not occur until five years
after the date of origination (each such adjustable-rate Mortgage Loan, a
"Delayed First Adjustment Mortgage Loan"). On each Adjustment Date for each
adjustable-rate Mortgage Loan, the Mortgage Rate thereon will be adjusted to
equal the sum, rounded to the nearest or next highest multiple of 0.125%, of
Six-Month LIBOR (as defined below) and a fixed percentage amount (the "Gross
Margin"). The Mortgage Rate on any adjustable-rate Mortgage Loan will not
decrease on the first related Adjustment Date, will not increase by more than a
stated percentage (3.000% per annum, as specified in the related mortgage note)
on the first related Adjustment Date (the "Initial Periodic Rate Cap") and will
not increase or decrease by more than a stated percentage (1.000% per annum, as
specified in the related mortgage note) on any Adjustment Date thereafter (the
"Periodic Rate Cap"). The Adjustable-Rate Group I Mortgage Loans have a weighted
average Initial Periodic Rate Cap of approximately 2.996% per annum and a
weighted average Periodic Rate Cap of approximately 1.000% per annum thereafter.
The Adjustable-Rate Group II Mortgage Loans have a weighted average Initial
Periodic Rate Cap of approximately 2.979% per annum and a weighted average
Periodic Rate Cap of approximately 1.000% per annum thereafter. Each Mortgage
Rate on each adjustable-rate Mortgage Loan 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"). 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 the related adjustable-rate Mortgage Loan
over its remaining term, and pay interest at the Mortgage
S-19
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 and the related Gross Margin, rounded as described in this prospectus
supplement. None of the adjustable-rate Mortgage Loans will permit the related
mortgagor to convert the adjustable Mortgage Rate thereon to a fixed Mortgage
Rate.
Approximately 56.17% of the Group I Mortgage Loans and approximately 64.72%
of the Group II Mortgage Loans (the "Interest Only Mortgage Loans") provide that
for a period of 60 months after origination, the required monthly payments are
limited to accrued interest (each, an "Interest Only Period"). At the end of the
Interest Only Period, the monthly payments on each such Mortgage Loan will be
recalculated to provide for amortization of the Principal Balance by the
maturity date and payment of interest at the then-current Mortgage Rate.
Approximately 93.07% of the Group I Mortgage Loans and approximately 93.44%
of the Group II Mortgage Loans provide for payment by the mortgagor of a
prepayment charge in limited circumstances on certain prepayments. Generally,
each such Mortgage Loan provides for payment of a prepayment charge on partial
prepayments and prepayments in full made within a stated number of months that
is between 12 and 60 months from the date of origination of such Mortgage Loan.
The amount of the prepayment charge is provided in the related mortgage note and
with respect to approximately 87.13% of the Mortgage Loans that have a
prepayment charge, the prepayment charge is equal to six months' interest on any
amounts prepaid in excess of 20% of the original Principal Balance of the
related Mortgage Loan in any 12 month period. The holders of the Class P
Certificates will be entitled to all prepayment charges received on the Mortgage
Loans, and such amounts will not be available for distribution on the other
classes of Certificates. Under certain circumstances, as described in the
Pooling Agreement, the Servicer may waive the payment of any otherwise
applicable prepayment charge. Investors should conduct their own analysis of the
effect, if any, that the prepayment charges, and decisions by the Servicer with
respect to the waiver thereof, may have on the prepayment performance of the
Mortgage Loans. The Depositor makes no representations as to the effect that the
prepayment charges, and decisions by the Servicer with respect to the waiver
thereof, may have on the prepayment performance of the Mortgage Loans.
Approximately 6.63% of the Group I Mortgage Loans and approximately 2.48%
of the Group II Mortgage Loans (the "Dividend Mortgage Loans") contain a
provision entitling the mortgagor thereunder to annual refunds, at the end of
each of the first four years of the life of the related Mortgage Loan, of a
portion of the interest paid by such mortgagor during the preceding twelve
months, if the mortgagor is not currently delinquent and has not defaulted or
prepaid. Accordingly, the Servicer will retain, each month on behalf of the
Trust, interest on each Dividend Mortgage Loan at the Dividend Rate then
applicable for such Mortgage Loan, and such retained interest will not be
available for distribution to Certificateholders. All of the Dividend Mortgage
Loans are fixed-rate Mortgage Loans or Delayed First Adjustment Mortgage Loans
with first Adjustment Dates scheduled to occur after an initial period of two
years or three years following the date of origination. The per annum "Dividend
Rate" for each Dividend Mortgage Loan is as follows:
DIVIDEND RATES OF THE FIXED-RATE MORTGAGE LOANS AND THE DELAYED FIRST
ADJUSTMENT MORTGAGE LOANS THAT ARE DIVIDEND MORTGAGE LOANS
TWO YEAR DELAYED FIRST THREE YEAR DELAYED FIRST
FIXED-RATE ADJUSTMENT MORTGAGE ADJUSTMENT MORTGAGE
MORTGAGE LOANS LOANS LOANS
--------------- ---------------------- ------------------------
Year 1.................. 0.25% 0.25% 0.25%
Year 2.................. 0.25% 0.25% 0.25%
Year 3.................. 0.25% 1.00% 0.25%
Year 4.................. 0.50% 0.25% 1.00%
Year 5 and thereafter... 0.00% 0.00% 0.00%
THE INDEX. The index with respect to the adjustable-rate Mortgage Loans 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 note as published by the Western Edition of
THE WALL STREET JOURNAL ("Six Month LIBOR" or the "Index"). If the Index becomes
unpublished or is otherwise unavailable, the Servicer will select an alternative
index which is based upon comparable information.
S-20
GROUP I MORTGAGE LOAN STATISTICS
The following statistical information, unless otherwise specified, is based
upon percentages of the Principal Balances of the Group I Mortgage Loans as of
the Cut-off Date.
Approximately 29.08% of the Group I Mortgage Loans had loan-to-value ratios
at origination in excess of 80.00%. No Group I Mortgage Loan had a loan-to-value
ratio at origination in excess of 100.00%. The weighted average loan-to-value
ratio of the Group I Mortgage Loans at origination was approximately 80.98%.
There can be no assurance that the loan-to-value ratio of any Group I Mortgage
Loan determined at any time after origination is less than or equal to its
original loan-to-value ratio. Additionally, the Originator's determination of
the value of a Mortgaged Property used in the calculation of the original
loan-to-value ratios of the Mortgage Loans may differ from the appraised value
of such Mortgaged Property or the actual value of such Mortgaged Property at
origination. See "Risk Factors--High Loan-to-Value Ratios Increase Risk of
Loss."
All of the Group I Mortgage Loans have a scheduled payment due each month
(the "Due Date") on the first day of the month.
The weighted average remaining term to maturity of the Group I Mortgage
Loans was approximately 356 months as of the Cut-off Date. None of the Group I
Mortgage Loans had a first Due Date prior to November 1, 2002 or after May 1,
2003, or has a remaining term to maturity of less than 175 months or greater
than 358 months as of the Cut-off Date. The latest maturity date of any Group I
Mortgage Loan is April 1, 2033.
The average Principal Balance of the Group I Mortgage Loans at origination
was approximately $157,193. The average Cut-off Date Principal Balance of the
Group I Mortgage Loans was approximately $157,025. No Group I Mortgage Loan had
a Cut-off Date Principal Balance of greater than approximately $568,000 or less
than approximately $22,900.
As of the Cut-off Date, the Group I Mortgage Loans had Mortgage Rates of
not less than 4.375% per annum and not more than 10.750% per annum and the
weighted average Mortgage Rate of the Group I Mortgage Loans was approximately
7.103% per annum. As of the Cut-off Date, the Adjustable-Rate Group I Mortgage
Loans had Gross Margins ranging from 2.875% per annum to 7.875% per annum,
Minimum Mortgage Rates ranging from 4.375% per annum to 10.500% per annum and
Maximum Mortgage Rates ranging from 10.375% per annum to 16.500% per annum. As
of the Cut-off Date, the weighted average Gross Margin of the Adjustable-Rate
Group I Mortgage Loans was approximately 4.802% per annum, the weighted average
Minimum Mortgage Rate of the Adjustable-Rate Group I Mortgage Loans was
approximately 7.024% per annum and the weighted average Maximum Mortgage Rate of
the Adjustable-Rate Group I Mortgage Loans was approximately 13.024% per annum.
The latest next Adjustment Date following the Cut-off Date on any
Adjustable-Rate Group I Mortgage Loan occurs in May 2008 and the weighted
average time until the next Adjustment Date for all of the Adjustable-Rate Group
I Mortgage Loans is approximately 24 months.
The Group I Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
S-21
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
PRINCIPAL BALANCE ($) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ------------------------ --------- ----------------- ------------------------
22,900 - 50,000....... 135 $ 5,619,063.98 0.93%
50,001 - 100,000....... 906 71,050,493.03 11.73
100,001 - 150,000....... 987 123,344,464.17 20.37
150,001 - 200,000....... 769 134,434,317.38 22.20
200,001 - 250,000....... 513 115,432,239.09 19.06
250,001 - 300,000....... 421 115,033,690.82 19.00
300,001 - 350,000....... 112 35,065,673.60 5.79
350,001 - 400,000....... 9 3,417,671.40 0.56
450,001 - 500,000....... 2 977,685.41 0.16
500,001 - 550,000....... 1 546,997.45 0.09
550,001 - 568,000....... 1 568,000.00 0.09
----- --------------- ------
Total................. 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) The average Cut-off Date Principal Balance of the Group I Mortgage Loans was
approximately $157,025.
CREDIT SCORES FOR THE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
CREDIT SCORE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ------------------ --------- ----------------- ------------------------
534-550........... 289 $ 37,189,700.17 6.14%
551-575........... 776 99,081,099.38 16.36
576-600........... 235 33,310,879.61 5.50
601-625........... 544 89,679,912.14 14.81
626-650........... 542 89,711,393.33 14.82
651-675........... 456 77,865,256.77 12.86
676-700........... 317 54,396,119.93 8.98
701-725........... 351 61,691,528.06 10.19
726-750........... 177 31,132,167.91 5.14
751-775........... 108 19,621,422.51 3.24
776-800........... 55 10,686,635.70 1.76
801-820........... 6 1,124,180.82 0.19
----- --------------- ------
Total........ 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) The weighted average credit score of the Group I Mortgage Loans that had
credit scores was approximately 641.
S-22
ORIGINAL TERMS TO MATURITY OF THE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
ORIGINAL TERM (MONTHS) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ---------------------- --------- ----------------- ------------------------
180................... 52 $ 4,310,956.47 0.71%
240................... 2 300,942.27 0.05
360................... 3,802 600,878,397.59 99.24
----- --------------- ------
Total............ 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) The weighted average original term to maturity of the Group I Mortgage Loans
was approximately 359 months.
REMAINING TERMS TO MATURITY OF THE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
REMAINING TERM (MONTHS) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ----------------------- --------- ----------------- ------------------------
175-176................ 2 $ 126,850.96 0.02%
177-178................ 50 4,184,105.51 0.69
237-238................ 2 300,942.27 0.05
351-352................ 4 552,900.69 0.09
353-354................ 20 3,196,299.65 0.53
355-356................ 184 27,713,109.47 4.58
357-358................ 3,594 569,416,087.78 94.04
----- --------------- ------
Total............. 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) The weighted average remaining term to maturity of the Group I Mortgage
Loans was approximately 356 months.
PROPERTY TYPES OF THE GROUP I MORTGAGE LOANS
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
PROPERTY TYPE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------------- --------- ----------------- ------------------------
Single Family ............. 2,739 $412,886,516.19 68.19%
PUD(1)..................... 531 95,144,327.91 15.71
Condominium................ 371 61,693,006.92 10.19
2-4 Units.................. 164 30,749,180.84 5.08
Manufactured Housing....... 51 5,017,264.47 0.83
----- --------------- ------
Total................. 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) PUD refers to a home or "unit" in a Planned Unit Development.
S-23
OCCUPANCY STATUS OF THE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
OCCUPANCY STATUS LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- -------------------- --------- ----------------- ------------------------
Primary............. 3,725 $589,475,038.91 97.35%
Non-owner........... 116 13,939,307.32 2.30
Second Home......... 15 2,075,950.10 0.34
----- --------------- ------
Total.......... 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) Occupancy as represented by the mortgagor at the time of origination.
PURPOSE OF THE GROUP I MORTGAGE LOANS
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
PURPOSE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ----------------------- --------- ----------------- ------------------------
Purchase............... 2,261 $371,641,005.42 61.38%
Cash Out Refinance..... 1,162 171,312,364.29 28.29
Rate/Term Refinance.... 433 62,536,926.62 10.33
----- --------------- ------
Total............. 3,856 $605,490,296.33 100.00%
===== =============== ======
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS(1)(2)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
ORIGINAL LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- -------------------------------- --------- ----------------- ------------------------
16.95 - 20.00................... 3 $ 152,681.39 0.03%
20.01 - 25.00................... 3 415,426.81 0.07
25.01 - 30.00................... 9 812,698.27 0.13
30.01 - 35.00................... 10 947,276.39 0.16
35.01 - 40.00................... 7 395,977.74 0.07
40.01 - 45.00................... 16 1,409,512.61 0.23
45.01 - 50.00................... 27 2,738,714.64 0.45
50.01 - 55.00................... 34 4,237,966.12 0.70
55.01 - 60.00................... 55 7,410,302.20 1.22
60.01 - 65.00................... 94 13,191,561.06 2.18
65.01 - 70.00................... 128 17,494,957.90 2.89
70.01 - 75.00................... 202 29,563,029.06 4.88
75.01 - 80.00................... 2,072 350,634,094.02 57.91
80.01 - 85.00................... 416 57,943,882.07 9.57
85.01 - 90.00................... 355 53,963,884.15 8.91
90.01 - 95.00................... 369 55,170,504.15 9.11
95.01 - 100.00................... 56 9,007,827.75 1.49
----- --------------- ------
Total......................... 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) The weighted average original loan-to-value ratio of the Group I Mortgage
Loans as of the Cut-off Date was approximately 80.98%.
(2) For a description of the determination of loan-to-value ratio by the
Originator see "First Franklin Financial Corporation--Underwriting
Standards" herein.
S-24
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES RELATED TO THE GROUP I
MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
LOCATION LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- --------- ----------------- ------------------------
Alabama.............. 18 $ 1,809,570.16 0.30%
Arizona.............. 73 9,516,339.22 1.57
Arkansas............. 3 164,981.15 0.03
California........... 1,362 288,867,045.18 47.71
Colorado............. 84 13,982,261.49 2.31
Connecticut.......... 17 2,511,622.17 0.41
Delaware............. 3 498,259.56 0.08
Florida.............. 291 35,528,036.10 5.87
Georgia.............. 4 497,854.20 0.08
Idaho................ 7 880,259.18 0.15
Illinois............. 181 25,628,066.68 4.23
Indiana.............. 55 5,361,340.28 0.89
Iowa................. 16 1,262,071.40 0.21
Kansas............... 16 1,626,265.95 0.27
Kentucky............. 45 4,178,219.05 0.69
Louisiana............ 1 197,600.00 0.03
Maine................ 14 1,388,386.14 0.23
Maryland............. 31 5,537,606.70 0.91
Massachusetts........ 47 8,645,875.79 1.43
Michigan............. 198 24,671,822.34 4.07
Minnesota............ 88 13,329,197.79 2.20
Mississippi.......... 31 2,595,316.02 0.43
Missouri............. 75 7,616,129.99 1.26
Montana.............. 1 91,872.94 0.02
Nebraska............. 21 1,916,817.25 0.32
Nevada............... 80 11,928,602.80 1.97
New Hampshire........ 11 1,415,450.53 0.23
New Jersey........... 45 7,804,311.81 1.29
New Mexico........... 10 1,327,172.89 0.22
New York............. 87 14,988,049.51 2.48
North Carolina....... 102 12,155,955.49 2.01
North Dakota......... 1 102,384.64 0.02
Ohio................. 177 18,041,236.88 2.98
Oklahoma............. 4 259,480.72 0.04
Oregon............... 94 12,785,979.40 2.11
Pennsylvania......... 39 3,842,640.41 0.63
Rhode Island......... 6 747,926.58 0.12
South Carolina....... 28 3,229,732.37 0.53
South Dakota......... 3 281,830.28 0.05
Tennessee............ 66 6,986,808.01 1.15
Texas................ 151 16,680,317.02 2.75
Utah................. 77 9,241,863.38 1.53
Vermont.............. 2 315,783.80 0.05
Virginia............. 35 5,124,186.05 0.85
Washington........... 108 14,626,604.33 2.42
West Virginia........ 2 271,227.97 0.04
Wisconsin............ 43 4,775,895.84 0.79
Wyoming.............. 3 254,038.89 0.04
----- --------------- ------
Total........ 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) The greatest ZIP Code geographic concentration of Group I Mortgage Loans
was approximately 0.83% in the 92592 ZIP Code.
S-25
DOCUMENTATION LEVELS OF THE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
DOCUMENTATION LEVEL LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- -------------------------------- --------- ----------------- ------------------------
Full Documentation.............. 3,259 $516,468,596.25 85.30%
No Income Verification.......... 273 41,455,558.35 6.85
No Documentation................ 256 35,663,424.83 5.89
Limited Income Verification..... 68 11,902,716.90 1.97
----- --------------- ------
Total...................... 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) For a description of each Documentation Level, see "First Franklin
Financial Corporation--Underwriting Standards" herein.
CURRENT MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
CURRENT MORTGAGE RATE (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ------------------------- --------- ----------------- ------------------------
4.375 - 5.000.......... 26 $ 5,236,298.31 0.86%
5.001 - 6.000.......... 489 97,842,767.10 16.16
6.001 - 7.000.......... 1,259 222,131,473.51 36.69
7.001 - 8.000.......... 1,084 159,824,680.06 26.40
8.001 - 9.000.......... 762 95,055,111.36 15.70
9.001 - 10.000.......... 217 23,514,738.33 3.88
10.001 - 10.750.......... 19 1,885,227.66 0.31
----- --------------- ------
Total................ 3,856 $605,490,296.33 100.00%
===== =============== ======
___________________
(1) The weighted average current Mortgage Rate of the Group I Mortgage Loans as
of the Cut-off Date was approximately 7.103% per annum.
GROSS MARGINS OF THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
GROSS MARGIN (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- --------- ----------------- ------------------------
2.875 - 3.000........ 8 $ 1,200,816.67 0.21%
3.001 - 4.000........ 718 140,081,057.26 25.08
4.001 - 5.000........ 1,266 216,494,307.11 38.76
5.001 - 6.000........ 950 137,978,470.47 24.70
6.001 - 7.000........ 455 56,162,733.35 10.05
7.001 - 7.875........ 56 6,641,979.42 1.19
----- --------------- ------
Total............ 3,453 $558,559,364.28 100.00%
===== =============== ======
___________________
(1) The weighted average Gross Margin of the Adjustable-Rate Group I Mortgage
Loans as of the Cut-off Date was approximately 4.802% per annum.
S-26
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
NEXT ADJUSTMENT DATE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ---------------------- --------- ----------------- ------------------------
September 1, 2003..... 1 $ 233,603.52 0.04%
October 1, 2003....... 3 713,412.35 0.13
April 1, 2004......... 1 170,192.81 0.03
October 1, 2004....... 4 552,900.69 0.10
November 1, 2004...... 5 799,193.52 0.14
December 1, 2004...... 11 1,787,449.12 0.32
January 1, 2005....... 17 2,325,795.63 0.42
February 1, 2005...... 147 22,194,763.06 3.97
March 1, 2005......... 1,529 244,817,890.01 43.83
April 1, 2005......... 1,532 244,859,782.38 43.84
May 1, 2005........... 19 2,971,758.48 0.53
February 1, 2006...... 1 150,000.00 0.03
March 1, 2006......... 20 3,473,706.49 0.62
April 1, 2006......... 15 2,032,595.02 0.36
February 1, 2008...... 4 905,380.62 0.16
March 1, 2008......... 69 14,115,015.87 2.53
April 1, 2008......... 74 16,303,924.71 2.92
May 1, 2008........... 1 152,000.00 0.03
----- --------------- ------
Total......... 3,453 $558,559,364.28 100.00%
===== =============== ======
___________________
(1) The weighted average time until the next Adjustment Date for the
Adjustable-Rate Group I Mortgage Loans as of the Cut-off Date was
approximately 24 months.
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
MAXIMUM MORTGAGE RATE (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ------------------------- --------- ----------------- ------------------------
10.375 - 11.000......... 26 $ 5,236,298.31 0.94%
11.001 - 12.000......... 487 97,541,628.27 17.46
12.001 - 13.000......... 1,208 215,649,889.08 38.61
13.001 - 14.000......... 935 139,845,618.68 25.04
14.001 - 15.000......... 638 81,392,895.44 14.57
15.001 - 16.000......... 156 18,229,688.75 3.26
16.001 - 16.500......... 3 663,345.75 0.12
----- --------------- ------
Total................ 3,453 $558,559,364.28 100.00%
===== =============== ======
___________________
(1) The weighted average Maximum Mortgage Rate of the Adjustable-Rate Group I
Mortgage Loans as of the Cut-off Date was approximately 13.024% per annum.
S-27
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
MINIMUM MORTGAGE RATE (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ------------------------- --------- ----------------- ------------------------
4.375 - 5.000.......... 26 $ 5,236,298.31 0.94%
5.001 - 6.000.......... 487 97,541,628.27 17.46
6.001 - 7.000.......... 1,208 215,649,889.08 38.61
7.001 - 8.000.......... 935 139,845,618.68 25.04
8.001 - 9.000.......... 638 81,392,895.44 14.57
9.001 - 10.000.......... 156 18,229,688.75 3.26
10.001 - 10.500.......... 3 663,345.75 0.12
----- --------------- ------
Total................ 3,453 $558,559,364.28 100.00%
===== =============== ======
___________________
(1) The weighted average Minimum Mortgage Rate of the Adjustable-Rate Group I
Mortgage Loans as of the Cut-off Date was approximately 7.024% per annum.
INITIAL PERIODIC RATE CAPS OF THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
INITIAL PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ----------------------------- --------- ----------------- ------------------------
1.000........................ 4 $ 947,015.87 0.17%
2.000........................ 1 170,192.81 0.03
3.000........................ 3,448 557,442,155.60 99.80
----- --------------- ------
Total................... 3,453 $558,559,364.28 100.00%
===== =============== ======
___________________
(1) Relates solely to initial rate adjustments.
SUBSEQUENT PERIODIC RATE CAPS OF THE ADJUSTABLE-RATE GROUP I MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- --------- ----------------- ------------------------
1.000................ 3,453 $558,559,364.28 100.00%
----- --------------- ------
Total........... 3,453 $558,559,364.28 100.00%
===== =============== ======
___________________
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
GROUP II MORTGAGE LOAN STATISTICS
The following statistical information, unless otherwise specified, is based
upon percentages of the Principal Balances of the Group II Mortgage Loans as of
the Cut-off Date.
Approximately 14.02% of the Group II Mortgage Loans had loan-to-value
ratios at origination in excess of 80.00%. No Group II Mortgage Loan had a
loan-to-value ratio at origination in excess of 100.00%. The weighted average
loan-to-value ratio of the Group II Mortgage Loans at origination was
approximately 79.02%. There can be no assurance that the loan-to-value ratio of
any Group II Mortgage Loan determined at any time after origination is less than
or equal to its original loan-to-value ratio. Additionally, the Originator's
determination of the value of a Mortgaged Property used in the calculation of
the original loan-to-value ratios of the Mortgage Loans may differ from the
appraised value of such Mortgaged Property or the actual value of such Mortgaged
Property at origination. See "Risk Factors--High Loan-to-Value Ratios Increase
Risk of Loss."
All of the Group II Mortgage Loans have a Due Date on the first day of the
month.
S-28
The weighted average remaining term to maturity of the Group II Mortgage
Loans was approximately 357 months as of the Cut-off Date. None of the Group II
Mortgage Loans had a first Due Date prior to January 1, 2003 or after May 1,
2003, or has a remaining term to maturity of less than 178 months or greater
than 358 months as of the Cut- off Date. The latest maturity date of any Group
II Mortgage Loan is April 1, 2033.
The average Principal Balance of the Group II Mortgage Loans at origination
was approximately $445,731. The average Cut-off Date Principal Balance of the
Group II Mortgage Loans was approximately $445,314. No Group II Mortgage Loan
had a Cut-off Date Principal Balance of greater than approximately $1,006,648 or
less than approximately $26,000.
As of the Cut-off Date, the Group II Mortgage Loans had Mortgage Rates of
not less than 4.750% per annum and not more than 9.625% per annum and the
weighted average Mortgage Rate of the Group II Mortgage Loans was approximately
6.565% per annum. As of the Cut-off Date, the Adjustable-Rate Group II Mortgage
Loans had Gross Margins ranging from 3.000% per annum to 7.250% per annum,
Minimum Mortgage Rates ranging from 4.750% per annum to 9.625% per annum and
Maximum Mortgage Rates ranging from 10.750% per annum to 15.625% per annum. As
of the Cut-off Date, the weighted average Gross Margin of the Adjustable-Rate
Group II Mortgage Loans was approximately 4.183% per annum, the weighted average
Minimum Mortgage Rate of the Adjustable-Rate Group II Mortgage Loans was
approximately 6.523% per annum and the weighted average Maximum Mortgage Rate of
the Adjustable-Rate Group II Mortgage Loans was approximately 12.523% per annum.
The latest next Adjustment Date following the Cut-off Date on any
Adjustable-Rate Group II Mortgage Loan occurs in April 2008 and the weighted
average time until the next Adjustment Date for all of the Adjustable-Rate Group
II Mortgage Loans is approximately 26 months.
The Group II Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
S-29
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
PRINCIPAL BALANCE ($) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ---------------------------- --------- ----------------- ------------------------
26,000 - 50,000........ 5 $ 169,371.78 0.06%
50,001 - 100,000........ 18 1,352,943.17 0.50
100,001 - 150,000........ 5 607,326.12 0.23
150,001 - 200,000........ 2 342,555.37 0.13
200,001 - 250,000........ 2 453,138.26 0.17
300,001 - 350,000........ 96 32,204,160.20 11.97
350,001 - 400,000........ 128 47,913,702.96 17.81
400,001 - 450,000........ 96 41,291,930.59 15.35
450,001 - 500,000........ 78 37,256,747.71 13.85
500,001 - 550,000........ 60 31,491,621.08 11.71
550,001 - 600,000........ 43 24,795,595.63 9.22
600,001 - 650,000........ 28 17,593,233.30 6.54
650,001 - 700,000........ 14 9,492,936.47 3.53
700,001 - 750,000........ 8 5,881,738.49 2.19
750,001 - 800,000........ 9 7,059,175.59 2.62
800,001 - 850,000........ 4 3,319,945.18 1.23
850,001 - 900,000........ 1 851,250.00 0.32
900,001 - 950,000........ 1 925,937.10 0.34
950,001 -1,000,000........ 5 4,960,000.00 1.84
1,000,001 -1,006,648........ 1 1,006,647.61 0.37
--- --------------- ------
Total............. 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) The average Cut-off Date Principal Balance of the Group II Mortgage Loans
was approximately $445,314.
CREDIT SCORES FOR THE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
CREDIT SCORE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- --------- ----------------- ------------------------
540-550.............. 8 $ 2,188,826.98 0.81%
551-575.............. 25 7,282,388.07 2.71
576-600.............. 21 8,284,603.65 3.08
601-625.............. 73 30,878,104.94 11.48
626-650.............. 110 49,314,151.41 18.33
651-675.............. 98 45,143,523.39 16.78
676-700.............. 78 35,814,674.92 13.32
701-725.............. 91 42,598,749.90 15.84
726-750.............. 47 21,905,376.84 8.14
751-775.............. 40 18,711,589.59 6.96
776-799.............. 13 6,847,966.92 2.55
--- --------------- ------
Total............ 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) The weighted average credit score of the Group II Mortgage Loans that had
credit scores was approximately 674.
S-30
ORIGINAL TERMS TO MATURITY OF THE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
ORIGINAL TERM (MONTHS) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ---------------------- --------- ----------------- ------------------------
180................... 1 $ 103,466.58 0.04%
240................... 1 99,603.15 0.04
360................... 602 268,766,886.88 99.92
--- --------------- ------
Total....... 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) The weighted average original term to maturity of the Group II Mortgage
Loans was approximately 360 months.
REMAINING TERMS TO MATURITY OF THE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
REMAINING TERM (MONTHS) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ----------------------- --------- ----------------- ------------------------
178-178................ 1 $ 103,466.58 0.04%
237-238................ 1 99,603.15 0.04
353-354................ 1 378,889.01 0.14
355-356................ 27 10,728,192.85 3.99
357-358................ 574 257,659,805.02 95.80
--- --------------- ------
Total............ 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) The weighted average remaining term to maturity of the Group II Mortgage
Loans was approximately 357 months.
PROPERTY TYPES OF THE GROUP II MORTGAGE LOANS
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
PROPERTY TYPE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- --------- ----------------- ------------------------
Single Family ....... 381 $168,042,518.23 62.48%
PUD(1)............... 173 79,759,332.40 29.65
Condominium.......... 42 16,509,236.91 6.14
2-4 Units............ 8 4,658,869.07 1.73
--- --------------- ------
Total........... 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) PUD refers to a home or "unit" in a Planned Unit Development.
S-31
OCCUPANCY STATUS OF THE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
OCCUPANCY STATUS LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- --------- ----------------- ------------------------
Primary.............. 597 $267,334,046.73 99.39%
Non-Owner............ 7 1,635,909.88 0.61
--- --------------- ------
Total........... 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) Occupancy as represented by the mortgagor at the time of origination.
PURPOSE OF THE GROUP II MORTGAGE LOANS
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
PURPOSE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ----------------------- --------- ----------------- ------------------------
Purchase............... 410 $187,498,758.15 69.71%
Cash Out Refinance..... 140 55,159,660.43 20.51
Rate/Term Refinance.... 54 26,311,538.03 9.78
--- --------------- ------
Total............. 604 $268,969,956.61 100.00%
=== =============== ======
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS(1)(2)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
ORIGINAL LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- -------------------------------- --------- ----------------- ------------------------
13.21 - 15.00................... 1 $ 34,941.01 0.01%
35.01 - 40.00................... 1 325,000.00 0.12
40.01 - 45.00................... 3 1,744,478.09 0.65
45.01 - 50.00................... 1 84,775.09 0.03
50.01 - 55.00................... 3 1,313,449.95 0.49
55.01 - 60.00................... 10 5,099,212.25 1.90
60.01 - 65.00................... 15 5,857,371.12 2.18
65.01 - 70.00................... 22 11,015,952.49 4.10
70.01 - 75.00................... 53 27,791,195.49 10.33
75.01 - 80.00................... 394 177,982,413.42 66.17
80.01 - 85.00................... 27 10,680,722.13 3.97
85.01 - 90.00................... 42 16,099,369.15 5.99
90.01 - 95.00................... 30 10,423,431.29 3.88
95.01 -100.00................... 2 517,645.13 0.19
--- --------------- ------
Total..................... 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) The weighted average original loan-to-value ratio of the Group II Mortgage
Loans as of the Cut-off Date was approximately 79.02%.
(2) For a description of the determination of loan-to-value ratio by the
Originator see "First Franklin Financial Corporation--Underwriting
Standards" herein.
S-32
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES RELATED TO THE GROUP II
MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
LOCATION LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ---------------------- --------- ----------------- ------------------------
Arizona............... 3 $ 1,510,446.01 0.56%
California............ 446 203,895,872.12 75.81
Colorado.............. 9 4,562,932.81 1.70
Connecticut........... 4 1,668,394.47 0.62
Florida............... 31 6,202,211.83 2.31
Georgia............... 9 4,063,927.73 1.51
Illinois.............. 12 5,359,498.13 1.99
Indiana............... 6 1,766,127.14 0.66
Maine................. 1 359,539.28 0.13
Maryland.............. 6 3,720,575.35 1.38
Massachusetts......... 4 2,103,671.09 0.78
Michigan.............. 11 5,475,214.55 2.04
Minnesota............. 1 573,050.00 0.21
Missouri.............. 1 426,400.00 0.16
Nevada................ 3 1,327,880.05 0.49
New Hampshire......... 1 598,353.23 0.22
New Jersey............ 1 580,384.55 0.22
New Mexico............ 3 1,422,137.41 0.53
New York.............. 12 6,034,080.12 2.24
North Carolina........ 3 1,367,094.70 0.51
Ohio.................. 10 2,765,427.27 1.03
Oregon................ 2 924,903.11 0.34
South Carolina........ 3 1,094,220.47 0.41
Tennessee............. 2 1,042,103.06 0.39
Texas................. 8 4,578,909.82 1.70
Utah.................. 1 471,056.09 0.18
Virginia.............. 4 1,891,400.00 0.70
Washington............ 7 3,184,146.22 1.18
--- --------------- ------
Total......... 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) The greatest ZIP Code geographic concentration of Group II Mortgage Loans
was approximately 1.18% in the 92127 ZIP Code.
S-33
DOCUMENTATION LEVELS OF THE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
DOCUMENTATION LEVEL LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- -------------------------------- --------- ----------------- ------------------------
Full Documentation.............. 540 $246,892,887.66 91.79%
No Income Verification.......... 27 10,028,830.81 3.73
Limited Income Verification..... 16 6,514,234.57 2.42
No Documentation................ 21 5,534,003.57 2.06
--- --------------- ------
Total...................... 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) For a description of each Documentation Level, see "First Franklin
Financial Corporation--Underwriting Standards" herein.
CURRENT MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
CURRENT MORTGAGE RATE (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ------------------------- --------- ----------------- ------------------------
4.750 - 5.000............ 6 $ 2,503,262.80 0.93%
5.001 - 6.000............ 160 75,200,377.48 27.96
6.001 - 7.000............ 283 130,197,888.99 48.41
7.001 - 8.000............ 115 49,206,320.50 18.29
8.001 - 9.000............ 37 11,351,527.47 4.22
9.001 - 9.625............ 3 510,579.37 0.19
--- --------------- ------
Total................. 604 $268,969,956.61 100.00%
=== =============== ======
___________________
(1) The weighted average current Mortgage Rate of the Group II Mortgage Loans
as of the Cut-off Date was approximately 6.565% per annum.
GROSS MARGINS OF THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
GROSS MARGIN (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- --------- ----------------- ------------------------
3.000 - 3.000........ 3 $ 1,185,200.00 0.48%
3.001 - 4.000........ 266 129,233,140.83 52.44
4.001 - 5.000........ 198 86,545,443.11 35.12
5.001 - 6.000........ 65 25,584,341.46 10.38
6.001 - 7.000........ 9 3,108,113.60 1.26
7.001 - 7.250........ 2 774,075.01 0.31
--- --------------- ------
Total............. 543 $246,430,314.01 100.00%
=== =============== ======
___________________
(1) The weighted average Gross Margin of the Adjustable-Rate Group II Mortgage
Loans as of the Cut-off Date was approximately 4.183% per annum.
S-34
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
NEXT ADJUSTMENT DATE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- --------- ----------------- ------------------------
August 1, 2003....... 1 $ 647,796.83 0.26%
September 1, 2003.... 1 349,289.32 0.14
October 1, 2003...... 3 1,600,555.00 0.65
December 1, 2004..... 1 378,889.01 0.15
January 1, 2005...... 5 2,968,583.66 1.20
February 1, 2005..... 14 5,587,971.21 2.27
March 1, 2005........ 207 94,048,140.60 38.16
April 1, 2005........ 234 105,895,586.11 42.97
May 1, 2005.......... 1 377,850.00 0.15
February1, 2006...... 2 166,082.74 0.07
March 1, 2006........ 3 1,372,800.00 0.56
April 1, 2006........ 8 1,898,720.95 0.77
January 1, 2008...... 1 359,199.99 0.15
February 1, 2008..... 2 777,697.49 0.32
March 1, 2008........ 28 14,256,572.52 5.79
April 1, 2008........ 32 15,744,578.58 6.39
--- --------------- ------
Total........ 543 $246,430,314.01 100.00%
=== =============== ======
___________________
(1) The weighted average time until the next Adjustment Date for the
Adjustable-Rate Group II Mortgage Loans as of the Cut-off Date was
approximately 26 months.
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
MAXIMUM MORTGAGE RATE (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ------------------------- --------- ----------------- ------------------------
10.750 - 11.000.......... 6 $ 2,503,262.80 1.02%
11.001 - 12.000.......... 158 74,179,454.41 30.10
12.001 - 13.000.......... 255 116,497,585.53 47.27
13.001 - 14.000.......... 97 43,182,596.16 17.52
14.001 - 15.000.......... 25 9,660,302.32 3.92
15.001 - 15.625.......... 2 407,112.79 0.17
--- --------------- ------
Total................ 543 $246,430,314.01 100.00%
=== =============== ======
___________________
(1) The weighted average Maximum Mortgage Rate of the Adjustable-Rate Group II
Mortgage Loans as of the Cut-off Date was approximately 12.523% per annum.
S-35
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
MINIMUM MORTGAGE RATE (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ------------------------- --------- ----------------- ------------------------
4.750 - 5.000............ 6 $ 2,503,262.80 1.02%
5.001 - 6.000............ 158 74,179,454.41 30.10
6.001 - 7.000............ 255 116,497,585.53 47.27
7.001 - 8.000............ 97 43,182,596.16 17.52
8.001 - 9.000............ 25 9,660,302.32 3.92
9.001 - 9.625............ 2 407,112.79 0.17
--- --------------- ------
Total................. 543 $246,430,314.01 100.00%
=== =============== ======
___________________
(1) The weighted average Minimum Mortgage Rate of the Adjustable-Rate Group II
Mortgage Loans as of the Cut-off Date was approximately 6.523% per annum.
INITIAL PERIODIC RATE CAPS OF THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
INITIAL PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ----------------------------- --------- ----------------- ------------------------
1.000........................ 5 $ 2,597,641.15 1.05%
3.000........................ 538 243,832,672.86 98.95
--- --------------- ------
Total................... 543 $246,430,314.01 100.00%
=== =============== ======
___________________
(1) Relates solely to initial rate adjustments.
SUBSEQUENT PERIODIC RATE CAPS OF THE ADJUSTABLE-RATE GROUP II MORTGAGE LOANS(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS
PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- --------- ----------------- ------------------------
1.000................ 543 $246,430,314.01 100.00%
--- --------------- ------
Total........... 543 $246,430,314.01 100.00%
=== =============== ======
___________________
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
FIRST FRANKLIN FINANCIAL CORPORATION
GENERAL
First Franklin Financial Corporation (the "Originator") is a Delaware
corporation headquartered in San Jose, California. The information set forth in
the following paragraphs has been provided by the Originator, and none of the
Depositor, the Servicer, the Seller, the Trustee, the Underwriters or any other
party makes any representation as to the accuracy or completeness of such
information.
The Originator is a direct, wholly-owned subsidiary of National City Bank
of Indiana ("NCBA"). NCBA is a wholly-owned subsidiary of National City
Corporation. At December 31, 2002, the Originator had approximately $1.731
billion in assets, approximately $1.145 billion in liabilities and approximately
$586 million in equity.
The Originator is a HUD-approved mortgagee and an approved seller/servicer
by both Fannie Mae and Freddie Mac. It currently operates twenty nine wholesale
branches, one retail branch and one portfolio retention platform in the United
States including offices in Atlanta, Georgia; Baltimore, Maryland; Boston,
Massachusetts; Charlotte, North Carolina; Chicago, Illinois; Cincinnati and
Cleveland, Ohio; Dallas and Houston, Texas; Denver, Colorado; Detroit,
S-36
Michigan; Indianapolis, Indiana; Las Vegas, Nevada; Miami and Orlando, Florida;
Minneapolis, Minnesota; New York, New York; Phoenix, Arizona; Pittsburgh,
Pennsylvania; Portland, Oregon; Salt Lake City, Utah; Seattle, Washington and
Irvine, Laguna Hills, San Bernardino, San Diego, San Jose, Studio City, Walnut
Creek and Westlake Village, California. The Originator's primary source of
originations is through mortgage brokerage companies.
Founded in 1981, the Originator has grown from a small mortgage broker to a
full-service mortgage lender with a wide variety of products. During the late
1980's and early 1990's, the Originator focused primarily on originating and
purchasing agency mortgage loans. Agency origination volume peaked in 1993 at
over $3.5 billion.
In 1994, the Originator embarked on a transformation to a full service "A"
through "D" credit lender. Since that time, agency mortgage loan origination
volume has declined significantly as activities have been focused on originating
and acquiring non-agency mortgage loans. For all of 2002, originations totaled
approximately $10.623 billion, with $572 million of retail non-agency mortgage
loans and $10.051 billion of wholesale non-agency mortgage loans.
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by the Originator,
generally in accordance with the underwriting criteria described herein. The
information set forth in the following paragraphs has been provided by the
Originator, and none of the Depositor, the Servicer, the Seller, the Trustee,
the Underwriters or any other party makes any representation as to the accuracy
or completeness of such information.
The Originator's underwriting standards are primarily intended to assess
the ability and willingness of the borrower to repay the debt and to evaluate
the adequacy of the mortgaged property as collateral for the mortgage loan. All
of the Mortgage Loans were underwritten with a view toward the resale thereof in
the secondary mortgage market. The Originator considers, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio
("Debt Ratio"), as well as the value, type and use of the mortgaged property.
The Mortgage Loans generally bear higher rates of interest than mortgage loans
that are originated in accordance with Fannie Mae and Freddie Mac standards, and
may experience rates of delinquencies and foreclosures that are higher, and that
may be substantially higher, than those experienced by portfolios of mortgage
loans underwritten in a more traditional manner. Unless prohibited by state law
or otherwise waived by the Originator upon the payment by the related mortgagor
of higher origination fees and a higher Mortgage Rate, a majority of the
Mortgage Loans provide for the payment by the mortgagor of a prepayment charge
on certain full or partial prepayments made within two years, three years, four
years or five years from the date of origination of the related Mortgage Loan as
described under "The Mortgage Pool--Mortgage Loan Statistics" above. The amount
of the prepayment charge is as provided in the related Mortgage Note and with
respect to approximately 84.07% of the Group I Mortgage Loans and approximately
93.99% of the Group II Mortgage Loans that have a prepayment charge, the
prepayment charge is equal to six month's interest on any amounts prepaid in
excess of 20% of the original principal balance of the related Mortgage Loan in
any 12 month period.
Substantially all of the mortgage loans originated by the Originator are
based on loan application packages submitted through mortgage brokerage
companies. These brokers must meet minimum standards set by the Originator based
on an analysis of the following information submitted with an application for
approval: applicable state lending license (in good standing), satisfactory
credit report only if no federal income tax identification number, signed broker
agreement, signed W-9 and signed broker authorization. Once approved, mortgage
brokerage companies are eligible to submit loan application packages in
compliance with the terms of a signed broker agreement.
The Originator has one underwriting program called the Direct Access
Program. Within the Direct Access Program, there are four documentation
programs, the Full Documentation Program, the Limited Income Verification
Program (the "LIV"), the No Income Verification Program (the "NIV") and the No
Documentation Program (the "No Doc"). All of the Mortgage Loans were originated
in accordance with the Originator's Direct Access Program. While each
underwriting program is intended to assess the risk of default, the Direct
Access Program makes use of credit bureau risk scores (the "Credit Bureau Risk
Score"). The Credit Bureau Risk Score is a statistical ranking of likely future
credit performance developed by Fair, Isaac & Company ("Fair, Isaac") and the
three national credit repositories--Equifax, Trans Union and First American
(formerly Experian which was formerly TRW). The Credit Bureau Risk Scores
available from the three national credit repositories are calculated by the
assignment of weightings to the most predictive data collected by the credit
repositories and range from the 300's to the 900's. Although the Credit Bureau
Risk Scores
S-37
are based solely on the information at the particular credit repository, such
Credit Bureau Risk Scores have been calibrated to indicate the same level of
credit risk regardless of which credit repository is used. The Credit Bureau
Risk Score is used as an aid to, not a substitute for, the underwriter's
judgment.
The Direct Access Program was developed to simplify the origination process
for the mortgage brokerage companies approved by the Originator. In contrast to
assignment of credit grades according to traditional non-agency credit
assessment methods, i.e., mortgage and other credit delinquencies, Direct Access
relies upon a borrower's Credit Bureau Risk Score initially to determine a
borrower's likely future credit performance. Mortgage brokerage companies are
able to access Credit Bureau Risk Scores at the initial phases of the loan
application process and use the score to determine a borrower's interest rate
based upon the Originator's Direct Access Program risk-based pricing matrix
(subject to final loan approval by the Originator).
Under the Direct Access Program, the Originator requires that the Credit
Bureau Risk Score of the primary borrower (the borrower with at least 51.00% of
total income for all LTVs) be used to determine program eligibility. Credit
Bureau Risk Scores must be obtained from at least two national credit
repositories, with the lower of the two scores being utilized in program
eligibility determination. If Credit Bureau Risk Scores are obtained from three
credit repositories, the middle of the three scores can be utilized. In all
cases, a borrower's complete credit history must be detailed in the credit
report that produces a given Credit Bureau Risk Score or the borrower is not
eligible for the Direct Access Program. Generally, the minimum Credit Bureau
Risk Score allowed under the Direct Access Program is 600.
The Credit Bureau Risk Score, along with loan-to-value ratio, is an
important tool in assessing the creditworthiness of a Direct Access borrower.
However, these two factors are not the only considerations in underwriting a
Direct Access loan. The Originator's underwriting staff fully reviews each
Direct Access loan to determine whether the Originator's guidelines for income,
assets, employment and collateral are met.
All of the Mortgage Loans were underwritten by the Originator's
underwriters having the appropriate signature authority. Each underwriter is
granted a level of authority commensurate with their proven judgment, maturity
and credit skills. On a case by case basis, the Originator may determine that,
based upon compensating factors, a prospective mortgagor not strictly qualifying
under the underwriting risk category guidelines described below warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low loan-to-value ratio, low Debt Ratio, substantial liquid assets, good
credit history, stable employment and time in residence at the applicant's
current address. It is expected that a substantial portion of the Mortgage Loans
may represent such underwriting exceptions.
The Originator's underwriters verify the income of each applicant under
various documentation programs as follows: under the Full Documentation Program,
applicants are generally required to submit verification of stable income for
the periods of six months to two years preceding the application dependent on
credit score range; under the LIV Program, the borrower is qualified based on
the income stated on the application and applicants are generally required to
submit verification of adequate cash flow to meet credit obligations for the 6
month period preceding the application; under the NIV Program, applicants are
qualified based on monthly income as stated on the mortgage application; and
under the No Doc Program, employment, income and assets are neither disclosed
nor verified. For Direct Access first lien mortgage loans with a credit score
greater than or equal to 560 and were not originated in conjunction with a
second lien mortgage, bank statements (for 12 months) are acceptable as full
documentation. For Direct Access first lien mortgage loans with credit scores
greater than or equal to 640, regardless of being originated with a
corresponding second lien mortgage, twelve months bank statements are acceptable
as full documentation. In all cases, the income stated must be reasonable and
customary for the applicant's line of work. Although the income is not verified
under the LIV and NIV Programs, a preclosing audit generally will confirm that
the business exists. Verification may be made through phone contact to the place
of business, obtaining a valid business license, CPA/Enrolled Agent letter or
through Dun and Bradstreet Information Services.
The applicant generally must have a sufficiently established credit history
to qualify for the appropriate Credit Bureau Risk Score range under the Direct
Access Program. This credit history is substantiated by a two repository merged
report prepared by an independent credit report agency. The report typically
summarizes the applicant's entire credit history, and generally includes a seven
year public record search for each address where the applicant has lived during
the two years prior to the issuance of the credit report and contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcy,
S-38
repossession, suits or judgments. In some instances, borrowers with a minimal
credit history are eligible for financing under the Direct Access Program.
The Originator originates loans secured by 1-4 unit residential properties
made to eligible borrowers with a vested fee simple (or in some cases a
leasehold) interest in the property. The Originator's guidelines are applied in
accordance with a procedure which complies with applicable federal and state
laws and regulations and generally require an appraisal of the mortgaged
property which conforms to Freddie Mac and/or Fannie Mae standards; and if
appropriate, a review appraisal. Generally, appraisals are provided by
appraisers approved by the Originator. Review appraisals may only be provided by
appraisers approved by the Originator. In some cases, the Originator relies on a
statistical appraisal methodology provided by a third-party.
Qualified independent appraisers must meet minimum standards of licensing
and provide errors and omissions insurance in states where it is required to
become approved to do business with the Originator. Each Uniform Residential
Appraisal Report includes a market data analysis based on recent sales of
comparable homes in the area and, where deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home. The review
appraisal may be an enhanced desk, field review or an automated valuation report
that confirms or supports the original appraiser's value of the mortgaged
premises. The review appraisal may be waived by a Standard Plus Delegated
Underwriter.
The Originator requires title insurance on all mortgage loans secured by
liens on real property. The Originator also requires that fire and extended
coverage casualty insurance be maintained on the secured property in an amount
at least equal to the principal balance of the related residential loan or the
replacement cost of the property, whichever is less.
The Originator conducts a number of quality control procedures, including a
post-funding compliance audit as well as a full re-underwriting of a random
selection of loans to assure asset quality. Under the compliance audit, all
loans are reviewed to verify credit grading, documentation compliance and data
accuracy. Under the asset quality procedure, a random selection of each month's
originations is reviewed. The loan review confirms the existence and accuracy of
legal documents, credit documentation, appraisal analysis and underwriting
decision. A report detailing audit findings and level of error is sent monthly
to each branch for response. The audit findings and branch responses are then
reviewed by the Originator's senior management. Adverse findings are tracked
monthly and over a rolling six month period. This review procedure allows the
Originator to assess programs for potential guideline changes, program
enhancements, appraisal policies, areas of risk to be reduced or eliminated and
the need for additional staff training.
Under the mortgage loan programs, various risk categories are used to grade
the likelihood that the applicant will satisfy the repayment conditions of the
loan. These risk categories establish the maximum permitted loan-to-value ratio
and loan amount, given the occupancy status of the mortgaged property and the
applicant's credit history and Debt Ratio. In general, higher credit risk
mortgage loans are graded in categories which permit higher Debt Ratios and more
(or more recent) major derogatory credit items such as outstanding judgments or
prior bankruptcies; however these loan programs establish lower maximum
loan-to-value ratios and lower maximum loan amounts for loans graded in such
categories.
"Equity Refinance" transactions are defined as those instances where the
borrower receives the lesser of 2% of the new loan amount or $2,000
cash-in-hand. Funds used for debt consolidation are not included in this amount.
The Originator's guidelines under the Direct Access Program generally have
the following criteria for borrower eligibility for the specified Credit Bureau
Risk Score range.
"600 and higher": For LTVs greater than 80%, no liens or judgments
affecting title may remain open after the funding of the loan. Collections,
charge-offs, or judgments not affecting title with aggregate balances greater
than $5,000 or 2% of the loan amount must be paid prior to loan closing unless
the time elapsed since the collection, charge-off, or judgment is greater than
two years. If charge-offs, collections, judgments, liens and disputed trade
lines are seasoned more than 24 months, it is not required that they be paid
off. For LTVs less than or equal to 80%, no payoff is required. The maximum
loan-to-value ratio of 100% is permitted for owner occupied single family (1-2
units) property. The maximum loan-to-value ratio generally is reduced by 5% on a
mortgaged property consisting of 3-4 units. The Debt
S-39
Ratio generally may not exceed 55% for all credit scores on full documentation
and LIV loans. Debt ratio may not exceed 50% for NIV loans and first time home
buyers.
"570-599": For LTVs greater than 80%, no liens or judgments affecting title
may remain open after the funding of the loan. Collections, charge-offs, or
judgments not affecting title with aggregate balances greater than $5,000 or 2%
of the loan amount must be paid prior to loan closing unless the time elapsed
since the collection, charge-off, or judgment is greater than two years. If
charge-offs, collections, judgments, liens and disputed trade lines are seasoned
more than 24 months, it is not required that they be paid off. For LTVs less
than or equal to 80%, no payoff is required. A maximum loan-to-value ratio of
90% is permitted for a purchase, rate/term, debt consolidation or cash-out
transaction. The maximum loan-to-value ratio generally is reduced by 5% on a
mortgaged property consisting of 3-4 units. Properties with rural
characteristics may be subject to further loan-to-value ratio reduction.
Loan-to-value ratios for non-owner occupied properties are limited to 80% and
second homes are limited to 85%. Generally, the Debt Ratio may not exceed 55%.
"540-569": No liens or judgments affecting title may remain open after the
funding of the loan. Collections, charge-offs, or judgments not affecting title
with aggregate balances greater than $5,000 or 2% of the loan amount must be
paid prior to loan closing unless the time elapsed since the collection,
charge-off, or judgment is greater than two years. If charge-offs, collections,
judgments, liens and disputed trade lines are seasoned more than 24 months, it
is not required that they be paid off. A maximum loan-to-value ratio of 90% is
permitted for a purchase, rate/term, debt consolidation or cash-out transaction.
Properties with rural characteristics may be subject to further loan-to-value
ratio reduction. Loan-to-value ratios for non-owner occupied properties are
limited to 75% and second homes are limited to 85%. The Debt Ratio must be 55%
or less.
For all of the above, collections, charge-offs, judgments and liens not
affecting title may remain open for loan- to-value ratios less than or equal to
80%.
THE SELLER
The Seller of the Mortgage Loans is Greenwich Capital Financial Products,
Inc., a Delaware corporation. The Seller previously acquired the Mortgage Loans
from the Originator.
THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. The
Trust created under the Pooling Agreement will consist of (i) all of the
Depositor's right, title and interest in the Mortgage Loans, the related
mortgage notes, Mortgages and other related documents, (ii) all payments on or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired on
behalf of Certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the rights of the Trustee under all
insurance policies required to be maintained pursuant to the Pooling Agreement,
(v) the Net WAC Rate Carryover Reserve Account and (vi) the rights of the
Depositor under the Mortgage Loan Purchase Agreement.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the Trust all of its
right, title and interest in and to each Mortgage Loan, the related mortgage
note, Mortgage, assignment of mortgage in recordable form in blank or to the
Trustee and other related documents (collectively, the "Related Documents"),
including all scheduled payments with respect to each such Mortgage Loan due
after the Cut-off Date. The Trustee, concurrently with such transfer, will
deliver the Certificates to the Depositor. Each Mortgage Loan transferred to the
Trust will be identified on a schedule (the "Mortgage Loan Schedule") delivered
to the Trustee pursuant to the Pooling Agreement. The Mortgage Loan Schedule
will include information such as the Principal Balance of each Mortgage Loan as
of the Cut-off Date, its Mortgage Rate as well as other information with respect
to each Mortgage Loan.
The Pooling Agreement will require that, within the time period specified
therein, the Depositor will deliver or cause to be delivered to the Trustee (or
a custodian, as the Trustee's agent for such purpose) the mortgage notes
S-40
endorsed to the Trustee on behalf of the Certificateholders and the Related
Documents. In lieu of delivery of original Mortgages or mortgage notes, if such
original is not available or lost, the Depositor may deliver or cause to be
delivered true and correct copies thereof, or, with respect to a lost mortgage
note, a lost note affidavit executed by the Seller. The assignments of Mortgage
will not be recorded by or on behalf of the Depositor in the appropriate offices
for real property records; provided, however, upon the occurrence of certain
events set forth in the Pooling Agreement, each such assignment of Mortgage
shall be recorded by the Seller as set forth in the Pooling Agreement.
Within 45 days of the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Pooling Agreement and if any
Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within 120 days following notification
thereof to the Seller by the Trustee, the Seller will be obligated to either (i)
substitute for such Mortgage Loan a Qualified Substitute Mortgage Loan; however,
such substitution is permitted only within two years of the Closing Date and may
not be made unless an opinion of counsel is provided to the effect that such
substitution will not disqualify any of the REMICs (as defined in the Pooling
Agreement) as a REMIC or result in a prohibited transaction tax under the Code
or (ii) purchase such Mortgage Loan at a price (the "Purchase Price") equal to
the outstanding Principal Balance of such Mortgage Loan as of the date of
purchase, plus all accrued and unpaid interest thereon, computed at the Mortgage
Rate through the end of the calendar month in which the purchase is effected,
plus the amount of any unreimbursed Advances and Servicing Advances (each as
defined herein) made by the Servicer, plus any costs and damages incurred by the
Trust in connection with any violation by such loan of any predatory- or
abusive-lending law. The Purchase Price will be required to be remitted to the
Servicer for deposit in the Collection Account (as defined herein) on or prior
to the next succeeding Determination Date (as defined herein) after such
obligation arises. The obligation of the Seller to repurchase or substitute for
a Deleted Mortgage Loan (as defined herein) is the sole remedy regarding any
defects in the Mortgage Loans and Related Documents available to the Trustee or
the Certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Seller will be required to remit to the Servicer for deposit in the
Collection Account on or prior to the next succeeding Determination Date after
such obligation arises an amount (the "Substitution Adjustment") equal to the
excess of the Principal Balance of the related Deleted Mortgage Loan over the
Principal Balance of such Qualified Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Deleted Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Deleted Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Deleted Mortgage Loan; (ii) have a Mortgage Rate
not less than the Mortgage Rate of the Deleted Mortgage Loan and not more than
1% in excess of the Mortgage Rate of such Deleted Mortgage Loan; (iii) in the
case of any adjustable-rate Mortgage Loan, have a Maximum Mortgage Rate and
Minimum Mortgage Rate not less than the respective rate for the Deleted Mortgage
Loan, have a Gross Margin equal to or greater than the Deleted Mortgage Loan and
have the same Adjustment Date frequency as the Deleted Mortgage Loan, (iv) have
a Dividend Rate, if applicable, equal to or less than that of the Deleted
Mortgage Loan; (v) have the same Due Date as the Deleted Mortgage Loan; (vi)
have a remaining term to maturity not more than one year earlier and not later
than the remaining term to maturity of the Deleted Mortgage Loan; (vii) comply
with each representation and warranty as to the Mortgage Loans set forth in the
Mortgage Loan Purchase Agreement (deemed to be made as of the date of
substitution); (viii) have been underwritten or re-underwritten by the
Originator in accordance with the same underwriting criteria and guidelines as
the Mortgage Loans being replaced; (ix) be of the same or better credit quality
as the Mortgage Loan being replaced and (x) satisfy certain other conditions
specified in the Pooling Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., the Mortgage Rate). In
addition, the Seller will represent and warrant, on the Closing Date and each
Subsequent Transfer Date, as applicable, that, among other things: (i) at the
time of transfer to the Depositor, the Seller transferred or assigned all of its
right, title and interest in each Mortgage Loan and the Related Documents, free
of any lien, (ii) each Mortgage Loan complied, at the time of origination, in
all material respects with applicable state and federal laws, (iii) the Mortgage
Loans are not subject to the requirements of the Homeownership Act or any
comparable state law; (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) no Mortgage Loan
originated before October 1, 2002 has a prepayment charge term longer than five
years after its date of origination and no Group I Mortgage Loan originated on
or after October 1, 2002 has a prepayment
S-41
charge term longer than three years after its date of origination and (vi) none
of the Group I Mortgage Loans originated in Georgia are subject to the Georgia
Fair Lending Act effective from October 1, 2002 to March 6, 2003. Upon discovery
of a breach of any such representation and warranty which materially and
adversely affects the interests of the Certificateholders (which shall be deemed
to have occurred in the case of a breach of any of the representations and
warranties set forth in clauses (iii) through (vi) above) in the related
Mortgage Loan and Related Documents, the Seller will have a period of 120 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 120-day period, the Seller will be obligated to (i)
substitute for such Deleted Mortgage Loan a Qualified Substitute Mortgage Loan
or (ii) repurchase such Deleted Mortgage Loan from the Trust. The same procedure
and limitations that are set forth above for the substitution or repurchase of
Deleted Mortgage Loans as a result of deficient documentation relating thereto
will apply to the substitution or purchase of a Deleted Mortgage Loan as a
result of a breach of a representation or warranty in the Mortgage Loan Purchase
Agreement that materially and adversely affects the interests of the
Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Deleted Mortgage Loans."
Pursuant to the Pooling Agreement, the Servicer will service and administer
the Mortgage Loans as more fully set forth therein. In addition, the Servicer
will represent and warrant, on the Closing Date, that, among other things it
will accurately and fully report its mortgagor credit files to each of the
credit repositories in a timely manner.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer shall establish and maintain or cause to be maintained one or
more separate trust accounts (each, a "Collection Account") for the benefit of
the Certificateholders. Each Collection Account will be an Eligible Account (as
defined in the Pooling Agreement). Upon receipt by the Servicer of amounts in
respect of the Mortgage Loans (excluding amounts representing the Servicing Fee
or other servicing compensation, reimbursement for Advances and Servicing
Advances and insurance proceeds to be applied to the restoration or repair of a
Mortgaged Property), the Servicer will deposit such amounts in the Collection
Account. Amounts so deposited may be invested in Permitted Investments (as
described in the Pooling Agreement) maturing no later than one Business Day
prior to the date on which the amount on deposit therein is required to be
deposited in the Distribution Account. The Trustee will establish an account
(the "Distribution Account") into which will be deposited amounts withdrawn from
the Collection Account for distribution to Certificateholders on a Distribution
Date and payment of certain fees and expenses of the Trust. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be invested
in Permitted Investments maturing on or before the Business Day prior to the
related Distribution Date unless such Permitted Investments are invested in
investments managed or advised by the Trustee or an affiliate thereof, in which
case such Permitted Investments may mature on the related Distribution Date.
THE SERVICER
The information set forth in the following paragraphs has been provided by
the Servicer (which is referred to in this section as "Chase"). None of the
Depositor, the Trustee, the Originator, the Seller, the Underwriter or any of
their affiliates has made or will make any representation as to the accuracy or
completeness of such information.
Chase, a New Jersey corporation found in 1920, is a wholly owned indirect
subsidiary of J.P. Morgan Chase & Co. Chase is engaged in the mortgage
origination and servicing businesses and is a HUD-approved mortgagee. Chase is
subject to supervision, examination and regulation by the Board of Governors of
the Federal Reserve System and various state regulatory bodies. Chase makes
loans in all 50 states and the District of Columbia primarily for the purpose of
enabling borrowers to purchase or refinance residential real property, secured
by first and second liens on such property. Chase's real estate loans primarily
are made to homeowners based on the security of one- to four- family residences.
Set forth below is historical delinquency, foreclosure and loan loss data
for Chase's portfolio of fixed rate and adjustable rate subprime mortgage loans
which were originated or purchased by Chase and subsequently securitized in
asset-backed transactions (the "Chase Subprime Securitized Servicing
Portfolio"). The Chase Subprime Securitized Servicing Portfolio represents only
a portion of the total servicing portfolio of Chase and many of the mortgage
loans in the Chase Subprime Securitized Servicing Portfolio have not been
outstanding long enough to experience the level
S-42
of delinquencies, foreclosures and loan losses which might be expected to occur
on a larger, more seasoned portfolio of mortgage loans which were underwritten,
originated and serviced in a manner similar to the mortgage loans in the Chase
Subprime Securitized Servicing Portfolio. Because of the relatively small size
and relative lack of seasoning of the Chase Subprime Securitized Servicing
Portfolio, there can be no assurance that the delinquency, foreclosure and loan
loss experience on the Mortgage Loans will correspond to the delinquency,
foreclosure and loan loss experience shown in the tables below, and the actual
delinquency, foreclosure and loan loss experience on the Mortgage Loans could be
significantly worse. Moreover, the Mortgage Loans were acquired by the Seller
from the Originator and were not originated by Chase and as a result, the actual
delinquency, loss and foreclosure experience on the Mortgage Loans could be
significantly worse than the delinquency, foreclosure and loan loss experience
shown in the tables below.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE
CHASE SUBPRIME SECURITIZED SERVICING PORTFOLIO
(DOLLARS IN THOUSANDS)
As of March 31 As of December 31
------------------------ -------------------------------------------------------------------------
2003 2002 2001 2000
------------------------ ---------------------- ---------------------- ------------------------
Number of Number of Number of Number of
Mortgage Principal Mortgage Principal Mortgage Principal Mortgage Principal
Loans Balance ($) Loans Balance ($) Loans Balance ($) Loans Balance ($)
---------- ----------- --------- ----------- --------- ----------- --------- -----------
Portfolio 73,717 $8,375,287 73,597 $8,326,818 66,278 $7,274,554 31,960 $3,268,660
Delinquency
30-59 days ......... 2.29% 1.98% 2.69% 2.28% 2.27% 1.96% 1.61% 1.46%
60-89 days ......... 0.80% 0.72% 0.86% 0.72% 0.71% 0.65% 0.60% 0.55%
90 days or more..... 1.60% 1.40% 1.41% 1.21% 0.89% 0.79% 0.94% 0.80%
---- ---- ---- ---- ---- ---- ---- ----
Total................. 4.69% 4.10% 4.96% 4.21% 3.88% 3.40% 3.15% 2.81%
Foreclosure Rate ..... 2.71% 2.53% 2.65% 2.48% 1.78% 1.64% 2.13% 2.05%
REO Properties ....... 525 N/A 480 N/A 264 N/A 127 N/A
The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude loans
in foreclosure. The portfolio statistics set forth above exclude REO Properties.
The foreclosure rate reflects the number of mortgage loans in foreclosure
as a percentage of the total number of mortgage loans or the dollar amount of
mortgage loans in foreclosure as a percentage of the total dollar amount of
mortgage loans, as the case may be, as of the date indicated. REO Properties are
real estate owned properties which relate to foreclosed mortgages or properties
for which deeds in lieu of foreclosure have been accepted, and held by Chase
pending disposition.
LOAN LOSS EXPERIENCE OF THE
CHASE SUBPRIME SECURITIZED SERVICING PORTFOLIO
(Dollars in Thousands)
-------------------------------------------------------------------------------------
Three Months Ending March 31, Year Ending December 31,
----------------------------- ------------------------------------------------------
2003 2002 2001 2000
----------------------------- --------------- --------------- -----------------
Average amount outstanding.... $8,653,672 $7,902,732 $5,018,737 $2,829,706
Net losses.................... $ 8,668 $ 34,897 $ 29,677 $ 8,613
Net losses as a percentage of 0.10% 0.44% 0.59% 0.30%
average amount outstanding....
The average amount outstanding during the period is the arithmetic average
of the principal balance of the mortgage loans outstanding on the last business
day of each month during the period. Net losses are amounts relating to mortgage
loans which have been determined by Chase to be uncollectible, less amounts
received by Chase as recoveries from liquidation proceeds and deficiency
judgments.
S-43
THERE CAN BE NO ASSURANCE THAT THE DELINQUENCY, FORECLOSURE AND LOAN LOSS
EXPERIENCE ON THE MORTGAGE LOANS WILL CORRESPOND TO THE DELINQUENCY, FORECLOSURE
AND LOAN LOSS EXPERIENCE SET FORTH IN THE TABLES ABOVE, IN PART BECAUSE THE
PORTFOLIO OF MORTGAGE LOANS REFLECTED IN THOSE TABLES IS RELATIVELY SMALL AND
UNSEASONED, WHICH IS LIKELY TO CAUSE THE DELINQUENCY, FORECLOSURE AND LOAN LOSS
EXPERIENCE SHOWN TO UNDERSTATE, PERHAPS SUBSTANTIALLY, THE ACTUAL DELINQUENCY,
FORECLOSURE AND LOAN LOSS EXPERIENCE THAT MIGHT OCCUR AS THE PORTFOLIO BECOMES
MORE SEASONED. THEREFORE, CHASE CANNOT PREDICT TO WHAT DEGREE THE ACTUAL
DELINQUENCY, FORECLOSURE AND LOAN LOSS EXPERIENCE ON THE MORTGAGE LOANS WILL
CORRESPOND TO THE STATISTICAL INFORMATION SET FORTH ABOVE. MOREOVER, THE
MORTGAGE LOANS WERE ACQUIRED BY THE SELLER FROM THE ORIGINATOR AND NOT FROM
CHASE. CONSEQUENTLY, THE DELINQUENCY, FORECLOSURE AND LOAN LOSS EXPERIENCE SET
FORTH IN THE TABLES ABOVE MAY NOT NECESSARILY BE MATERIAL TO A PROSPECTIVE
INVESTOR'S DECISION TO INVEST IN THE OFFERED CERTIFICATES.
In general, during periods in which the residential real estate market is
experiencing an overall decline in property values such that the principal
balances of the mortgage loans and any secondary financing on the related
mortgaged properties become equal to or greater than the value of the related
mortgaged properties, rates of delinquencies, foreclosure and losses could be
significantly higher than might otherwise be the case. In addition, adverse
economic conditions (which may affect real property values) may affect the
timely payment by mortgagors of scheduled payments, and accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to the mortgage
pool.
COLLECTION PROCEDURES. Chase employs a variety of collection techniques
during the various stages of delinquency. The primary purpose of all collection
efforts performed by Chase is to bring a delinquent mortgage loan current in as
short a time as possible. Phone calls are used as the principal form of
contacting a mortgagor. Chase utilizes a predictive dialing system for the
management of collection calling activity. Prior to initiating foreclosure
proceedings, Chase makes every reasonable effort to determine the reason for the
default; whether the delinquency is a temporary or permanent condition, and the
mortgagor's attitude toward the obligation. Chase will take action to foreclose
a mortgage only once every reasonable effort to cure the default has been made
and a projection of the ultimate gain or loss on REO Property sale is
determined. In accordance with accepted servicing practices, foreclosures are
processed within individual state guidelines and in accordance with the
provisions of the mortgage and applicable state law.
ADVANCES
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced on or before each Distribution Date from (i) its
own funds or funds provided by an Advancing Person as described below, (ii)
funds in the Collection Account that are not included in the Available Funds for
such Distribution Date or (iii) a combination of (i) and (ii), an amount equal
to the aggregate of all payments of principal and interest (net of Servicing
Fees) that were due during the related Due Period on the Mortgage Loans, other
than Balloon Payments, and that were delinquent on the related Determination
Date, plus certain amounts representing assumed payments not covered by any
current net income on the Mortgaged Properties acquired by foreclosure or deed
in lieu of foreclosure and, with respect to Balloon Loans, with respect to which
the Balloon Payment is not made when due, an assumed monthly payment that would
have been due on the related Due Date based on the original principal
amortization schedule for such Balloon Loan (any such advance, an "Advance").
Advances are required to be made only to the extent they are deemed by the
Servicer to be recoverable from related late collections, insurance proceeds,
condemnation proceeds and liquidation proceeds. The purpose of making such
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. The Servicer will not be required,
however, to make any Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to bankruptcy proceedings or the
application of the Relief Act. Subject to the recoverability standard above, the
Servicer's obligation to make Advances as to any Mortgage Loan will continue
until the Mortgage Loan is paid in full or until the recovery of all Liquidation
Proceeds thereon.
All Advances will be reimbursable to the Servicer from late collections,
insurance proceeds, condemnation proceeds and liquidation proceeds from the
Mortgage Loan as to which such unreimbursed Advance was made unless such amounts
are deemed to be nonrecoverable by the Servicer from the proceeds of the related
Mortgage Loan, in which event reimbursement will be made to the Servicer from
general funds in the Collection Account. The Servicer may recover from amounts
in the Collection Account the amount of any Advance that remains unreimbursed to
the Servicer from the related liquidation proceeds after the final liquidation
of the related Mortgage Loan, and such reimbursement
S-44
amount will not be available for remittance to the Trustee for distribution on
the Certificates. In the event the Servicer fails in its obligation to make any
required Advance, the Trustee, in its capacity as successor Servicer, will be
obligated to make any such Advance, to the extent required in the Pooling
Agreement.
In the course of performing its servicing obligations, the Servicer will
pay all reasonable and customary "out-of- pocket" costs and expenses (including
reasonable attorneys' fees and disbursements) incurred in the performance of its
servicing obligations, including, but not limited to, the cost of (i) the
preservation, restoration, inspection and protection of the Mortgaged
Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage, including the fees of an
independent contractor appointed by the Servicer to operate and/or manage such
properties and (iv) certain insurance premiums and certain ongoing expenses
associated with the Mortgage Pool and incurred by the Servicer in connection
with its responsibilities under the Pooling Agreement. Each such expenditure
will constitute a "Servicing Advance."
Servicing Advances are required to be made only to the extent they are
deemed by the Servicer to be recoverable from related late collections,
insurance proceeds, condemnation proceeds and liquidation proceeds. The
Servicer's right to reimbursement for Servicing Advances is limited to late
collections on the related Mortgage Loan, including liquidation proceeds,
condemnation proceeds, released mortgaged property proceeds, insurance proceeds
and such other amounts as may be collected by the Servicer from the related
mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Servicer from the proceeds of the related Mortgage Loan,
in which event reimbursement will be made to the Servicer from general funds in
the Collection Account.
The Pooling Agreement provides that the Trustee, on behalf of the Trust and
with the consent of the Servicer, may enter into a facility with any person
which provides that such person (an "Advancing Person") may fund Advances and/or
Servicing Advances, although no such facility shall reduce or otherwise affect
the Servicer's obligation to fund such Advances and/or Servicing Advances. Any
Advances and/or Servicing Advances made by an Advancing Person will be
reimbursed to the Advancing Person in the same manner as reimbursements would be
made to the Servicer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Servicer in respect of its
servicing activities (the "Servicing Fee") for the Mortgage Loans will be at the
"Servicing Fee Rate" of 0.50% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Servicer is entitled to
retain all service-related fees, including assumption fees, modification fees,
extension fees, late payment charges and Prepayment Interest Excess (as defined
in the Pooling Agreement), non-sufficient fund fees and other ancillary fees
(but not prepayment charges, which will be distributed to the holders of the
Class P Certificates), to the extent collected from mortgagors, together with
any interest or other income earned on funds held in the Collection Account and
any Servicing Accounts. The Servicer is obligated to deposit into the Collection
Account the amount of any Prepayment Interest Shortfall (payments made by the
Servicer in satisfaction of such obligation, "Compensating Interest") but only
in an amount up to its Servicing Fee for the related Distribution Date.
With respect to any Determination Date and each Mortgage Loan as to which a
principal prepayment was applied during the portion of the related Prepayment
Period (as defined below) occurring in the month preceding the month of such
Determination Date, the "Prepayment Interest Shortfall" is an amount equal to
the interest at the applicable Mortgage Rate (net of the Servicing Fee) on the
amount of such principal prepayment for the number of days from the date on
which the principal prepayment is applied until the last day of such preceding
calendar month.
THE TRUSTEE
Wells Fargo Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States, will be
named Trustee pursuant to the Pooling Agreement. The Trustee will make available
a monthly statement to Certificateholders containing information regarding the
Certificates. The Trustee may make such statement available each month, to any
interested party, via the Trustee's website. See "Description of the
Certificates--Reports to Certificateholders."
S-45
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling Agreement will be equal to certain investment
earnings on the amounts on deposit in the Distribution Account and a fee (the
"Trustee Fee") equal to accrued interest at the "Trustee Fee Rate" of 0.006% per
annum on the Principal Balance of the Mortgage Loans. The Pooling Agreement will
provide that the Trustee and any director, officer, employee or agent of the
Trustee will be indemnified by the Trust and will be held harmless against any
loss, liability or expense (not including expenses, disbursements and advances
incurred or made by the Trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the Trustee's
performance in accordance with the provisions of the Pooling Agreement) incurred
by the Trustee arising out of or in connection with the acceptance or
administration of its obligations and duties under the Pooling Agreement, other
than any loss, liability or expense (i) that constitutes a specific liability of
the Trustee under the Pooling Agreement or (ii) incurred by reason of willful
misfeasance, bad faith or negligence in the performance of the Trustee's duties
under the Pooling Agreement or as a result of a breach, or by reason of reckless
disregard, of the Trustee's obligations and duties under the Pooling Agreement.
The Pooling Agreement will provide that the Trustee may withdraw amounts owing
to it under the Pooling Agreement prior to distributions to Certificateholders.
VOTING RIGHTS
At all times 98% of all voting rights will be allocated among the holders
of the Offered Certificates and the Class C Certificates in proportion to the
then outstanding Certificate Principal Balances of their respective
Certificates. At all times 1% of all voting rights will be allocated to the
holders of the Class P Certificates and 1% of all voting rights will be
allocated to the holders of the Class R Certificates. The voting rights
allocated to any class of Certificates shall be allocated among all holders of
the Certificates of such class in proportion to the outstanding percentage
interests of such holders in such class.
AMENDMENT
The Pooling Agreement may be amended under the circumstances set forth
under "The Agreements --Amendment" in the prospectus.
TERMINATION
The majority holder of the Class C Certificates (unless such holder is the
Seller, Greenwich Capital Markets, Inc. or an affiliate of either of them), or
if such holder (x) fails to exercise such option or (y) is the Seller, Greenwich
Capital Markets, Inc. or an affiliate of either of them, the Servicer (with the
written consent of the Depositor or an affiliate thereof, such consent not to be
unreasonably withheld) (either such holder or the Servicer, as applicable, the
"Terminator") will have the right to purchase all of the Mortgage Loans and REO
Properties and thereby effect the early retirement of the Certificates, on any
Distribution Date on which the aggregate Principal Balance of the Mortgage Loans
(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 REO Properties is
equal to or less than 10% of the aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date. The first Distribution Date on which such option
could be exercised is referred to herein as the "Optional Termination Date." In
the event that the option is exercised, the purchase will be made at a price
(the "Termination Price") generally equal to the greater of (i) the Principal
Balance of the Mortgage Loans and the appraised value of the REO Properties and
(ii) the fair market value of the Mortgage Loans and the REO Properties, in each
case plus accrued and unpaid interest for each Mortgage Loan at the related
Mortgage Rate to but not including the first day of the month in which such
repurchase price is paid plus unreimbursed Servicing Advances, Advances, any
unpaid Servicing Fees allocable to such Mortgage Loans and REO Properties and
any accrued and unpaid Net WAC Rate Carryover Amounts. However, this option may
only be exercised if the Termination Price is sufficient to pay all interest
accrued on, as well as amounts necessary to retire the principal balance of, the
notes issued pursuant to any indenture which are secured by all or a portion of
the Class C Certificates, the Class P Certificates and/or the Class R
Certificates. In the event the Terminator exercises this option, the portion of
the purchase price allocable to the Offered Certificates will be, to the extent
of available funds:
(i) 100% of the then outstanding Certificate Principal Balance of the
Offered Certificates, plus
(ii) interest for the final Accrual Period on the then outstanding
Certificate Principal Balance of the Offered Certificates at the
then applicable Pass-Through Rate for the class, plus
S-46
(iii) any previously accrued but unpaid interest thereon to which the
holders of the Offered Certificates are entitled, together with the
amount of any Net WAC Rate Carryover Amounts (payable to and from
the Net WAC Rate Carryover Reserve Account), plus
(iv) in the case of the Mezzanine Certificates, any previously unpaid
Allocated Realized Loss Amount.
SERVICING OF DELINQUENT MORTGAGE LOANS
The Servicer will be required to act with respect to delinquent Mortgage
Loans in accordance with procedures set forth in the Pooling 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. These procedures are intended to 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. However, there can be no assurance that
following such procedures will have that result or that following such
procedures will lead to the alternative that is in the best interests of the
Certificateholders. If the Servicer extends the payment period or accepts a
lesser amount than stated in the mortgage note in satisfaction of the mortgage
note, your yield may be affected.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. Set
forth below are summaries of the specific terms and provisions pursuant to which
the Offered Certificates will be issued. The following summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Pooling Agreement. When particular
provisions or terms used in the Pooling Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
The Trust will issue (i) the Class A-1 Certificates and the Class A-2
Certificates (collectively, the "Class A Certificates"), (ii) the Class M-1
Certificates, the Class M-2 Certificates, the Class M-3A Certificates, the Class
M-3F Certificates, the Class M-4A Certificates, the Class M-4F Certificates, the
Class M-5A Certificates and the Class M-5F Certificates (collectively, the
"Mezzanine Certificates"), (iii) the Class C Certificates (together with the
Mezzanine Certificates, the "Subordinate Certificates"), (iv) the Class P
Certificates and (v) the Class R Certificates (the "Residual Certificates"). The
Class A Certificates, the Mezzanine Certificates, the Class C Certificates, the
Class P Certificates and the Residual Certificates are collectively referred to
herein as the "Certificates." Only the Class A Certificates and the Mezzanine
Certificates are offered hereby (together, the "Offered Certificates").
The Offered Certificates will have the Original Certificate Principal
Balances specified on the cover hereof, subject to a permitted variance of plus
or minus five percent. The Class C Certificates will have an Original
Certificate Principal Balance equal to the excess of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date over the Original
Certificate Principal Balances of the Offered Certificates and the Class P
Certificates. The Class P Certificates will have an Original Certificate
Principal Balance of $100 and will not bear interest. The Class P Certificates
will be entitled to all prepayment charges received in respect of the Mortgage
Loans and such amounts will not be available for distribution to the holders of
the Offered Certificates. The Class R Certificates will not have Original
Certificate Principal Balances and will not bear interest.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $50,000 and integral multiples of $1.00 in excess thereof. The assumed final
maturity date (the "Assumed Final Distribution Date") for the Certificates is
the Distribution Date in July 2033.
Distributions on the Offered Certificates will be made by the Trustee on
the 25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing in July 2003 (each, a "Distribution Date"),
to the persons in whose names such Certificates are registered at the close of
business on the Record Date. The "Record Date" for any Certificate issued in
book-entry form, other than the Hybrid Certificates and the Fixed Rate
Certificates,
S-47
is the business day immediately preceding such Distribution Date and the "Record
Date" for the Hybrid Certificates and the Fixed Rate Certificates and any
physical Certificate or any book-entry Certificate that becomes a Definitive
Certificate (as defined herein), will be the last business day of the month
immediately preceding the month in which the related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (for so long as
they are registered in the name of the applicable depository or its nominee, the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Book-Entry Certificates ("Certificate Owners") will hold such Certificates
through The Depository Trust Company ("DTC") in the United States, or upon
request through Clearstream Banking Luxembourg, formerly known as Cedelbank SA
("Clearstream"), or the Euroclear System ("Euroclear") (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Clearstream and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Clearstream and The Chase Manhattan Bank will act as depositary
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $50,000.
Except as described below, no Certificate Owner acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling Agreement. Certificate Owners are only permitted to exercise
their rights indirectly through DTC and participants of DTC ("DTC
Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates. DTC
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not DTC Participants may
transfer ownership of Book-Entry Certificates only through DTC Participants and
indirect participants by instructing such DTC Participants and indirect
participants to transfer Book-Entry Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Book-Entry Certificates,
which account is maintained with their respective DTC Participants. Under the
Rules and in accordance with DTC's normal procedures, transfers of ownership of
Book-Entry Certificates will be executed through DTC and the accounts of the
respective DTC Participants at DTC will be debited and credited. Similarly, the
DTC Participants and indirect participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing
Certificate Owners.
S-48
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant (as
defined below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Federal Income Tax
Consequences--REMICS--Backup Withholding With Respect to REMIC Certificates" and
"--Foreign Investors in REMIC Certificates" in the prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its DTC Participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC Participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the Rules, as
in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, a
Luxembourg limited liability company, was formed in January 2000 through the
merger of Cedel International and Deutsche Boerse Clearing, the shareholders of
which comprise 93 of the world's major financial institutions.
Clearstream is registered as a bank in Luxembourg, and as such is subject
to regulation by the Institute Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream Participants")
and facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Clearstream provides
various services, including safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Clearstream also deals with domestic securities markets in several
countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with the Euroclear Operator (as
defined below) in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment,
S-49
thereby eliminating the need for physical movement of certificates and any risk
from lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 29 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Euroclear Bank S.A./N.V. (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co. DTC will be responsible for
crediting the amount of such distributions to the accounts of the applicable DTC
Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such distributions to the Certificate Owners
of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Consequences--REMICS--Backup Withholding With Respect to
REMIC Certificates" and "--Foreign Investors in REMIC Certificates" in the
prospectus. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a Certificate Owner to pledge Book-Entry Certificates to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to the
lack of physical certificates for such Book-Entry Certificates. In addition,
issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain potential
investors may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to Certificate Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Certificate Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling Agreement only at the direction of one
or more Financial Intermediaries to whose DTC accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry Certificates.
Clearstream or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Pooling Agreement
on behalf of a Clearstream Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related DTC Participants, with respect
to some Book-Entry Certificates which conflict with actions taken with respect
to other Book-Entry Certificates.
S-50
Definitive Certificates will be issued to Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor advises the Trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book- Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of a
Servicer Event of Termination (as defined in the Pooling Agreement), Certificate
Owners having percentage interests aggregating not less than 51% of the
Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer, the Seller or the Trustee will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of Offered Certificates will be made
on each Distribution Date from Available Funds. With respect to any Distribution
Date, "Available Funds" will be equal to the sum of the following amounts with
respect to the Mortgage Loans, net of amounts reimbursable therefrom to the
Servicer or the Trustee: (i) the aggregate amount of monthly payments on the
Mortgage Loans due on the related Due Date (net of the portion of such monthly
payments equal to interest on Dividend Mortgage Loans at the applicable Dividend
Rate) and received by the Servicer by the Determination Date, after deduction of
the Trustee Fee for such Distribution Date, the Servicing Fee for such
Distribution Date, any accrued and unpaid Trustee Fees and Servicing Fees in
respect of any prior Distribution Dates, (ii) certain unscheduled payments in
respect of the Mortgage Loans, including prepayments, Insurance Proceeds, Net
Liquidation Proceeds and proceeds from repurchases of and substitutions for such
Mortgage Loans occurring during the related Prepayment Period, excluding
prepayment charges and (iii) payments from the Servicer in connection with
Advances and Prepayment Interest Shortfalls for such Distribution Date. The
holders of the Class P Certificates will be entitled to all prepayment charges
received on the Mortgage Loans and such amounts will not be available for
distribution to the holders of the Offered Certificates.
The Class A-1 Certificates generally represent an interest in the Group I
Mortgage Loans and the Class A-2 Certificates generally represent an interest in
the Group II Mortgage Loans.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
I. On each Distribution Date the Trustee shall withdraw from the
Distribution Account that portion of Available Funds for such Distribution Date
consisting of the Group I Interest Remittance Amount for such Distribution Date,
and make the following disbursements and transfers in the order of priority
described below, in each case to the extent of the Group I Interest Remittance
Amount remaining for such Distribution Date.
(i) to the holders of the Class A-1 Certificates, the Monthly Interest
Distributable Amount and the Unpaid Interest Shortfall Amount, if any, for such
Certificates; and
S-51
(ii) to the holders of the Class A-2 Certificates, an amount equal to the
excess, if any, of (x) the amount required to be distributed pursuant to clause
II(i) below for such Distribution Date over (y) the amount actually distributed
pursuant to such clause from the Group II Interest Remittance Amount.
II. On each Distribution Date the Trustee shall withdraw from the
Distribution Account that portion of Available Funds for such Distribution Date
consisting of the Group II Interest Remittance Amount for such Distribution
Date, and make the following disbursements and transfers in the order of
priority described below, in each case to the extent of the Group II Interest
Remittance Amount remaining for such Distribution Date.
(i) to the holders of the Class A-2 Certificates, the Monthly Interest
Distributable Amount and the Unpaid Interest Shortfall Amount, if any, for such
Certificates; and
(ii) to the holders of the Class A-1 Certificates, an amount equal to the
excess, if any, of (x) the amount required to be distributed pursuant to clause
I(i) above for such Distribution Date over (y) the amount actually distributed
pursuant to such clause from the Group I Interest Remittance Amount.
III. On each Distribution Date, following the distributions made pursuant
to clauses I and II above, the Trustee shall make the following disbursements
and transfers in the order of priority described below, in each case to the
extent of the sum of the Group I Interest Remittance Amount and the Group II
Interest Remittance Amount remaining undistributed for such Distribution Date.
(i) to the holders of the Class M-1 Certificates, the related Monthly
Interest Distributable Amount;
(ii) to the holders of the Class M-2 Certificates, the related Monthly
Interest Distributable Amount;
(iii) concurrently, to the holders of the Class M-3A Certificates and the
Class M-3F Certificates, the related Monthly Interest Distributable Amount on a
PRO RATA basis based on the entitlement of each such class;
(iv) concurrently, to the holders of the Class M-4A Certificates and the
Class M-4F Certificates, the related Monthly Interest Distributable Amount on a
PRO RATA basis based on the entitlement of each such class; and
(v) concurrently, to the holders of the Class M-5A Certificates and the
Class M-5F Certificates, the related Monthly Interest Distributable Amount on a
PRO RATA basis based on the entitlement of each such class.
On any Distribution Date, any shortfalls resulting from the application of
the Relief Act and any Prepayment Interest Shortfalls to the extent not covered
by Compensating Interest paid by the Servicer will be allocated, first, to the
interest distribution amount with respect to the Class C Certificates, and
thereafter, to the Monthly Interest Distributable Amounts with respect to the
Offered Certificates on a PRO RATA basis based on the respective amounts of
interest accrued on such Certificates for such Distribution Date. THE HOLDERS OF
THE OFFERED CERTIFICATES WILL NOT BE ENTITLED TO REIMBURSEMENT FOR ANY SUCH
INTEREST SHORTFALLS.
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 shall be distributed in the
following amounts and order of priority:
(i) first, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(ii) second, after taking into account the amount distributed to the
holders of the Class A-2 Certificates pursuant to clause II(i) below on such
Distribution Date, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
S-52
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 shall be distributed in the
following amounts and order of priority:
(i) first, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(ii) second, after taking into account the amount distributed to the
holders of the Class A-1 Certificates pursuant to clause I(i) above on such
Distribution Date, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance thereof 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
shall be distributed in the following amounts and order of priority:
(i) first, to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) second, to the holders of the Class M-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iii) third, to the holders of the Class M-3A Certificates and the Class
M-3F Certificates, on a PRO RATA basis based on the Certificate Principal
Balance of each such class, until the Certificate Principal Balances thereof
have been reduced to zero;
(iv) fourth, to the holders of the Class M-4A Certificates and the Class
M-4F Certificates, on a PRO RATA basis based on the Certificate Principal
Balance of each such class, until the Certificate Principal Balances thereof
have been reduced to zero; and
(v) fifth, to the holders of the Class M-5A Certificates and the Class M-5F
Certificates, on a PRO RATA basis based on the Certificate Principal Balance of
each such class, until the Certificate Principal Balances thereof have 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 shall be distributed in
the following amounts and order of priority:
(i) first, 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) second, to the extent of the portion, if any, of the Class A-1
Principal Distribution Amount remaining undistributed pursuant to clause IV(i)
above on such Distribution Date, and after taking into account the amount
distributed to the holders of the Class A-2 Certificates pursuant to clause V(i)
below on such Distribution Date, to the holders of the Class A-2 Certificates,
until the Certificate Principal Balance thereof has been reduced to zero; and
(iii) third, to the holders of the Class A-2 Certificates, an amount equal
to the excess, if any, of (x) the amount required to be distributed pursuant to
clause V(i) below for such Distribution Date over (y) the sum of (A) the amount
actually distributed pursuant to clause V(i) below from the Group II Principal
Distribution Amount on such Distribution Date and (B) the amount, if any,
distributed to the holders of the Class A-2 Certificates pursuant to clause
IV(ii) above on such Distribution Date.
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 shall be distributed in
the following amounts and order of priority:
S-53
(i) first, 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) second, to the extent of the portion, if any, of the Class A-2
Principal Distribution Amount remaining undistributed pursuant to clause V(i)
above on such Distribution Date, and after taking into account the amount
distributed to the holders of the Class A-1 Certificates pursuant to clause
IV(i) above on such Distribution Date, to the holders of the Class A-1
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero; and
(iii) third, to the holders of the Class A-1 Certificates, an amount equal
to the excess, if any, of (x) the amount required to be distributed pursuant to
clause IV(i) above for such Distribution Date over (y) the sum of (A) the amount
actually distributed pursuant to clause IV(i) above from the Group I Principal
Distribution Amount on such Distribution Date and (B) the amount, if any,
distributed to the holders of the Class A-1 Certificates pursuant to clause
V(ii) above on such Distribution Date.
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 shall be distributed in the following amounts and order of priority:
(i) first, 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) second, 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) third, to the holders of the Class M-3A Certificates and the Class
M-3F Certificates, on a PRO RATA basis based on the Certificate Principal
Balance of each such class, the Class M-3 Principal Distribution Amount until
the Certificate Principal Balance thereof has been reduced to zero;
(iv) fourth, to the holders of the Class M-4A Certificates and the Class
M-4F Certificates, on a PRO RATA basis based on the Certificate Principal
Balance of each such class, the Class M-4 Principal Distribution Amount until
the Certificate Principal Balance thereof has been reduced to zero; and
(v) to the holders of the Class M-5A Certificates and the Class M-5F
Certificates, on a PRO RATA basis based on the Certificate Principal Balance of
each such class, the Class M-5 Principal Distribution Amount until the
Certificate Principal Balance thereof has been reduced to zero.
The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the Mortgage Loans evidenced by the Subordinate Certificates. Increasing the
respective percentage interest in the Trust of the Subordinate Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Class
A Certificates consists of subordination, as described under
"--Subordination"below, excess interest and overcollateralization, as described
under "--Overcollateralization Provisions" herein and crosscollateralization as
described under "--Allocation of Available Funds" above.
S-54
SUBORDINATION
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 payments 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 (i)
the preferential right of the holders of the Class A Certificates to receive on
any Distribution Date, prior to distribution on the Subordinate Certificates,
distributions in respect of interest and principal, subject to funds available
for such distributions and (ii) if necessary, the right of the holders of the
Class A Certificates to receive future distributions of amounts that would
otherwise be payable to the holders of the Subordinate Certificates.
In addition, the rights of the holders of the Class M-1 Certificates to
receive distributions will be senior to the rights of holders of the Class M-2
Certificates, the rights of the holders of the Class M-2 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-3
Certificates, the rights of the holders of the Class M-3 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-4
Certificates, the rights of the holders of the Class M-4 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-5
Certificates and the rights of the holders of the Mezzanine Certificates to
receive distributions will be senior to the rights of the holders of the Class C
Certificates, in each case to the extent described herein. This subordination is
intended to enhance the likelihood of regular receipt by the holders of more
senior Certificates of distributions in respect of interest and principal and to
afford such holders protection against Realized Losses.
ALLOCATION OF LOSSES
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date, first, to Net Monthly Excess Cashflow, second, to the Class C
Certificates, third, to the Class M-5A Certificates and the Class M-5F
Certificates on a PRO RATA basis based on the Certificate Principal Balance of
each such class, fourth, to the Class M-4A Certificates and the Class M-4F
Certificates on a PRO RATA basis based on the Certificate Principal Balance of
each such class, fifth, to the Class M-3A Certificates and the Class M-3F
Certificates on a PRO RATA basis based on the Certificate Principal Balance of
each such class, sixth, to the Class M-2 Certificates and seventh, to the Class
M-1 Certificates.
The Pooling Agreement does not permit the allocation of Realized Losses to
the Class A Certificates, the Class P Certificates or the Class R Certificates.
Investors in the Class A Certificates should note that although Realized Losses
cannot be allocated to the Class A Certificates, under certain loss scenarios
there will not be enough interest and principal on the Mortgage Loans to pay the
Class A Certificates all interest and principal amounts to which they are then
entitled.
Any allocation of a Realized Loss to a Subordinate 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
Subordinate Certificate be reduced more than once in respect of any particular
amount both (i) allocable to such Certificate in respect of Realized Losses and
(ii) payable as principal to the holder of such Certificate from Net Monthly
Excess Cashflow.
Once Realized Losses have been allocated to the Mezzanine Certificates,
such amounts with respect to such Certificates will no longer accrue interest
nor will such amounts be reinstated thereafter. However, Allocated Realized Loss
Amounts may be paid to the holders of the Mezzanine Certificates from Net
Monthly Excess Cashflow, according to the priorities set forth under
"--Overcollateralization Provisions" below.
OVERCOLLATERALIZATION PROVISIONS
The weighted average net Mortgage Rate for the Mortgage Loans is generally
expected to be higher than the weighted average of the Pass-Through Rates on the
Offered Certificates. As a result, interest collections on the Mortgage Loans
are expected to exceed the amount of interest payable to the holders of the
Offered Certificates and the fees and
S-55
expenses payable by the Trust. The Pooling Agreement requires that, on each
Distribution Date, the Net Monthly Excess Cashflow, if any, be distributed as
follows:
(i) to the holders of the class or classes of Certificates then entitled to
receive distributions in respect of principal, in an amount equal to any Extra
Principal Distribution Amount, distributable to such holders as part of the
Group I Principal Distribution Amount and/or the Group II Principal Distribution
Amount as described under "--Allocation of Available Funds--Principal
Distributions on the Offered Certificates" above;
(ii) to the holders of the Class M-1 Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount allocable to such Certificates;
(iii) to the holders of the Class M-1 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to the Class M-1 Certificates;
(iv) to the holders of the Class M-2 Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount allocable to such Certificates;
(v) to the holders of the Class M-2 Certificates, in an amount equal to the
Allocated Realized Loss Amount allocable to the Class M-2 Certificates;
(vi) to the holders of the Class M-3A Certificates and the Class M-3F
Certificates, in an amount equal to the Unpaid Interest Shortfall Amount
allocable to such Certificates, on a PRO RATA basis based on the entitlement of
each such class;
(vii) to the holders of the Class M-3A Certificates and the Class M-3F
Certificates, in an amount equal to the Allocated Realized Loss Amount allocable
to such Certificates, on a PRO RATA basis based on the Certificate Principal
Balance of each such class;
(viii) to the holders of the Class M-4A Certificates and the Class M-4F
Certificates, in an amount equal to the Unpaid Interest Shortfall Amount
allocable to such Certificates, on a PRO RATA basis based on the entitlement of
each such class;
(ix) to the holders of the Class M-4A Certificates and the Class M-4F
Certificates, in an amount equal to the Allocated Realized Loss Amount allocable
to such Certificates, on a PRO RATA basis based on the Certificate Principal
Balance of each such class;
(x) to the holders of the Class M-5A Certificates and the Class M-5F
Certificates, in an amount equal to the Unpaid Interest Shortfall Amount
allocable to such Certificates, on a PRO RATA basis based on the entitlement of
each such class;
(xi) to the holders of the Class M-5A Certificates and the Class M-5F
Certificates, in an amount equal to the Allocated Realized Loss Amount allocable
to such Certificates, on a PRO RATA basis based on the Certificate Principal
Balance of each such class;
(xii) 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;
(xiii) to the holders of the Class C Certificates as provided in the
Pooling Agreement;
(xiv) if such Distribution Date follows the Prepayment Period during which
occurs the latest date on which a prepayment charge may be required to be paid
in respect of any Mortgage Loan, to the holders of the Class P Certificates, in
reduction of the Certificate Principal Balance thereof, until the Certificate
Principal Balance thereof is reduced to zero; and
(xv) any remaining amounts to the holders of the Residual Certificates as
provided in the Pooling Agreement.
S-56
On each Distribution Date, after making the distributions of the Available
Funds as described above, the Trustee will withdraw from the Net WAC Rate
Carryover Reserve Account the amount deposited therein pursuant to subclause (x)
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, if any, in respect of the
Mortgage Loans received during the related Prepayment Period and will distribute
these amounts to the holders of the Class P Certificates.
DEFINITIONS
Many of the defined terms listed below may apply to both Loan
Groups/Certificate Groups and are sometimes used in this prospectus supplement
to refer to a particular Loan Group/Certificate Group by the use of the words
"Group I" and "Group II."
The "Accrual Period" (a) for the Hybrid Certificates and the Fixed Rate
Certificates for a given Distribution Date will be the calendar month preceding
the month of such Distribution Date based on a 360-day year consisting of twelve
30-day months and (b) for the Floating Rate Certificates for a given
Distribution Date will be the actual number of days based on a 360-day year
included in the period commencing on the immediately preceding Distribution Date
(or, in the case of the first such Accrual Period, commencing on the Closing
Date) and ending on the day immediately preceding such Distribution Date.
An "Allocated Realized Loss Amount" with respect to any class of the
Mezzanine Certificates and any Distribution Date is an amount equal to the sum
of any Realized Losses allocated to that class of Certificates on the
Distribution Date and any Allocated Realized Loss Amounts for that class
remaining unpaid from the previous Distribution Date.
The "Certificate Principal Balance" of any Offered Certificate or Class P
Certificate immediately prior to any Distribution Date will be equal to the
Certificate Principal Balance thereof on the Closing Date (the "Original
Certificate Principal Balance") reduced by the sum of all amounts actually
distributed in respect of principal of such Class and, in the case of a
Mezzanine Certificate, Realized Losses allocated thereto on all prior
Distribution Dates. The "Certificate Principal Balance" of the Class C
Certificates as of any date of determination is equal to the excess, if any, of
(a) the then aggregate Principal Balance of the Mortgage Loans over (b) the then
aggregate Certificate Principal Balances of the Offered 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 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) 74.50% 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 $3,027,451.48.
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) 74.50% 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 $1,344,849.78.
S-57
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 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) 83.50% 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 $4,372,301.26.
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 Distribution
Date) and (iii) the Certificate Principal Balance of the Class M-2 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 91.50% 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 $4,372,301.26.
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 Distribution
Date), (iii) the Certificate Principal Balance of the Class M-2 Certificates
(after taking into account the payment of the Class M-2 Principal Distribution
Amount on such Distribution Date) and (iv) the aggregate 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) 94.00% 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 $4,372,301.26.
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 Distribution
Date), (iii) the Certificate Principal Balance of the Class M-2 Certificates
(after taking into account the payment of the Class M-2 Principal Distribution
Amount on such Distribution Date), (iv) the aggregate 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 Distribution Date) and (v)
the aggregate 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) 96.00% 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 $4,372,301.26.
The "Class M-5 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
S-58
A Principal Distribution Amount on such Distribution Date), (ii) the Certificate
Principal Balance of the Class M-1 Certificates (after taking into account the
payment of the Class M-1 Principal Distribution Amount on such Distribution
Date), (iii) the Certificate Principal Balance of the Class M-2 Certificates
(after taking into account the payment of the Class M-2 Principal Distribution
Amount on such Distribution Date), (iv) the aggregate 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 Distribution Date), (v) the
aggregate Certificate Principal Balance of the Class M-4 Certificates (after
taking into account the payment of the Class M-4 Principal Distribution Amount
on such Distribution Date) and (vi) the aggregate Certificate Principal Balance
of the Class M-5 Certificates immediately prior to such Distribution Date over
(y) the lesser of (A) the product of (i) 98.50% 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
$4,372,301.26.
The "Credit Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the aggregate Certificate Principal Balance
of the Subordinate Certificates by (y) the aggregate principal balance of the
Mortgage Loans, calculated prior to taking into account distributions of
principal on the Mortgage Loans and distribution of the 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 Mortgage Loan is "Delinquent" if any monthly payment due on a Due Date is
not made by the close of business on the next scheduled Due Date for such
Mortgage Loan. A Mortgage Loan is "30 days Delinquent" if such monthly payment
has not been received by the close of business on the corresponding day of the
month immediately succeeding the month in which such monthly payment was due or,
if there was no such corresponding day (e.g., as when a 30-day month follows a
31-day month in which a payment was due on the 31st day of such month), then on
the last day of such immediately succeeding month; and similarly for "60 days
Delinquent" and "90 days Delinquent," etc.
The "Determination Date" with respect to any Distribution Date will be the
15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day.
A "Due Period" with respect to any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
The "Extra Principal Distribution Amount" for any Distribution Date, is the
lesser of (x) the Net Monthly Excess Cashflow for such Distribution Date and (y)
the Overcollateralization Deficiency Amount for such Distribution Date.
The "Group I Allocation Percentage" for any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (i) the Group I
Principal Remittance Amount for such Distribution Date, and the denominator of
which is (ii) the Principal Remittance Amount for such Distribution Date.
The "Group I Basic Principal Distribution Amount" means with respect to any
Distribution Date, the excess of (i) the Group I Principal Remittance Amount for
such Distribution Date over (ii) the Overcollateralization Release Amount, if
any, for such Distribution Date multiplied by the Group I Allocation Percentage.
The "Group I Interest Remittance Amount" with respect to any Distribution
Date is that portion of the Available Funds for such Distribution Date
attributable to interest received or advanced with respect to the Group I
Mortgage Loans.
The "Group I Principal Distribution Amount" with respect to any
Distribution Date is the sum of (i) the Group I Basic Principal Distribution
Amount for such Distribution Date and (ii) the Extra Principal Distribution
Amount for such Distribution Date multiplied by the Group I Allocation
Percentage.
S-59
The "Group I Principal Remittance Amount" means with respect to any
Distribution Date, that portion of Available Funds equal to the sum of (i) all
scheduled payments of principal collected or advanced on the Group I Mortgage
Loans by the Servicer that were due during the related Due Period, (ii) the
principal portion of all partial and full principal prepayments of the Group I
Mortgage Loans applied by the Servicer during the related Prepayment Period,
(iii) the principal portion of all related Net Liquidation Proceeds and
Insurance Proceeds received during the related Prepayment Period with respect to
the Group I Mortgage Loans, (iv) that portion of the Purchase Price,
representing principal of any repurchased Group I Mortgage Loan, deposited to
the Collection Account during the related Prepayment Period, (v) the principal
portion of any related Substitution Adjustments deposited in the Collection
Account during the related Prepayment Period with respect to the Group I
Mortgage Loans and (vi) on the Distribution Date on which the Trust is to be
terminated in accordance with the Pooling Agreement, that portion of the
Termination Price, representing principal with respect to the Group I Mortgage
Loans.
The "Group II Allocation Percentage" for any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (i) the Group II
Principal Remittance Amount for such Distribution Date, and the denominator of
which is (ii) the Principal Remittance Amount for such Distribution Date.
The "Group II Basic Principal Distribution Amount" means with respect to
any Distribution Date, the excess of (i) the Group II Principal Remittance
Amount for such Distribution Date over (ii) the Overcollateralization Release
Amount, if any, for such Distribution Date multiplied by the Group II Allocation
Percentage.
The "Group II Interest Remittance Amount" with respect to any Distribution
Date is that portion of the Available Funds for such Distribution Date
attributable to interest received or advanced with respect to the Group II
Mortgage Loans.
The "Group II Principal Distribution Amount" with respect to any
Distribution Date is the sum of (i) the Group II Basic Principal Distribution
Amount for such Distribution Date and (ii) the Extra Principal Distribution
Amount for such Distribution Date multiplied by the Group II Allocation
Percentage.
The "Group II Principal Remittance Amount" means with respect to any
Distribution Date, that portion of Available Funds equal to the sum of (i) all
scheduled payments of principal collected or advanced on the Group II Mortgage
Loans by the Servicer that were due during the related Due Period, (ii) the
principal portion of all partial and full principal prepayments of the Group II
Mortgage Loans applied by the Servicer during such Prepayment Period, (iii) the
principal portion of all related Net Liquidation Proceeds and Insurance Proceeds
received during the related Prepayment Period with respect to the Group II
Mortgage Loans, (iv) that portion of the Purchase Price, representing principal
of any repurchased Group II Mortgage Loan, deposited to the Collection Account
during the related Prepayment Period, (v) the principal portion of any related
Substitution Adjustments deposited in the Collection Account during the related
Prepayment Period with respect to the Group II Mortgage Loans and (vi) on the
Distribution Date on which the Trust is to be terminated in accordance with the
Pooling Agreement, that portion of the Termination Price, representing principal
with respect to the Group II Mortgage Loans.
"Insurance Proceeds" means the proceeds of any title policy, hazard policy
or other insurance policy covering a Mortgage Loan to the extent such proceeds
are not to be applied to the restoration of the related Mortgaged Property or
released to the mortgagor in accordance with the procedures that the Servicer
would follow in servicing mortgage loans held for its own account, subject to
the terms and conditions of the related mortgage note and Mortgage.
The "Monthly Interest Distributable Amount" for any Distribution Date and
each class of Offered Certificates equals the amount of interest accrued during
the related Accrual Period at the related Pass-Through Rate on the Certificate
Principal Balance of such class immediately prior to such Distribution Date, in
each case, reduced by any Prepayment Interest Shortfalls allocated to such class
and shortfalls resulting from the application of the Relief Act (allocated to
each Certificate based on its respective entitlements to interest irrespective
of any Prepayment Interest Shortfalls or shortfalls resulting from the
application of the Relief Act for such Distribution Date).
The "Net Monthly Excess Cashflow" for any Distribution Date is equal to the
sum of (a) any Overcollateralization Release Amount and (b) the excess of (x)
the Available Funds for such Distribution Date over (y) the sum for such
Distribution Date of (A) the Monthly Interest Distributable Amounts for the
Offered Certificates, (B) the Unpaid Interest Shortfall Amounts for the Class A
Certificates and (C) the Principal Remittance Amount.
S-60
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date equals the amount, if any, by which the Overcollateralization
Target Amount exceeds the Overcollateralized Amount on such Distribution Date
(after giving effect to distributions in respect of the Group I Basic Principal
Distribution Amount and the Group II Basic Principal Distribution Amount on such
Distribution Date).
An "Overcollateralization Release Amount" means, with respect to any
Distribution Date, the lesser of (x) the Principal Remittance Amount for such
Distribution Date and (y) the excess, if any, of (i) the Overcollateralized
Amount for such Distribution Date (assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on such Distribution Date)
over (ii) the Overcollateralization Target Amount for such Distribution Date.
The "Overcollateralization Target Amount" means with respect to any
Distribution Date, (i) prior to the Stepdown Date, an amount equal to
approximately 0.75% of the aggregate Principal Balance of the Mortgage Loans as
of the Cut-off Date, (ii) on or after the Stepdown Date provided a Trigger Event
is not in effect, the greater of (x) 1.50% of the then current aggregate
outstanding Principal Balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal 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 $4,372,301, or (iii) on or after the Stepdown Date
and if a Trigger Event is in effect, the Overcollateralization Target Amount for
the immediately preceding Distribution Date.
The "Overcollateralized Amount" for any Distribution Date is an amount
equal to (i) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus (ii) the sum of the aggregate Certificate Principal Balance of the
Class A Certificates, the Mezzanine Certificates and the Class P Certificates as
of such Distribution Date (after giving effect to distributions to be made on
such Distribution Date).
The "Prepayment Period" for any Distribution Date is the period commencing
on the day after the Determination Date in the month preceding the month in
which such Distribution Date falls (or, in the case of the first Distribution
Date, from June 1, 2003) and ending on the Determination Date of the calendar
month in which such Distribution Date occurs.
The "Principal Remittance Amount" for any Distribution Date is the sum of
the Group I Principal Remittance Amount and the Group II Principal Remittance
Amount.
"Realized Loss" means, with respect to any defaulted Mortgage Loan that is
finally liquidated (a "Liquidated Mortgage Loan"), the amount of loss realized
equal to the portion of the Principal Balance remaining unpaid after application
of all liquidation proceeds, insurance proceeds or condemnation proceeds net of
amounts reimbursable to the Servicer for related Advances, Servicing Advances
and Servicing Fees (such amount, the "Net Liquidation Proceeds") in respect of
such Mortgage Loan.
The "Stepdown Date" means the earlier to occur of (i) the 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 July 2006 and (y) the first Distribution Date
on which the Credit Enhancement Percentage (calculated for this purpose only
after taking into account distributions of principal on the Mortgage Loans and
distribution of the 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) is greater than or
equal to 25.50%.
A "Trigger Event" is in effect with respect to any Distribution Date on or
after the Stepdown Date if:
(a) the percentage obtained by dividing (x) the principal amount of
Mortgage Loans Delinquent 60 days or more by (y) the aggregate principal balance
of the Mortgage Loans, in each case, as of the last day of the previous calendar
month, exceeds 42.00% of the Credit Enhancement Percentage or
(b) the aggregate amount of Realized Losses incurred since the Cut-off Date
through the last day of the related Due Period divided by the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date exceeds the
applicable percentages set forth below with respect to such Distribution Date:
S-61
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
------------------------------ ----------
July 2006 through June 2007 2.50%
July 2007 through June 2008 3.50%
July 2008 through June 2009 4.50%
July 2009 and thereafter 4.75%
The "Unpaid Interest Shortfall Amount" means (i) for each class of Offered
Certificates and the first Distribution Date, zero, and (ii) with
respect to each class of Offered Certificates and any Distribution Date after
the first Distribution Date, the amount, if any, by which (a) the sum of (1) the
Monthly Interest Distributable Amount for such class for the immediately
preceding Distribution Date and (2) the outstanding Unpaid Interest Shortfall
Amount, if any, for such class for such preceding Distribution Date exceeds (b)
the aggregate amount distributed on such class in respect of interest pursuant
to clause (a) of this definition on such preceding Distribution Date, plus
interest on the amount of interest due but not paid on the Certificates of such
class on such preceding Distribution Date, to the extent permitted by law, at
the Pass-Through Rate for such class for the related Accrual Period.
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date with respect to the
Offered Certificates will equal the lesser of (a) the related Formula Rate and
(b) the related Net WAC Rate for such Distribution Date. With respect to the
Hybrid Certificates and the Fixed Rate Certificates, interest in respect of any
Distribution Date will accrue during the related Accrual Period on the basis of
a 360-day year consisting of twelve 30-day months. With respect to the Floating
Rate Certificates, interest in respect of any Distribution Date will accrue
during the related Accrual Period on the basis of a 360-day year and the actual
number of days elapsed.
The "Formula Rate" for the Offered Certificates is the lesser of (a) the
Base Rate for such class or (b) the related Maximum Cap Rate.
The "Base Rate" for the Floating Rate Certificates (and the Hybrid
Certificates for each Distribution Date after June 2005) is the sum of the
interbank offered rate for one-month United States dollar deposits in the London
market (the "Certificate Index") as of the related LIBOR Determination Date (as
defined herein) plus a related margin (the "Certificate Margin"). The
Certificate Margin with respect to the Class A-1 Certificates on each
Distribution Date following the Distribution Date in June 2005 and on or prior
to the Optional Termination Date will equal 0.750% and on each Distribution Date
after the Optional Termination Date will equal 1.125%. The Certificate Margin
with respect to the Class A-2 Certificates on each Distribution Date following
the Distribution Date in June 2005 and on or prior to the Optional Termination
Date will equal 0.750% and on each Distribution Date after the Optional
Termination Date will equal 1.125%. The Certificate Margin with respect to the
Class M-1 Certificates on each Distribution Date following the Distribution Date
in June 2005 and on or prior to the Optional Termination Date will equal 1.200%
and on each Distribution Date after the Optional Termination Date will equal
1.800%. The Certificate Margin with respect to the Class M-2 Certificates on
each Distribution Date on or prior to the Optional Termination Date will equal
1.650% and on each Distribution Date after the Optional Termination Date will
equal 2.475%. The Certificate Margin with respect to the Class M-3A Certificates
on each Distribution Date on or prior to the Optional Termination Date will
equal 2.000% and on each Distribution Date after the Optional Termination Date
will equal 3.000%. The Certificate Margin with respect to the Class M-4A
Certificates on each Distribution Date on or prior to the Optional Termination
Date will equal 3.000% and on each Distribution Date after the Optional
Termination Date will equal 4.500%. The Certificate Margin with respect to the
Class M-5A Certificates on each Distribution Date on or prior to the Optional
Termination Date will equal 3.600% and on each Distribution Date after the
Optional Termination Date will equal 5.400%.
The Base Rate for the Class M-3F Certificates is (i) with respect to each
Distribution Date on or prior to the Optional Termination Date, 4.270% per annum
and (ii) with respect to each Distribution Date thereafter, 4.770% per annum.
The Base Rate for the Class M-4F Certificates is (i) with respect to each
Distribution Date on or prior to the Optional Termination Date, 4.810% per annum
and (ii) with respect to each Distribution Date thereafter, 5.310% per annum.
S-62
The Base Rate for the Class M-5F Certificates is (i) with respect to each
Distribution Date on or prior to the Optional Termination Date, 5.340% per annum
and (ii) with respect to each Distribution Date thereafter, 5.840% per annum.
The "Net WAC Rate" for any Distribution Date shall be a per annum rate
(subject, in the case of the Floating Rate Certificates to adjustment based on
the actual number of days elapsed in the related Accrual Period) equal to the
weighted average of the Adjusted Net Mortgage Rates of the Mortgage Loans.
The "Adjusted Net Mortgage Rate" for any Mortgage Loan for any Distribution
Date shall 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 Dividend Rate, if applicable.
The "Maximum Cap Rate" for any Distribution Date is a per annum rate
(subject, in the case of the Floating Rate Certificates, to adjustment based on
the actual number of days elapsed in the related Accrual Period) equal to the
weighted average of the Adjusted Net Maximum Mortgage Rates of the Mortgage
Loans.
The "Adjusted Net Maximum Mortgage Rate" for any Mortgage Loan for any
Distribution Date shall be a per annum rate equal to the applicable Maximum
Mortgage Rate for such Mortgage Loan (or the Mortgage Rate in the case of any
fixed-rate 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 Dividend Rate, if applicable.
If on any Distribution Date, the Pass-Through Rate for a class of Offered
Certificates is the Net WAC 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 on such Distribution Date had such Pass-Through Rate been the related
Formula Rate, over (y) the amount of interest such class of Certificates accrued
for such Distribution Date at the Net WAC 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 Accrual Period at the Formula Rate applicable for such class for such
Accrual Period. Any Net WAC Rate Carryover Amount on the Offered Certificates
will be paid on such Distribution Date or future Distribution Dates from and to
the extent of funds available therefor in accordance with the priorities
described above under "Overcollateralization Provisions."
On the Closing Date, the Trustee will establish an account (the "Net WAC
Rate Carryover Reserve Account") from which payments 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. On
each Distribution Date, to the extent required following the distribution of
Available Funds as described under "--Overcollateralization Provisions" above,
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:
(i) concurrently, to the Class A-1 Certificates and the Class A-2
Certificates, on a PRO RATA basis based on the Net WAC Rate Carryover Amounts
for each such class, until each such amount has been distributed in full;
(ii) to the Class M-1 Certificates, the Net WAC Rate Carryover Amount for
such class;
(iii) to the Class M-2 Certificates, the Net WAC Rate Carryover Amount for
such class;
(iv) to the Class M-3 Certificates, the Net WAC Rate Carryover Amount for
such class;
(iv) to the Class M-4 Certificates, the Net WAC Rate Carryover Amount for
such class; and
(v) to the Class M-5 Certificates, the Net WAC Rate Carryover Amount for
such class.
S-63
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Floating Rate Certificates (and the
Hybrid Certificates for each Distribution Date after June 2005) (each such date,
a "LIBOR Determination Date"), the Trustee will determine the Certificate Index
for such Accrual Period for the Floating Rate Certificates (and the Hybrid
Certificates for each Distribution Date after June 2005) on the basis of the
London interbank offered rate for one-month United States dollar deposits, as
such rates appear on the Telerate Page 3750, as of 11:00 a.m. (London time) on
such LIBOR Determination Date. If such rate does not appear on Telerate Page
3750, the rate for that day will be determined on the basis of the offered rates
of the Reference Banks (as defined herein) for one-month United States dollar
deposits, as of 11:00 a.m. (London time) on such LIBOR Determination Date. The
Trustee will request the principal London office of each of the Reference Banks
to provide a quotation of its rate. If on such LIBOR Determination Date two or
more Reference Banks provide such offered quotations, the Certificate Index for
the related Accrual Period will be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole multiple of
0.0625%). If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, the Certificate Index for the related Accrual
Period shall be the higher of (x) the Certificate Index as determined on the
previous LIBOR Determination Date and (y) the Reserve Interest Rate (as defined
herein).
As used in this section, "LIBOR Business Day" means a day on which banks
are open for dealing in foreign currency and exchange in London and New York
City; "Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Capital Markets Report (or such other page as may replace
that page on that service for the purpose of displaying comparable rates or
prices); "Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) which have been
designated as such by the Trustee and (iii) not controlling, controlled by or
under common control with, the Servicer or any successor Servicer or the
Originator; and "Reserve Interest Rate" shall be the rate per annum that the
Trustee determines to be either (i) the arithmetic mean (rounded upwards if
necessary to the nearest whole multiple of 0.0625%) of the one-month United
States dollar lending rates which New York City banks selected by the Trustee
are quoting on the relevant LIBOR Determination Date to the principal London
offices of leading banks in the London interbank market or (ii) in the event
that the Trustee can determine no such arithmetic mean, the lowest one-month
United States dollar lending rate which New York City banks selected by the
Trustee are quoting on such LIBOR Determination Date to leading European banks.
The establishment of the Certificate Index on each LIBOR Determination Date
by the Trustee and the Trustee's calculation of the rate of interest applicable
to the Floating Rate Certificates (and the Hybrid Certificates for each
Distribution Date after June 2005) for the related Accrual Period will (in the
absence of manifest error) be final and binding.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will provide or make available to
each holder of a Certificate and the rating agencies a statement (based on
information received from the Servicer pursuant to the Pooling Agreement)
setting forth, among other things, the information set forth in the prospectus
under "Description of the Securities--Reports to Securityholders." The Trustee
will make the statement (and, at its option, any additional files containing the
same information in an alternative format) available each month via the
Trustee's internet website. The Trustee's internet website shall initially be
located at "www.ctslink.com." Assistance in using the website can be obtained by
calling the Trustee's customer service desk at (301) 815-6600. Parties that are
unable to use the above distribution options are entitled to have a paper copy
mailed to them via first class mail by calling the customer service desk and
indicating such. The Trustee shall have the right to change the way statements
are distributed in order to make such distribution more convenient and/or more
accessible to the above parties and the Trustee shall provide timely and
adequate notification to all above parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
S-64
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans. If a purchaser of an Offered Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity may be lower than that so calculated. In
general, the earlier a loss occurs, the greater is the effect on an investor's
yield to maturity. There can be no assurance as to the delinquency, foreclosure
or loss experience with respect to the Mortgage Loans. Because the Mortgage
Loans were underwritten in accordance with standards less stringent than those
generally acceptable to Fannie Mae and Freddie Mac with regard to a borrower's
credit standing and repayment ability, the risk of delinquencies with respect
to, and losses on, the Mortgage Loans will be greater than that of mortgage
loans underwritten in accordance with Fannie Mae and Freddie Mac standards.
The rate of principal payments, the aggregate amount of distributions and
the yields to maturity of the Offered Certificates will be affected by the rate
and timing of payments of principal on the Mortgage Loans. The rate of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules of the Mortgage Loans and by the rate of principal prepayments
(including for this purpose prepayments resulting from refinancing, liquidations
of the Mortgage Loans due to defaults, casualties or condemnations and
repurchases by the Servicer). Because certain of the Mortgage Loans contain
prepayment charges, the rate of principal payments may be less than the rate of
principal payments for mortgage loans that do not have prepayment charges. The
Mortgage Loans are subject to the "due-on-sale" provisions included therein
which provide that the Mortgage Loan is assumable by a creditworthy purchaser of
the related Mortgaged Property. See "The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase) will result in distributions on the Offered Certificates
of principal amounts which would otherwise be distributed over the remaining
terms of the Mortgage Loans. Since the rate of payment of principal on the
Mortgage Loans will depend on future events and a variety of other factors, no
assurance can be given as to such rate or the rate of principal prepayments. The
extent to which the yield to maturity of a class of Offered Certificates may
vary from the anticipated yield will depend upon the degree to which such class
of Certificates is purchased at a discount or premium. Further, an investor
should consider the risk that, in the case of any Offered Certificate purchased
at a discount, a slower than anticipated rate of principal payments (including
prepayments) on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, a faster than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the Mortgage Rates on the Mortgage Loans,
such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Mortgage Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. The Mortgage Loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors with adjustable-rate Mortgage
Loans may be inclined to refinance their adjustable-rate Mortgage Loans with a
fixed-rate loan to "lock in" a lower interest rate or to refinance their
adjustable- rate Mortgage Loans with other more competitive adjustable-rate
mortgage loans. The existence of the applicable Periodic Rate Cap and Maximum
Mortgage Rate with respect to the adjustable-rate Mortgage Loans also may affect
the likelihood of prepayments resulting from refinancings. No assurances can be
given as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments. In addition, the delinquency and loss experience of
the fixed-rate Mortgage Loans may differ from that on the adjustable-rate
Mortgage Loans because the amount of the monthly payments on the adjustable-rate
Mortgage Loans are subject to adjustment on each Adjustment Date. Furthermore,
substantially all of the adjustable-rate Mortgage Loans will not have their
initial Adjustment Date for one, two, three or five years after the origination
thereof. The prepayment experience of the Delayed First Adjustment Mortgage
Loans may differ from that of the other Mortgage Loans. The Delayed First
Adjustment Mortgage Loans may be subject to greater rates of prepayments as they
approach their initial Adjustment Dates even if market interest rates are only
slightly higher or lower than the Mortgage Rates on the Delayed First Adjustment
Mortgage Loans as mortgagors seek to avoid changes in their monthly payments.
S-65
The interest-only feature of the Interest Only Mortgage Loans may reduce
the perceived benefits of refinancing to take advantage of lower market interest
rates or to avoid adjustments in the Mortgage Rates. However, as a Mortgage Loan
with such a feature nears the end of its interest-only period, the borrower may
be more likely to refinance the Mortgage Loan, even if market interest rates are
only slightly less than the Mortgage Rate in order to avoid the increase in the
monthly payments to amortize the Mortgage Loan over its remaining life.
Except in the circumstances described in this prospectus supplement,
principal distributions on the Class A-1 Certificates relate to principal
payments on the Group I Mortgage Loans and principal distributions on the Class
A-2 Certificates relate to principal payments on the Group II Mortgage Loans.
Approximately 93.07% of the Group I Mortgage Loans and approximately 93.44%
of the Group II Mortgage Loans (in each case, by aggregate principal balance of
the related Loan Group as of the Cut-off Date) provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. The holders of the Class P Certificates will be entitled to all
prepayment charges received on the Mortgage Loans, and such amounts will not be
available for distribution on the other classes of Certificates. Under certain
circumstances, as described in the Pooling Agreement, the Servicer may waive the
payment of any otherwise applicable prepayment charge. Investors should conduct
their own analysis of the effect, if any, that the prepayment charges, and
decisions by the Servicer with respect to the waiver thereof, may have on the
prepayment performance of the Mortgage Loans. The Depositor makes no
representations as to the effect that the prepayment charges, and decisions by
the Servicer with respect to the waiver thereof, may have on the prepayment
performance of the Mortgage Loans.
YIELD CONSIDERATIONS RELATING TO INTEREST DISTRIBUTIONS
DELAY IN DISTRIBUTIONS ON HYBRID CERTIFICATES AND THE FIXED RATE
CERTIFICATES. The effective yield to holders of the Hybrid Certificates and the
Fixed Rate Certificates will be less than the yields otherwise produced by their
pass-through rate and purchase prices because (i) on each Distribution Date the
interest payable thereon is the interest accrued during the month preceding the
month of the related Distribution Date, which ends 24 or more days prior to the
related Distribution Date, and (ii) during each Accrual Period, other than the
first Accrual Period, interest accrues on a Certificate Principal Balance that
is less than the Certificate Principal Balance actually outstanding for the
first 24 or more days of the related Accrual Period. As a result, the market
value of the Hybrid Certificates and the Fixed Rate Certificates may be lower
than would be the case if there were no such delays.
INTEREST MAY BE LIMITED BY THE NET WAC RATE. If the pass-through rate of
any class of Offered Certificates is limited by the Net WAC Rate, such class
will accrue less interest than would otherwise be the case.
To the extent the Pass-Through Rate for any class of Offered Certificates
on any Distribution Date is limited to the Net WAC Rate, a shortfall in interest
equal to the Net WAC Rate Carryover Amount will occur. Such shortfall will only
be distributable, from Net Monthly Excess Cashflow, to the extent of any Net
Monthly Excess Cashflow remaining after the distributions set forth under (i)
through (xi) under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement.
The retention by the Trust of interest on each Dividend Mortgage Loan at
the applicable Dividend Rate, will result in the Net WAC Rate being lower than
would be the case if the Trust did not have such obligations. In addition, the
Net WAC Rate for the Floating Rate Certificates will be lower for Accrual
Periods that are longer than 30 days, and the Pass-Through Rates on the Floating
Certificates are more likely to be capped at the Net WAC Rate than they would if
all Accrual Periods were 30 days long. For a discussion of other factors that
could cause the Pass-Through Rate on the Offered Certificates to be capped at
the Net WAC Rate, see "Risk Factors--Effect of Mortgage Rates on the Offered
Certificates" in this prospectus supplement.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to the Offered Certificates with the Securities and
Exchange Commission (the "Commission") in a report on Form 8-K and may file
certain additional yield tables and other computational materials with respect
to the Offered Certificates with the Commission in a report on Form 8-K. Such
tables and materials were prepared by the Underwriters at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such
S-66
prospective investors. Such tables and assumptions may be based on assumptions
that differ from the Structuring Assumptions (as defined herein). Accordingly,
such tables and other materials may not be relevant to or appropriate for
investors other than those specifically requesting them.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal prepayments is consistent with such investor's
expectation. In general, the earlier a principal prepayment on the Mortgage
Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The weighted average life of an Offered Certificate is the average amount
of time that will elapse from the Closing Date, until each dollar of principal
is repaid to the investors in such Certificate. Because it is expected that
there will be prepayments and defaults on the Mortgage Loans, the actual
weighted average lives of these Certificates are expected to vary substantially
from the weighted average remaining terms to stated maturity of the Mortgage
Loans as set forth herein under "The Mortgage Pool."
The Assumed Final Distribution Date for the Offered Certificates is as set
forth herein under "Description of the Certificates--General." The final
Distribution Date with respect to the Offered Certificates could occur
significantly earlier than the related Assumed Final Distribution Date because
(i) prepayments are likely to occur, (ii) excess cashflow, if any, will be
applied as principal of the Offered Certificates as described herein and (iii)
an early termination of the Trust may occur as provided herein.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the fixed-rate Mortgage
Loans of 115% of the Fixed-Rate Prepayment Vector and a prepayment rate for the
adjustable-rate Mortgage Loans of 100% of the Adjustable-Rate Prepayment Vector.
A "Fixed-Rate Prepayment Vector" assumes a constant prepayment rate ("CPR") of
4% per annum of the then unpaid principal balance of such mortgage loans in the
first month of the life of such mortgage loans and an additional approximately
1.4545% (precisely 16/11%) per annum in each month thereafter until the 12th
month. Beginning in the 12th month and in each month thereafter during the life
of such mortgage loans, such prepayment vector assumes a CPR of 20%. An
"Adjustable-Rate Prepayment Vector" assumes a 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 1.3478% (precisely
31/23%) per annum in each month until the 24th month. Beginning in the 24th
month and in each month thereafter during the life of such mortgage loans, such
prepayment vector assumes a CPR of 35%. 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 the Prepayment Vector described thereunder.
The tables entitled "Percent of Original Certificate Principal Balance
Outstanding" were prepared on the basis of the assumptions in the following
paragraph and the table set forth below. There are certain differences between
the loan characteristics included in such assumptions and the characteristics of
the actual Mortgage Loans. Any such discrepancy may have an effect upon the
percentages of Original Certificate Principal Balances outstanding and weighted
average lives of the 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 percentages and weighted average lives in the tables entitled "Percent
of Original Certificate Principal Balance Outstanding" were determined assuming
that (the "Structuring Assumptions"): (i) the Mortgage Loans have the
S-67
characteristics set forth in the table below entitled "Assumed Mortgage Loan
Characteristics," (ii) the closing date for the Offered Certificates occurs on
June 25, 2003 and the Offered Certificates were sold to investors on such date,
(iii) distributions on the Certificates are made on the 25th day of each month
regardless of the day on which the Distribution Date actually occurs, commencing
in July 2003, in accordance with the allocation of Available Funds set forth
above under "Description of the Certificates--Allocation of Available Funds,"
(iv) the prepayment rates are the percentages of the Prepayment Vector set forth
in the "Percent of Original Certificate Principal Balance Outstanding" tables
below, (v) prepayments include thirty days' interest thereon, (vi) the Seller is
not required to substitute or repurchase any of the Mortgage Loans pursuant to
the Mortgage Loan Purchase Agreement and no optional termination is exercised,
except with respect to the entries identified by the row captioned "Weighted
Average Life (years) to Optional Termination" in the tables below, (vii) the
Overcollateralization Target Amount is determined as set forth in this
prospectus supplement, (viii) scheduled payments for all Mortgage Loans are
received on the first day of each month commencing in July 2003 and the
principal portion of such payments is computed prior to giving effect to
prepayments received in the previous month and there are no losses or
delinquencies with respect to such Mortgage Loans, (ix) all related Mortgage
Loans prepay at the same rate and all such payments are treated as prepayments
in full of individual Mortgage Loans, with no shortfalls in collection of
interest, (x) such prepayments are received on the last day of each month
commencing in the month of the Closing Date, (xi) the Certificate Index is at
all times equal to 1.035%, (xii) the Pass-Through Rates for the Offered
Certificates are as set forth herein, (xiii) the Mortgage Rate for each
adjustable-rate Mortgage Loan is adjusted on its next Adjustment Date (and on
subsequent Adjustment Dates, if necessary) to equal the sum of (a) the assumed
level of the Index and (b) the respective Gross Margin (such sum being subject
to the applicable Periodic Rate Caps, Minimum Mortgage Rates and Maximum
Mortgage Rates), (xiv) with respect to the adjustable-rate Mortgage Loans,
Six-Month LIBOR is equal to 0.99875% and (xv) the Trustee Fee Rate is equal to
0.006% per annum and the Servicing Fee Rate for each Mortgage Loan is equal to
0.50% per annum. Nothing contained in the foregoing assumptions should be
construed as a representation that the Mortgage Loans will not experience
delinquencies or losses.
PREPAYMENT SCENARIOS(1)
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
Fixed-Rate Mortgage Loans: 0% 60% 85% 115% 145% 170% 200%
Adjustable-Rate Mortgage Loans: 0% 50% 75% 100% 125% 150% 175%
___________________
(1) Percentage of the Fixed-Rate Prepayment Vector or the Adjustable-Rate
Prepayment Vector, as applicable.
S-68
ASSUMED MORTGAGE LOAN CHARACTERISTICS
REMAINING
ORIGINAL TERM TERM TO
TO MATURITY MATURITY
DESCRIPTION PRINCIPAL BALANCE ($) MORTGAGE RATE (%) (MONTHS) (MONTHS)
- ---------------------------------- --------------------- ----------------- ------------- ---------
Fixed-Rate Group I Mortgage Loans:
26,387.51 9.00000 180 177
207,318.46 8.70712 360 358
221,816.63 8.15661 360 357
219,030.14 7.21414 180 178
297,349.27 8.44448 360 357
404,375.10 8.61769 360 357
55,206.23 6.75000 180(1) 177
2,854,267.66 7.92223 180 178
34,556,471.32 7.96643 359 356
221,294.46 9.82389 180(1) 177
934,770.47 7.85816 180 178
6,932,644.80 8.42970 360 357
Fixed-Rate Group II Mortgage Loans:
78,569.94 7.31573 360 357
937,750.41 6.84095 360 357
15,322,379.77 6.79797 360 357
103,466.58 9.37500 180 178
2,811,473.21 7.49501 356 353
538,847.44 6.25000 360 358
2,747,155.25 7.96609 360 358
___________________
(1) Balloon Mortgage Loans with original amortization terms of 360 months.
(CONTINUED ON NEXT PAGE)
S-69
ORIGINAL REMAINING MAXIMUM MINIMUM MONTHS TO INITIAL
INITIAL TERM TO TERM TO GROSS MORTGAGE MORTGAGE NEXT PERIODIC PERIODIC
PRINCIPAL MORTGAGE MATURITY MATURITY MARGIN RATE RATE ADJUSTMENT RATE CAP RATE CAP
DESCRIPTION BALANCE ($) RATE (%) (MONTHS) (MONTHS) (%) (%) (%) DATE (%) (%)
- ----------- ----------- -------- -------- -------- ------ --------- --------- ---------- -------- ---------
Adjustable-Rate Group I Mortgage Loans:
655,586.29 7.62718 360 357 5.80559 13.62718 7.62718 21 3.00000 1.00000
32,180,737.09 7.78976 360 357 5.72476 13.78976 7.78976 21 3.00000 1.00000
6,845,505.15 8.18168 360 357 5.48502 14.18168 8.18168 21 3.00000 1.00000
1,199,529.30 8.58185 360 358 4.92067 14.58185 8.58185 22 3.00000 1.00000
1,540,199.81(1) 7.57791 360 357 4.38053 13.57791 7.57791 21 3.00000 1.00000
121,820,350.55 7.82636 360 357 5.45103 13.82636 7.82636 21 3.00000 1.00000
251,240,222.91(1) 6.46917 360 357 4.32381 12.46935 6.46935 21 3.00000 1.00000
150,000.00(1) 8.75000 360 356 6.25000 14.75000 8.75000 32 3.00000 1.00000
692,575.80(1) 6.46556 360 357 3.79568 12.46556 6.46556 57 3.00000 1.00000
443,716.22 6.64427 360 358 4.74061 12.64427 6.64427 4 1.00000 1.00000
36,818,522.26 7.78015 360 357 5.70827 13.78015 7.78015 21 3.00000 1.00000
1,785,865.45 7.50288 360 357 5.25106 13.50288 7.50288 33 3.00000 1.00000
713,096.03 7.93810 360 357 5.35422 13.93825 7.93810 57 3.00000 1.00000
42,513,427.54(1) 6.37498 360 357 4.51903 12.37498 6.37498 21 3.00000 1.00000
3,251,464.59(1) 6.43654 360 357 4.28907 12.43647 6.43654 33 3.00000 1.00000
29,453,040.64(1) 6.43975 360 357 4.00527 12.43976 6.43975 58 3.00000 1.00000
170,192.81 8.50000 360 358 5.12500 14.50000 8.50000 10 2.00000 1.00000
15,133,226.41 8.33275 360 357 5.51947 14.33275 8.33275 21 3.00000 1.00000
207,971.48 6.87500 360 357 4.37500 12.87500 6.87500 33 3.00000 1.00000
10,362,225.58(1) 7.25118 360 357 4.68011 13.25120 7.25118 21 3.00000 1.00000
260,999.99(1) 7.75000 360 357 5.12500 13.75000 7.75000 33 3.00000 1.00000
617,608.73(1) 7.32729 360 358 4.56295 13.32729 7.32729 58 3.00000 1.00000
503,299.65 8.87500 360 358 5.15613 14.87500 8.87500 4 1.00000 1.00000
Adjustable-Rate Group II Mortgage Loans:
5,014,251.26 7.07135 360 357 4.74743 13.07135 7.07135 21 3.00000 1.00000
41,548.08 8.37500 360 358 6.12500 14.37500 8.37500 34 3.00000 1.00000
1,538,776.32 7.51176 360 357 4.92551 13.51176 7.51176 21 3.00000 1.00000
1,922,420.58(1) 6.87569 360 357 3.90414 12.87569 6.87569 21 3.00000 1.00000
718,302.84 8.37500 360 358 3.87500 14.37500 8.37500 4 1.00000 1.00000
41,895,710.65 6.63808 360 357 4.26191 12.63809 6.63808 21 3.00000 1.00000
125,721,258.67(1) 6.40508 360 357 4.15216 12.40508 6.40508 21 3.00000 1.00000
699,199.99(1) 6.80049 360 356 4.29705 12.80049 6.80049 56 3.00000 1.00000
843,228.46 6.60465 360 358 4.56067 12.60465 6.60465 4 1.00000 1.00000
5,112,352.05 6.86146 360 357 4.65009 12.86146 6.86146 21 3.00000 1.00000
8,123,202.57 6.55131 360 358 3.86521 12.55131 6.55131 58 3.00000 1.00000
16,226,327.92(1) 6.23663 360 357 4.29193 12.23663 6.23663 21 3.00000 1.00000
2,090,800.00(1) 6.51334 360 357 4.24785 12.51334 6.51334 33 3.00000 1.00000
22,315,646.02(1) 6.27502 360 357 3.74400 12.27502 6.27502 57 3.00000 1.00000
508,638.11 8.27631 360 357 5.48670 14.27631 8.27631 33 3.00000 1.00000
26,000.00(1) 5.75000 360 358 3.50000 11.75000 5.75000 22 3.00000 1.00000
281,575.88(1) 6.84386 360 358 4.87544 12.84386 6.84386 34 3.00000 1.00000
6,999,785.98 7.40213 360 357 4.60721 13.40213 7.40213 21 3.00000 1.00000
515,041.62 6.37500 360 358 3.50000 12.37500 6.37500 34 3.00000 1.00000
4,800,137.16(1) 7.32141 360 358 4.52140 13.32141 7.32141 22 3.00000 1.00000
1,036,109.85 7.24978 360 357 4.04663 13.24978 7.24978 3 1.00000 1.00000
___________________
(1) Interest Only Mortgage Loans.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of the Offered Certificates, and set forth the
percentages of the Original Certificate Principal Balance of such Certificate
that would be outstanding after each of the dates shown, at various percentages
of the Prepayment Vector.
S-70
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS A-1
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004........... 100 91 86 82 77 72 68
June 25, 2005........... 99 74 63 52 42 32 23
June 25, 2006........... 99 59 43 29 18 8 1
June 25, 2007........... 98 46 32 21 14 8 1
June 25, 2008........... 97 37 23 14 8 4 1
June 25, 2009........... 95 30 17 9 5 2 1
June 25, 2010........... 93 25 13 6 3 1 0
June 25, 2011........... 91 20 9 4 2 0 0
June 25, 2012........... 89 16 7 3 1 0 0
June 25, 2013........... 87 13 5 2 0 0 0
June 25, 2014........... 84 11 4 1 0 0 0
June 25, 2015........... 82 9 3 0 0 0 0
June 25, 2016........... 79 7 2 0 0 0 0
June 25, 2017........... 76 6 1 0 0 0 0
June 25, 2018........... 72 5 1 0 0 0 0
June 25, 2019........... 69 4 0 0 0 0 0
June 25, 2020........... 65 3 0 0 0 0 0
June 25, 2021........... 61 2 0 0 0 0 0
June 25, 2022........... 57 2 0 0 0 0 0
June 25, 2023........... 52 1 0 0 0 0 0
June 25, 2024........... 47 1 0 0 0 0 0
June 25, 2025........... 42 1 0 0 0 0 0
June 25, 2026........... 38 0 0 0 0 0 0
June 25, 2027........... 33 0 0 0 0 0 0
June 25, 2028........... 29 0 0 0 0 0 0
June 25, 2029........... 23 0 0 0 0 0 0
June 25, 2030........... 18 0 0 0 0 0 0
June 25, 2031........... 12 0 0 0 0 0 0
June 25, 2032........... 5 0 0 0 0 0 0
June 25, 2033........... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 19.46 5.15 3.64 2.78 2.23 1.83 1.49
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 19.40 4.81 3.38 2.60 2.09 1.72 1.46
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-71
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS A-2
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004........... 100 91 86 82 77 73 68
June 25, 2005........... 99 74 63 52 42 33 24
June 25, 2006........... 99 59 43 29 18 9 1
June 25, 2007........... 98 46 32 22 14 9 1
June 25, 2008........... 97 37 24 14 8 4 1
June 25, 2009........... 95 30 17 9 5 2 1
June 25, 2010........... 93 25 13 6 3 1 0
June 25, 2011........... 91 20 9 4 2 0 0
June 25, 2012........... 89 16 7 3 1 0 0
June 25, 2013........... 87 13 5 2 0 0 0
June 25, 2014........... 84 11 4 1 0 0 0
June 25, 2015........... 81 9 3 0 0 0 0
June 25, 2016........... 78 7 2 0 0 0 0
June 25, 2017........... 75 6 1 0 0 0 0
June 25, 2018........... 72 5 1 0 0 0 0
June 25, 2019........... 68 4 1 0 0 0 0
June 25, 2020........... 64 3 0 0 0 0 0
June 25, 2021........... 60 2 0 0 0 0 0
June 25, 2022........... 56 2 0 0 0 0 0
June 25, 2023........... 51 1 0 0 0 0 0
June 25, 2024........... 46 1 0 0 0 0 0
June 25, 2025........... 41 1 0 0 0 0 0
June 25, 2026........... 37 0 0 0 0 0 0
June 25, 2027........... 33 0 0 0 0 0 0
June 25, 2028........... 28 0 0 0 0 0 0
June 25, 2029........... 23 0 0 0 0 0 0
June 25, 2030........... 17 0 0 0 0 0 0
June 25, 2031........... 11 0 0 0 0 0 0
June 25, 2032........... 5 0 0 0 0 0 0
June 25, 2033........... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 19.32 5.16 3.65 2.79 2.24 1.84 1.49
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 19.26 4.82 3.39 2.61 2.09 1.72 1.47
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-72
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-1
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004........... 100 100 100 100 100 100 100
June 25, 2005........... 100 100 100 100 100 100 100
June 25, 2006........... 100 100 100 100 100 100 100
June 25, 2007........... 100 100 74 50 32 21 87
June 25, 2008........... 100 87 55 33 19 10 25
June 25, 2009........... 100 71 41 22 11 3 0
June 25, 2010........... 100 58 30 14 6 0 0
June 25, 2011........... 100 47 22 9 0 0 0
June 25, 2012........... 100 38 16 6 0 0 0
June 25, 2013........... 100 31 12 0 0 0 0
June 25, 2014........... 100 25 9 0 0 0 0
June 25, 2015........... 100 20 6 0 0 0 0
June 25, 2016........... 100 17 2 0 0 0 0
June 25, 2017........... 100 13 0 0 0 0 0
June 25, 2018........... 100 11 0 0 0 0 0
June 25, 2019........... 100 9 0 0 0 0 0
June 25, 2020........... 100 7 0 0 0 0 0
June 25, 2021........... 100 4 0 0 0 0 0
June 25, 2022........... 100 1 0 0 0 0 0
June 25, 2023........... 100 0 0 0 0 0 0
June 25, 2024........... 100 0 0 0 0 0 0
June 25, 2025........... 98 0 0 0 0 0 0
June 25, 2026........... 88 0 0 0 0 0 0
June 25, 2027........... 78 0 0 0 0 0 0
June 25, 2028........... 66 0 0 0 0 0 0
June 25, 2029........... 54 0 0 0 0 0 0
June 25, 2030........... 41 0 0 0 0 0 0
June 25, 2031........... 27 0 0 0 0 0 0
June 25, 2032........... 12 0 0 0 0 0 0
June 25, 2033........... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 26.17 8.94 6.19 4.80 4.19 4.05 4.64
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 26.05 8.25 5.69 4.45 3.91 3.82 3.42
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-73
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-2
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004........... 100 100 100 100 100 100 100
June 25, 2005........... 100 100 100 100 100 100 100
June 25, 2006........... 100 100 100 100 100 100 100
June 25, 2007........... 100 100 74 50 32 20 11
June 25, 2008........... 100 87 55 33 19 8 0
June 25, 2009........... 100 71 41 22 10 0 0
June 25, 2010........... 100 58 30 14 0 0 0
June 25, 2011........... 100 47 22 7 0 0 0
June 25, 2012........... 100 38 16 0 0 0 0
June 25, 2013........... 100 31 12 0 0 0 0
June 25, 2014........... 100 25 6 0 0 0 0
June 25, 2015........... 100 20 1 0 0 0 0
June 25, 2016........... 100 17 0 0 0 0 0
June 25, 2017........... 100 13 0 0 0 0 0
June 25, 2018........... 100 9 0 0 0 0 0
June 25, 2019........... 100 5 0 0 0 0 0
June 25, 2020........... 100 2 0 0 0 0 0
June 25, 2021........... 100 0 0 0 0 0 0
June 25, 2022........... 100 0 0 0 0 0 0
June 25, 2023........... 100 0 0 0 0 0 0
June 25, 2024........... 100 0 0 0 0 0 0
June 25, 2025........... 98 0 0 0 0 0 0
June 25, 2026........... 88 0 0 0 0 0 0
June 25, 2027........... 78 0 0 0 0 0 0
June 25, 2028........... 66 0 0 0 0 0 0
June 25, 2029........... 54 0 0 0 0 0 0
June 25, 2030........... 41 0 0 0 0 0 0
June 25, 2031........... 27 0 0 0 0 0 0
June 25, 2032........... 12 0 0 0 0 0 0
June 25, 2033........... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 26.16 8.79 6.08 4.69 4.01 3.72 3.70
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 26.05 8.25 5.69 4.42 3.80 3.54 3.42
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-74
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-3
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004........... 100 100 100 100 100 100 100
June 25, 2005........... 100 100 100 100 100 100 100
June 25, 2006........... 100 100 100 100 100 100 100
June 25, 2007........... 100 100 74 50 32 20 0
June 25, 2008........... 100 87 55 33 19 0 0
June 25, 2009........... 100 71 41 22 0 0 0
June 25, 2010........... 100 58 30 8 0 0 0
June 25, 2011........... 100 47 22 0 0 0 0
June 25, 2012........... 100 38 15 0 0 0 0
June 25, 2013........... 100 31 0 0 0 0 0
June 25, 2014........... 100 25 0 0 0 0 0
June 25, 2015........... 100 20 0 0 0 0 0
June 25, 2016........... 100 16 0 0 0 0 0
June 25, 2017........... 100 5 0 0 0 0 0
June 25, 2018........... 100 0 0 0 0 0 0
June 25, 2019........... 100 0 0 0 0 0 0
June 25, 2020........... 100 0 0 0 0 0 0
June 25, 2021........... 100 0 0 0 0 0 0
June 25, 2022........... 100 0 0 0 0 0 0
June 25, 2023........... 100 0 0 0 0 0 0
June 25, 2024........... 100 0 0 0 0 0 0
June 25, 2025........... 98 0 0 0 0 0 0
June 25, 2026........... 88 0 0 0 0 0 0
June 25, 2027........... 78 0 0 0 0 0 0
June 25, 2028........... 66 0 0 0 0 0 0
June 25, 2029........... 54 0 0 0 0 0 0
June 25, 2030........... 41 0 0 0 0 0 0
June 25, 2031........... 27 0 0 0 0 0 0
June 25, 2032........... 1 0 0 0 0 0 0
June 25, 2033........... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 26.12 8.53 5.89 4.54 3.87 3.53 3.39
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 26.05 8.25 5.69 4.40 3.76 3.43 3.33
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-75
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-4
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004........... 100 100 100 100 100 100 100
June 25, 2005........... 100 100 100 100 100 100 100
June 25, 2006........... 100 100 100 100 100 100 100
June 25, 2007........... 100 100 74 50 32 10 0
June 25, 2008........... 100 87 55 33 6 0 0
June 25, 2009........... 100 71 41 15 0 0 0
June 25, 2010........... 100 58 30 0 0 0 0
June 25, 2011........... 100 47 16 0 0 0 0
June 25, 2012........... 100 38 0 0 0 0 0
June 25, 2013........... 100 31 0 0 0 0 0
June 25, 2014........... 100 25 0 0 0 0 0
June 25, 2015........... 100 11 0 0 0 0 0
June 25, 2016........... 100 0 0 0 0 0 0
June 25, 2017........... 100 0 0 0 0 0 0
June 25, 2018........... 100 0 0 0 0 0 0
June 25, 2019........... 100 0 0 0 0 0 0
June 25, 2020........... 100 0 0 0 0 0 0
June 25, 2021........... 100 0 0 0 0 0 0
June 25, 2022........... 100 0 0 0 0 0 0
June 25, 2023........... 100 0 0 0 0 0 0
June 25, 2024........... 100 0 0 0 0 0 0
June 25, 2025........... 98 0 0 0 0 0 0
June 25, 2026........... 88 0 0 0 0 0 0
June 25, 2027........... 78 0 0 0 0 0 0
June 25, 2028........... 66 0 0 0 0 0 0
June 25, 2029........... 54 0 0 0 0 0 0
June 25, 2030........... 41 0 0 0 0 0 0
June 25, 2031........... 27 0 0 0 0 0 0
June 25, 2032........... 0 0 0 0 0 0 0
June 25, 2033........... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 26.04 8.24 5.69 4.39 3.72 3.40 3.25
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 26.03 8.20 5.66 4.37 3.71 3.39 3.24
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-76
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-5
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ------------------------ ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004........... 100 100 100 100 100 100 100
June 25, 2005........... 100 100 100 100 100 100 100
June 25, 2006........... 100 100 100 100 100 100 100
June 25, 2007........... 100 100 74 40 12 0 0
June 25, 2008........... 100 87 48 13 0 0 0
June 25, 2009........... 100 71 25 0 0 0 0
June 25, 2010........... 100 53 8 0 0 0 0
June 25, 2011........... 100 35 0 0 0 0 0
June 25, 2012........... 100 21 0 0 0 0 0
June 25, 2013........... 100 10 0 0 0 0 0
June 25, 2014........... 100 0 0 0 0 0 0
June 25, 2015........... 100 0 0 0 0 0 0
June 25, 2016........... 100 0 0 0 0 0 0
June 25, 2017........... 100 0 0 0 0 0 0
June 25, 2018........... 100 0 0 0 0 0 0
June 25, 2019........... 100 0 0 0 0 0 0
June 25, 2020........... 100 0 0 0 0 0 0
June 25, 2021........... 100 0 0 0 0 0 0
June 25, 2022........... 100 0 0 0 0 0 0
June 25, 2023........... 100 0 0 0 0 0 0
June 25, 2024........... 100 0 0 0 0 0 0
June 25, 2025........... 98 0 0 0 0 0 0
June 25, 2026........... 88 0 0 0 0 0 0
June 25, 2027........... 78 0 0 0 0 0 0
June 25, 2028........... 66 0 0 0 0 0 0
June 25, 2029........... 46 0 0 0 0 0 0
June 25, 2030........... 26 0 0 0 0 0 0
June 25, 2031........... 3 0 0 0 0 0 0
June 25, 2032........... 0 0 0 0 0 0 0
June 25, 2033........... 0 0 0 0 0 0 0
Weighted Average Life
(years) to Maturity(1).. 25.59 7.33 5.07 3.94 3.38 3.15 3.12
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 25.59 7.33 5.07 3.94 3.38 3.15 3.12
_________________________
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-77
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class C Certificates and each
class of Mezzanine Certificates with a lower payment priority have been reduced
to zero, the yield to maturity on remaining class of Mezzanine Certificates will
become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof) that are covered by subordination, because the entire amount of any
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow), will
be allocated to those Certificates. The initial undivided interests in the Trust
evidenced by the Class M-1 Certificates, the Class M-2 Certificates, the Class
M-3 Certificates, the Class M-4 Certificates, the Class M-5 Certificates and the
Class C Certificates are approximately 4.50%, approximately 4.00%, approximately
1.25%, approximately 1.00%, approximately 1.25% and approximately 0.75%,
respectively. Investors in the Mezzanine Certificates should fully consider the
risk that Realized Losses on the Mortgage Loans could result in the failure of
such investors to fully recover their investments. In addition, once Realized
Losses have been allocated to the Mezzanine Certificates, such amounts with
respect to such Certificates will no longer accrue interest and will not be
reinstated thereafter. However, Allocated Realized Loss Amounts may be paid to
the holders of the Mezzanine Certificates from Net Monthly Excess Cashflow in
the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
Unless the Certificate Principal Balance of the Class A Certificates has
been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until the Stepdown Date or during any period in which a
Trigger Event is in effect. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a PRO RATA basis among the 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 Prepayment
Considerations" in the prospectus.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Mortgage Loans transferred to the Trust.
FEDERAL INCOME TAX CONSEQUENCES
One or more elections will be made to treat designated portions of the
Trust (exclusive of the Net WAC Rate Carryover 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 Agreement, for federal income tax
purposes, each REMIC elected by the Trust will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Residual Certificates will consist
of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the Trust and (ii) the Offered Certificates
(exclusive of any right of the holder of such Certificates to receive payments
from the Net WAC Rate Carryover Reserve Account in respect of the Net WAC Rate
Carryover Amount), the Class C Certificates and the Class P Certificates will
represent the "regular interests" in, and which generally will be treated as
debt instruments of, a REMIC. See "Certain Material Federal Income Tax
Considerations--General" in the prospectus.
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. The Net WAC Rate Carryover Reserve Account is
not an asset of any REMIC. The treatment of amounts received by a holder of an
Offered Certificate under such Certificateholder's right to receive the Net WAC
Rate Carryover Amount will depend on the portion, if any, of such
Certificateholder's purchase price allocable thereto. Under the REMIC
Regulations, each holder of an Offered 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
S-78
in the right to receive payments from the Net WAC Rate Carryover Reserve Account
in respect of the Net WAC Rate Carryover Amount in accordance with the relative
fair market values of each property right. The Trust 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 Trust intends to treat the right to receive payments from the Net
WAC Rate Carryover Reserve Account in respect of Net WAC Rate Carryover Amounts
as having a DE MINIMIS value. Under the REMIC Regulations, the Trust is required
to account for the 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 as discrete property rights. Holders of the Offered
Certificates are advised to consult their own tax advisors regarding the
allocation of issue price, timing, character and source of income and deductions
resulting from the ownership of 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.
Therefore, 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 Trust's treatment of payments of the Net WAC Rate Carryover
Amount is respected, ownership of the right to the Net WAC Rate Carryover Amount
will entitle the owner to amortize the separate price paid for the right to the
Net WAC Rate Carryover 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 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 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. 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 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.
For federal income tax reporting purposes, the Offered Certificates will
not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at the Prepayment Assumption. No
representation is made that the Mortgage Loans will prepay at such rate or at
any other rate. See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Securities" in the prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Offered Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered Certificates. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the 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.
S-79
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
all income with respect to such Certificates as original issue discount for each
period, computing such original issue discount (i) by assuming that the value of
the applicable index will remain constant for purposes of determining the
original yield to maturity of, and projecting future distributions on such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described in the prospectus
can be applied, and (ii) by accounting for any positive or negative variation in
the actual value of the applicable index in any period from its assumed value as
a current adjustment to original issue discount with respect to such period. See
"Certain Federal Income Tax Considerations--Taxation of Debt Securities " in the
prospectus.
Certain of the Certificates may be treated for federal income tax purposes
as having been issued at a premium. Whether any holder of a Certificate will be
treated as holding such Certificate with amortizable bond premium will depend on
such Certificateholder's purchase price and the distributions remaining to be
made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of such Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Certain Material Federal Income Tax Considerations--Taxation of
Debt Securities" in the prospectus.
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. 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.
Amounts held in the Pre-Funding Accounts and the Interest Coverage Accounts may
not be treated as assets described in the foregoing sections of the Code The
Offered Certificates will also be treated as "qualified mortgages" under Section
860G(a)(3) of the Code. See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans" in
the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on such Certificates in accordance with the accrual method of
accounting. As noted above, each holder of an Offered Certificate will be
required to allocate a portion of the purchase price paid for the Certificates
to the right to receive payments from the Net WAC Rate Carryover Reserve Account
in respect of the Net WAC Rate Carryover Amount. The value of the right to
receive any such Net WAC Rate Carryover Amount is a question of fact which could
be subject to differing interpretations. Because the Net WAC Rate Carryover
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 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 Agreement, (ii) by the Servicer, if the Servicer
has breached its obligations with respect to REMIC compliance under the Pooling
Agreement and (iii) otherwise by the Trust, with a resulting reduction in
amounts otherwise distributable to the holders of the Offered Certificates.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee or the Servicer.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Material Federal Income Tax
Considerations" in the prospectus.
S-80
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates by or on behalf
of, or with Plan assets of, a Plan may qualify for exemptive relief under the
Underwriters' Exemption, as currently in effect and as described under "ERISA
Considerations" in the prospectus. The Underwriters' Exemption relevant to the
Offered Certificates was granted by the Department of Labor on September 6, 1990
as Prohibited Transaction Exemption ("PTE") 90-59 at 55 F.R. 36724, and amended
on July 21, 1997 at PTE 97-34 at 62 F.R. 39021 and further amended on November
13, 2000 by PTE 2000-58 at 65 F.R. 67765. The Department of Labor issued a final
administrative exemption, PTE 2002-41, at 67 Fed. Reg. 54487 (August 22, 2002 ),
which amended the Underwriters' Exemption and similar exemptions issued to other
underwriters. This amendment allows the Trustee to be affiliated with the
Underwriter despite the restriction in PTE 2000-58 to the contrary. However, the
Underwriters' Exemption contains a number of conditions which must be met for
the exemption to apply, including the requirements that the Offered Certificates
be rated at least "BBB-" (or its equivalent) by Fitch, Moody's or S&P at the
time of the Plan's purchase and that the investing Plan must be an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act. A fiduciary of a Plan
contemplating purchasing an Offered Certificate must make its own determination
that the conditions set forth in the Underwriters' Exemption will be satisfied
with respect to the those Certificates.
Each beneficial owner of a Mezzanine Certificate or any interest therein
shall be deemed to have represented, by virtue of its acquisition or holding of
that certificate or interest therein, that either (i) it is not a plan investor,
(ii) it has acquired and is holding such Mezzanine Certificates in reliance on
the Underwriters' Exemption, and that it understands that there are certain
conditions to the availability of the Underwriters' Exemption, including that
the Mezzanine Certificates must be rated, at the time of purchase, not lower
than "BBB-" (or its equivalent) by Fitch, Moody's or S&P or (iii) (1) it is an
insurance company, (2) the source of funds used to acquire or hold the
certificate or interest therein is an "insurance company general account," as
such term is defined in PTCE 95-60, and (3) the conditions in Sections I and III
of PTCE 95-60 have been satisfied.
If any Mezzanine Certificate or any interest therein is acquired or held in
violation of the conditions described in the preceding paragraph, the next
preceding permitted beneficial owner will be treated as the beneficial owner of
that Mezzanine Certificate, retroactive to the date of transfer to the purported
beneficial owner. Any purported beneficial owner whose acquisition or holding of
any such certificate or interest therein was effected in violation of the
conditions described in the preceding paragraph shall indemnify and hold
harmless the Depositor, the Trustee, the Servicer, any subservicer, and the
Trust from and against any and all liabilities, claims, costs or expenses
incurred by those parties as a result of that acquisition or holding.
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Offered Certificates on behalf of or with Plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Offered Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. See "Considerations for
Benefit Plan Investors" in the prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect a
representation by the depositor or the related underwriter that an investment in
the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
The Depositor makes no representation that the sale of any of the Offered
Certificates to a Plan or other purchaser acting on its behalf meets any
relevant legal requirement for investments by Plans generally or any particular
Plan, or that the investment is appropriate for Plans generally or any
particular Plan.
S-81
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than
the second highest rating category by a rating agency, and, 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 overrides the preemption provisions of SMMEA. The Class M-2
Certificates, the Class M-3 Certificates, the Class M-4 Certificates and the
Class M-5 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated June 23, 2003 (the "Underwriting Agreement"), between the
Underwriter and the Depositor, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, the
Offered Certificates.
The Depositor has been advised by the Underwriter that it proposes
initially to offer the Offered Certificates of each class to the public in
Europe and the United States at the offering price set forth herein and to
certain dealers at such price less a selling concession, not in excess of the
percentage set forth in the table below of the Certificate Principal Balance of
the related class of Offered Certificates. The Underwriter may allow and such
dealers may reallow a reallowance discount, not in excess of the percentage set
forth in the table below of the Certificate Principal Balance of the related
class of Offered Certificates, to certain other dealers. After the initial
public offering, the public offering price, such concessions and such discounts
may be changed.
CLASS OF CERTIFICATES SELLING CONCESSION REALLOWANCE DISCOUNT
- ---------------------------- ------------------ --------------------
Class A-1................... 0.1500% 0.1000%
Class A-2................... 0.1500% 0.1000%
Class M-1................... 0.1500% 0.1000%
Class M-2................... 0.1500% 0.1000%
Class M-3................... 0.1500% 0.1000%
Class M-4................... 0.1500% 0.1000%
Class M-5................... 0.1500% 0.1000%
Until the distribution of the Offered Certificates is completed, rules of
the SEC may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Offered Certificates. As an exception to
these rules, the Underwriter is permitted to engage in certain transactions that
stabilize the price of the Offered Certificates. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
the Offered Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Offered Certificates. In addition,
neither the Depositor nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
S-82
The Depositor has been advised by the Underwriter that it intends to make a
market in the Offered Certificates purchased by it but the Underwriter has no
obligation to do so. There can be no assurance that a secondary market for the
Offered Certificates will develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor and the Underwriters by Thacher Proffitt & Wood,
New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A Certificates be rated "AAA" by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), "AAA" by Fitch Ratings ("Fitch") and Aaa by
Moody's Investors Service, Inc. ("Moody's," and together with S&P and Fitch, the
"Rating Agencies"), that the Class M-1 Certificates be rated "AA" by S&P, "AA"
Fitch and "Aa2" by Moody's, that the Class M-2 Certificates be rated "A" by S&P,
"A" by Fitch and "A2" by Moody's, that the Class M-3 Certificates be rated "A-"
by S&P, "A-" by Fitch and "A3" by Moody's, that the Class M-4 Certificates be
rated "BBB+" by S&P, "BBB+" by Fitch and "Baa1" by Moody's and that the Class
M-5 Certificates be rated "BBB" by S&P, "BBB" by Fitch and "Baa2" by Moody's.
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment 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 Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Offered Certificates by the Rating Agencies are subsequently lowered for
any reason, no person or entity is obligated to provide any additional support
or credit enhancement with respect to such Offered Certificates.
S-83
INDEX OF DEFINED TERMS
Accrual Period .............................................................S-57
Adjustable-Rate Group I Mortgage Loans......................................S-19
Adjustable-Rate Group II Mortgage Loans.....................................S-19
Adjustable-Rate Prepayment Vector...........................................S-67
Adjusted Net Maximum Mortgage Rate..........................................S-63
Adjusted Net Mortgage Rate..................................................S-63
Adjustment Date ............................................................S-19
Advance ....................................................................S-44
Advancing Person ...........................................................S-45
Allocated Realized Loss Amount..............................................S-57
Assumed Final Distribution Date.............................................S-47
Available Funds ............................................................S-51
Base Rate ..................................................................S-62
Book-Entry Certificates.....................................................S-48
Certificate Index ..........................................................S-62
Certificate Margin..........................................................S-62
Certificate Owners..........................................................S-48
Certificate Principal Balance...............................................S-57
Certificates. ..............................................................S-47
Chase ......................................................................S-42
Class A Certificates........................................................S-47
Class A Principal Distribution Amount.......................................S-57
Class I-A Principal Distribution Amount.....................................S-57
Class II-A Principal Distribution Amount....................................S-57
Class M-1 Principal Distribution Amount.....................................S-58
Class M-2 Principal Distribution Amount.....................................S-58
Class M-3 Principal Distribution Amount.....................................S-58
Clearstream ................................................................S-48
Clearstream Participants....................................................S-49
Code ..................................................................S-9, S-78
Collection Account..........................................................S-42
Commission .................................................................S-66
Compensating Interest.......................................................S-45
Cooperative ................................................................S-50
CPR ........................................................................S-67
Credit Bureau Risk Score....................................................S-37
Credit Enhancement Percentage...............................................S-59
Cut-off Date Principal Balance..............................................S-18
Debt Ratio .................................................................S-37
Definitive Certificate......................................................S-48
Delayed First Adjustment Mortgage Loan......................................S-19
Deleted Mortgage Loans......................................................S-42
Determination Date..........................................................S-59
Distribution Account........................................................S-42
Distribution Date .....................................................S-6, S-47
Dividend Mortgage Loans.....................................................S-20
Dividend Rate ..............................................................S-20
DTC ........................................................................S-48
DTC Participants ...........................................................S-48
Due Date ...................................................................S-21
Due Period .................................................................S-59
Euroclear ..................................................................S-48
Euroclear Operator..........................................................S-50
Euroclear Participants......................................................S-49
European Depositaries.......................................................S-48
Extra Principal Distribution Amount.........................................S-59
Fair, Isaac ................................................................S-37
Financial Intermediary......................................................S-48
Fitch .......................................................................S-9
Fixed-Rate Group I Mortgage Loans...........................................S-19
Fixed-Rate Group II Mortgage Loans..........................................S-19
Fixed-Rate Prepayment Vector................................................S-67
Formula Rate ...............................................................S-62
Georgia Act ................................................................S-16
Gross Margin ...............................................................S-19
Group I Allocation Percentage...............................................S-59
Group I Basic Principal Distribution Amount.................................S-59
Group I Interest Remittance Amount..........................................S-59
Group I Mortgage Loans.................................................S-5, S-18
Group I Principal Distribution Amount.......................................S-59
Group I Principal Remittance Amount.........................................S-60
Group II Allocation Percentage..............................................S-60
Group II Basic Principal Distribution Amount................................S-60
Group II Interest Remittance Amount.........................................S-60
Group II Mortgage Loans................................................S-5, S-18
Group II Principal Distribution Amount......................................S-60
Group II Principal Remittance Amount........................................S-60
High Cost Loans ............................................................S-16
Homeownership Act ..........................................................S-16
Index ......................................................................S-20
Initial Periodic Rate Cap...................................................S-19
Insurance Proceeds..........................................................S-60
Interest Only Mortgage Loans................................................S-20
Interest Only Period........................................................S-20
IRS ........................................................................S-79
LIBOR Business Day..........................................................S-64
LIBOR Determination Date....................................................S-64
Liquidated Mortgage Loan....................................................S-61
LIV ........................................................................S-37
Loan Group ..................................................................S-5
Maximum Cap Rate ...........................................................S-63
Maximum Mortgage Rate.......................................................S-19
Mezzanine Certificates......................................................S-47
Minimum Mortgage Rate.......................................................S-19
Monthly Interest Distributable Amount.......................................S-60
Moody's ...............................................................S-9, S-83
Mortgage ...................................................................S-18
Mortgage Loan Purchase Agreement............................................S-18
Mortgage Loan Schedule......................................................S-40
Mortgage Loans .............................................................S-18
Mortgage Pool ..............................................................S-18
Mortgage Rate ..............................................................S-19
Mortgaged Property..........................................................S-18
NCBA .......................................................................S-36
Net Liquidation Proceeds....................................................S-61
Net Monthly Excess Cashflow.................................................S-60
Net WAC Rate ...............................................................S-63
Net WAC Rate Carryover Amount...............................................S-63
S-84
Net WAC Rate Carryover Reserve Account......................................S-63
NIV ........................................................................S-37
No Doc .....................................................................S-37
Notional Principal Contract Regulations.....................................S-79
Offered Certificates........................................................S-47
OID Regulations ............................................................S-79
Optional Termination Date...................................................S-46
Original Certificate Principal Balance......................................S-57
Originator .................................................................S-36
Overcollateralization Deficiency Amount.....................................S-61
Overcollateralization Release Amount........................................S-61
Overcollateralization Target Amount.........................................S-61
Overcollateralized Amount...................................................S-61
Pass-Through Rate ..........................................................S-62
Periodic Rate Cap ..........................................................S-19
Plan .......................................................................S-81
Pool Balance ...............................................................S-18
Pooling Agreement ..........................................................S-18
Prepayment Assumption.......................................................S-67
Prepayment Interest Shortfall...............................................S-45
Prepayment Period ..........................................................S-61
Principal Balance ..........................................................S-18
Principal Remittance Amount.................................................S-61
PTE ........................................................................S-81
Purchase Price .............................................................S-41
Qualified Substitute Mortgage Loan..........................................S-41
Rating Agencies ............................................................S-83
Realized Loss ..............................................................S-61
Record Date ................................................................S-47
Reference Banks ............................................................S-64
Related Documents ..........................................................S-40
Relevant Depositary.........................................................S-48
REMIC ......................................................................S-78
Reserve Interest Rate.......................................................S-64
Residual Certificates.......................................................S-47
Rules ......................................................................S-48
S&P ...................................................................S-9, S-83
Servicing Advance...........................................................S-45
Servicing Fee ..............................................................S-45
Servicing Fee Rate..........................................................S-45
Six Month LIBOR ............................................................S-20
SMMEA .................................................................S-9, S-82
Stepdown Date ..............................................................S-61
Structuring Assumptions.....................................................S-67
Subordinate Certificates....................................................S-47
Substitution Adjustment.....................................................S-41
Telerate Page 3750..........................................................S-64
Termination Price ..........................................................S-46
Terms and Conditions........................................................S-50
Trigger Event ..............................................................S-61
Trust ......................................................................S-18
Trustee Fee ................................................................S-46
Trustee Fee Rate ...........................................................S-46
Underwriters ...............................................................S-17
Underwriting Agreement......................................................S-82
Unpaid Interest Shortfall Amount............................................S-62
S-85
[This page intentionally left blank]
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will be
offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC and upon request through Clearstream or Euroclear.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Clearstream and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional eurobonds, except that there
will be no temporary global security and no "lock-up" or restricted period.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Clearstream Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same- day
funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant,
I-1
the purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
the actual number of days in such accrual period and a year assumed to consist
of 360 days or a 360-day year consisting of twelve 30 day months, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Clearstream
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Clearstream or Euroclear cash debt will be valued instead as of the actual
settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Clearstream Participants
or Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days or a 360-day year consisting of twelve 30 day
months, as applicable. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Clearstream Participants
or Euroclear Participants should note that these trades would automatically fail
I-2
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) through Clearstream or Euroclear for one day (until the purchase side
of the day trade is reflected in their Clearstream or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) the Global Securities in the U.S. from a DTC Participant no later than
one day prior to settlement, which would give the Global Securities sufficient
time to be reflected in their Clearstream or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner who is an individual or corporation holding the Global
Securities on its own behalf through Clearstream or Euroclear (or through DTC if
the holder has an address outside the U.S.) will be subject to the 30% U.S.
withholding tax that generally applies to payments of interest (including
original issue discount) on registered debt issued by U.S. Persons, unless (i)
each clearing system, bank or other institution that holds customers' securities
in the ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner or a foreign partnership or trust and the U.S.
entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of Global
Securities that are non-U.S. Persons generally can obtain a complete exemption
from the withholding tax by filing a signed Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM W-8BEN). Non-U.S. Persons that are Certificate Owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form W-8BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form W-8BEN may be filed by the Certificate Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are generally
effective until the third succeeding calendar year from the date such form is
signed. However, a Form W-8BEN or Form W-8ECI with a taxpayer identification
number will remain effective until a change in circumstances makes any
information on such form incorrect, provided that the withholding agent reports
at least annually to the beneficial owner of Form 1042-S.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision
I-3
over the administration of the trust and one or more United States persons have
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in Treasury regulations, certain
trusts in existence on August 20, 1996, and treated as United States persons
prior to such date, that elect to continue to be treated as United States
persons will also be a U.S. Person. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
I-4
PROSPECTUS
MORTGAGE-BACKED/ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
GREENWICH CAPITAL ACCEPTANCE, INC. OR FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
THE SECURITIES
Each issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust or debt obligations secured
by trust assets.
o Each series of securities will consist of one or more classes.
o Each class of securities will represent the entitlement to a specified
portion of interest payments and a specified portion of principal
payments on the trust assets.
o A series may include classes of securities that are senior in right of
payment to other classes. Classes of securities may be entitled to
receive principal, interest or both prior to other classes or before or
after specified events.
o No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been
issued and sold, there can be no assurance that a resale market for them
will develop.
THE TRUST AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a trust will
include one or more of the following:
o mortgage loans secured generally by senior liens on one- to four-family
residential properties,
o closed-end and/or revolving home equity loans generally secured by
junior liens on one- to four-family residential properties,
o mortgage loans secured by senior liens on multifamily residential
properties,
o conditional sales contracts, installment sales agreements or loan
agreements secured by manufactured housing,
o home improvement installment sales contracts and loan agreements that
are either unsecured or secured generally by junior liens on one- to
four-family residential properties or by purchase money security
interests in the related home improvements,
o mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae or Freddie Mac, or
o private label mortgage-backed or asset-backed securities.
OFFERS OF THE SECURITIES
Offers of the securities may be made through one or more different methods. All
securities will be distributed by, or sold through underwriters managed by,
Greenwich Capital Markets, Inc.
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the applicable depositor, seller, master servicer
or any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
June 23, 2003
TABLE OF CONTENTS
PAGE
----
Important Notice About Information in This Prospectus and Each Accompanying
Prospectus Supplement......................................................4
Risk Factors...................................................................5
The Trust Fund................................................................16
The Mortgage Loans--General............................................17
Single Family Loans....................................................21
Home Equity Loans......................................................22
Multifamily Loans......................................................22
Manufactured Housing Contracts.........................................23
Home Improvement Contracts.............................................24
Agency Securities......................................................24
Private Label Securities...............................................30
Incorporation of Certain Information by Reference......................33
Use of Proceeds...............................................................34
The Depositors................................................................34
Loan Program..................................................................34
Underwriting Standards.................................................34
Qualifications of Sellers..............................................36
Representations by Sellers; Repurchases or Substitutions...............36
Description of the Securities.................................................38
General................................................................39
Distributions on Securities............................................41
Advances...............................................................45
Reports to Securityholders.............................................46
Credit Enhancement............................................................48
General................................................................48
Subordination..........................................................48
Pool Insurance Policies................................................50
FHA Insurance; VA Guarantees...........................................52
Special Hazard Insurance Policies......................................54
Bankruptcy Bonds.......................................................56
FHA Insurance on Multifamily Loans.....................................56
Reserve Accounts.......................................................57
Cross Support..........................................................58
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and
Similar Instruments or Agreements......................................58
Financial Instruments..................................................58
Yield and Prepayment Considerations...........................................59
Operative Agreements..........................................................62
2
Assignment of Trust Fund Assets........................................62
Payments on Loans; Deposits to Security Account........................65
Pre-Funding Account....................................................67
Sub-Servicing of Loans.................................................67
Collection Procedures..................................................69
Hazard Insurance.......................................................71
Realization upon Defaulted Mortgage Loans..............................73
Servicing and Other Compensation and Payment of Expenses...............75
Evidence as to Compliance..............................................76
Certain Matters Regarding the Master Servicer and the Depositors.......77
Events of Default; Rights upon Event of Default........................78
Amendment..............................................................81
Termination; Optional Termination; Calls...............................82
The Trustee............................................................83
Material Legal Aspects of the Loans...........................................83
General................................................................83
Foreclosure............................................................87
Repossession of Manufactured Homes.....................................89
Rights of Redemption...................................................91
Equitable Limitations on Remedies......................................91
Anti-Deficiency Legislation and Other Limitations on Lenders...........92
Homeownership Act and Similar State Laws...............................93
Due-on-Sale Clauses....................................................95
Prepayment Charges; Late Fees..........................................96
Applicability of Usury Laws............................................96
Soldiers' and Sailors' Civil Relief Act................................97
Environmental Risks....................................................97
The Home Improvement Contracts.........................................99
Installment Contracts.................................................100
Junior Mortgages; Rights of Senior Mortgagees.........................101
The Title I Program...................................................102
Material Federal Income Tax Consequences.....................................107
General...............................................................107
Taxation of Debt Securities...........................................108
Non-REMIC Certificates................................................115
REMIC Certificates....................................................127
State Tax Considerations.....................................................152
ERISA Considerations.........................................................152
Legal Investment Considerations..............................................158
Method of Distribution.......................................................161
Legal Matters................................................................162
Financial Information........................................................162
Available Information........................................................162
3
Ratings......................................................................162
Glossary of Terms............................................................164
4
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
Although the accompanying prospectus supplement for a particular series of
securities cannot contradict the information contained in this prospectus,
insofar as the prospectus supplement contains specific information about the
series that differs from the more general information contained in this
prospectus, you should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
We include cross-references in this prospectus and each accompanying prospectus
supplement to captions in these materials where you can find further related
discussions. There is a Glossary of Terms beginning on page 160 where you will
find definitions of certain capitalized terms used in this prospectus. The
preceding Table of Contents and the Table of Contents included in each
accompanying prospectus supplement provide the pages on which these captions are
located.
_____________________
If you require additional information, the mailing address of the depositor's
principal executive offices is either Greenwich Capital Acceptance, Inc. or
Financial Acceptance Securities Corp., at 600 Steamboat Road, Greenwich,
Connecticut 06830 and the telephone number is (203) 625-2700. For other means of
acquiring additional information about us or a series of securities, see "The
Trust Fund -- Incorporation of Certain Information by Reference" on page 34 of
this prospectus.
____________________
5
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION, TOGETHER WITH THE
INFORMATION SET FORTH UNDER "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT,
SINCE IT IDENTIFIES THE PRINCIPAL RISK FACTORS ASSOCIATED WITH AN INVESTMENT IN
THE SECURITIES.
PRINCIPAL PREPAYMENTS ON THE LOANS MAY
ADVERSELY AFFECT THE AVERAGE LIFE OF,
AND RATE OF RETURN ON, YOUR SECURITIES... You may be unable to reinvest the
principal payments on your securities
at a rate of return at least equal to
the rate on your securities. The
timing of principal payments on the
securities of a series will be
affected by a number of factors,
including the following:
o the extent of prepayments on the
loans in the trust or, if the
trust is comprised of underlying
securities, on the loans backing
the underlying securities;
o how payments of principal are
allocated among the classes of
securities of the series as
specified in the related
prospectus supplement;
o if any party has an option to
terminate the related trust
early or to call your
securities, the effect of the
exercise of the option;
o the rate and timing of defaults
and losses on the assets in the
related trust; and
o repurchases of assets in the
related trust as a result of
material breaches of
representations and warranties
made by the depositor or master
servicer.
The rate of prepayment of the loans
included in, or underlying the assets
held in, each trust may affect the
average life of the securities.
ONLY THE ASSETS OF THE RELATED TRUST
ARE AVAILABLE TO PAY YOUR
SECURITIES............................... Unless the applicable prospectus
supplement provides otherwise, the
securities of each series will be
payable solely from the assets of the
related trust, including any
applicable credit enhancement, and
will not have a claim against the
assets of any other trust. If the
assets of the related trust are not
sufficient, you may suffer a loss on
your securities.
6
Moreover, at the times specified in
the related prospectus supplement,
assets of the trust may be released to
the applicable depositor, master
servicer, any servicer, credit
enhancement provider or other
specified person, if all payments then
due on the securities have been made
and adequate provision for future
payments on the remaining securities
has been made. Once released, these
assets will no longer be available to
make payments on your securities
There will be no recourse against the
depositor, the master servicer, any
servicer or any of their affiliates if
a required distribution on the
securities is not made. The securities
will not represent an interest in, or
an obligation of, the depositor, the
master servicer, any servicer or any
of their affiliates.
The depositor's obligations are
limited to its representations and
warranties concerning the trust
assets. Because the depositor has no
significant assets, if it is required
to repurchase trust assets due to the
breach of a representation or
warranty, the depositor's source of
funds for the repurchase would be
limited to:
o moneys obtained from enforcing
any similar obligation of the
seller or originator of the
asset, or
o funds from a reserve account or
other credit enhancement
established to pay for asset
repurchases.
CREDIT ENHANCEMENT MAY NOT BE ADEQUATE
TO PREVENT LOSSES ON YOUR SECURITIES......Credit enhancement is intended to
reduce the effect of delinquent
payments or loan losses on those
classes of securities that have the
benefit of the credit enhancement.
Nevertheless, the amount of any credit
enhancement is subject to the limits
described in the related prospectus
supplement. Moreover, the amount of
credit enhancement may decline or be
depleted under certain circumstances
before the securities are paid in
full. As a result, securityholders may
suffer losses. In addition, credit
enhancement may not cover all
potential sources of risk of loss,
such as fraud or negligence by a loan
originator or other parties.
7
THE INTEREST ACCRUAL PERIOD MAY
REDUCE THE EFFECTIVE YIELD
ON YOUR SECURITIES........................Interest payable on the securities on
any distribution date will include all
interest accrued during the related
interest accrual period. The interest
accrual period for the securities of
each series will be specified in the
applicable prospectus supplement. If
the interest accrual period ends two
or more days before the related
distribution date, your effective
yield will be less than it would be if
the interest accrual period ended the
day before the distribution date. As a
result, your effective yield at par
would be less than the indicated
coupon rate.
ECONOMIC, LEGAL AND OTHER FACTORS COULD
REDUCE THE AMOUNT AND DELAY THE TIMING
OF RECOVERIES ON DEFAULTED LOANS..........The following factors, among others,
could adversely affect property values
in such a way that the outstanding
balance of the related loans would
equal or exceed those values:
o an overall decline in the
residential real estate markets
where the properties are
located,
o failure of borrowers to maintain
their properties adequately, and
o natural disasters that are not
necessarily covered by hazard
insurance, such as earthquakes
and floods.
If property values decline, actual
rates of delinquencies, foreclosures
and losses on the loans could be
higher than those currently
experienced by the mortgage lending
industry in general.
Even if you assume that the mortgaged
properties provide adequate security
for the loans, substantial delays
could occur before defaulted loans are
liquidated and the proceeds forwarded
to investors. Property foreclosure
actions are regulated by state
statutes and rules and are subject to
many of the delays and expenses that
characterize other types of lawsuits
if defenses or counterclaims are made.
As a result, foreclosure actions can
sometimes take several years to
complete. Moreover, some states
prohibit a mortgage lender from
obtaining a judgment against the
borrower for amounts not covered by
property proceeds if the property is
sold outside of a judicial proceeding.
As a result, if a borrower
8
defaults, these restrictions may
impede the servicer's ability to
dispose of the borrower's property and
obtain sufficient proceeds to repay
the loan in full. In addition, the
servicer is entitled to deduct from
liquidation proceeds all the expenses
it reasonably incurs in trying to
recover on the defaulted loan,
including legal fees and costs, real
estate taxes, and property
preservation and maintenance expenses.
State laws generally regulate interest
rates and other loan charges, require
certain disclosures, and often require
licensing of loan originators and
servicers. In addition, most states
have other laws and public policies
for the protection of consumers that
prohibit unfair and deceptive
practices in the origination,
servicing and collection of loans.
Depending on the provisions of the
particular law or policy and the
specific facts and circumstances
involved, violations may limit the
ability of the servicer to collect
interest or principal on the loans.
Also, the borrower may be entitled to
a refund of amounts previously paid
and the servicer may be subject to
damage claims and administrative
sanctions.
LOANS SECURED BY JUNIOR LIENS ARE
SUBJECT TO ADDITIONAL RISKS...............If a loan is in a junior lien
position, a decline in property values
could extinguish the value of the
junior lien loan before having any
effect on the related senior lien loan
or loans.
In general, the expenses of
liquidating defaulted loans do not
vary directly with the unpaid amount.
So, assuming that a servicer would
take the same steps to recover a
defaulted loan with a small unpaid
balance as it would a loan with a
large unpaid balance, the net amount
realized after paying liquidation
expenses would be a smaller percentage
of the balance of the small loan than
of the large loan. Since the mortgages
securing home equity loans typically
will be in a junior lien position, the
proceeds from any liquidation will be
applied first to the claims of the
related senior mortgageholders,
including foreclosure costs. In
addition, a junior mortgage lender may
only foreclose subject to any related
senior mortgage. As a result, the
junior mortgage lender generally must
either pay each related senior
mortgage lender in full at or before
the foreclosure sale or agree to make
the regular payments on each senior
mortgage. Since the trust will not
have any source of funds to satisfy
any senior mortgages or to continue
making payments on them,
9
the trust's ability as a practical
matter to foreclose on any junior lien
will be limited.
LOANS TO LOWER CREDIT QUALITY
BORROWERS ARE MORE LIKELY TO
EXPERIENCE LATE PAYMENTS AND DEFAULTS
AND INCREASE YOUR RISK OF LOSS............Trust assets may have been made to
lower credit quality borrowers who
fall into one of two categories:
o customers with moderate income,
limited assets and other income
characteristics that cause
difficulty in borrowing from
banks and other traditional
lenders; or
o customers with a history of
irregular employment, previous
bankruptcy filings, repossession
of property, charged-off loans
or garnishment of wages.
The average interest rate charged on
loans made to these types of borrowers
is generally higher than that charged
by lenders that typically impose more
stringent credit requirements. There
is a greater likelihood of late
payments on loans made to these types
of borrowers than on loans to
borrowers with a higher credit
quality. In particular, payments from
borrowers with a lower credit quality
are more likely to be sensitive to
changes in the economic climate in the
areas in which they reside.
As much as 20% (by principal balance)
of the trust assets for any particular
series of securities may be
contractually delinquent as of the
related cut-off date.
FAILURE TO PERFECT SECURITY
INTERESTS IN MANUFACTURED
HOMES MAY RESULT IN LOSSES
ON YOUR SECURITIES .......................Each manufactured housing conditional
sales contract or installment loan
agreement that is included in a trust
fund will be secured by a security
interest in the related manufactured
home. The steps necessary to perfect
the security interest in a
manufactured home will vary from
state-to-state. If, as a result of
clerical error or otherwise, the
master servicer fails to take the
appropriate steps to perfect the
security interest in a manufactured
home that secures a conditional sales
contract or installment loan agreement
10
included in the trust, the trustee may
not have a first priority security
interest in that manufactured home.
Moreover, the master servicer will not
amend the certificate of title to a
manufactured home to name the trustee
as lienholder, note the trustee's
interest on the certificate of title
or deliver the certificate of title to
the trustee. As a result, in some
states the assignment of the security
interest in the manufactured home to
the trustee may not be perfected or
may not be effective against creditors
of the master servicer or a bankruptcy
trustee in the event of a bankruptcy
of the master servicer.
In addition, courts in many states
have held that manufactured homes may,
in certain circumstances, become
subject to real estate title and
recording laws. As a result, the
security interest in each manufactured
home could be rendered subordinate to
the interests of other parties
claiming an interest in that
manufactured home under applicable
state real estate law.
The failure to properly perfect a
valid, first priority security
interest in a manufactured home that
secures a conditional sales contract
or installment loan agreement included
in the trust could lead to losses
that, to the extent not covered by any
credit enhancement, could adversely
affect the yield to maturity of the
related securities.
MULTIFAMILY LOANS GENERALLY
ARE RISKIER THAN SINGLE FAMILY
LOANS.....................................Loans that are secured by first liens
on rental apartment buildings or
projects containing five or more
residential units, together with loans
that are secured by first liens on
mixed-use properties, shall not in the
aggregate constitute 10% or more of
any pool by principal balance.
Multifamily loans are generally
considered riskier than single-family
loans for the following reasons:
o Multifamily loans typically are
much larger in amount, which
increases the risk represented
by the default of a single
borrower.
o Repayment of a multifamily loan
usually depends upon successful
management of the related
mortgaged property.
o Changing economic conditions in
particular markets
11
can affect the supply and demand
of rental units and the rents
that those markets will bear.
o Government regulations,
including rental control laws,
may adversely affect future
income from mortgaged properties
that are subject to those
regulations.
In addition, because individual
multifamily loans often are relatively
large in amount, principal prepayments
resulting from defaults, casualties,
condemnations or breaches of
representations and warranties may
adversely affect your yield.
LOANS WITH BALLOON PAYMENTS MAY
INCREASE YOUR RISK OF LOSS................Certain loans may not be fully
amortizing and may require a
substantial principal payment (a
"balloon" payment) at their stated
maturity. Loans of this type involve
greater risk than fully amortizing
loans since the borrower must
generally be able to refinance the
loan or sell the related property
prior to the loan's maturity date. The
borrower's ability to do so will
depend on such factors as the level of
available mortgage rates at the time
of sale or refinancing, the relative
strength of the local housing market,
the borrower's equity in the property,
the borrower's general financial
condition and tax laws.
IF AMOUNTS IN ANY PRE-FUNDING
ACCOUNT ARE NOT USED TO PURCHASE
TRUST ASSETS, YOU WILL RECEIVE A
PREPAYMENT ON THE RELATED SECURITIES......The related prospectus supplement may
provide that the depositor transfer a
specified amount into a pre-funding
account on the date the securities are
issued. In this case, the transferred
funds may be used only to acquire
additional assets for the trust during
a set period after the issuance. Any
amounts remaining in the account at
the end of the period will be
distributed as a prepayment of
principal to the holders of the
related securities. The resulting
prepayment could adversely affect the
yield on those securities.
VIOLATIONS OF APPLICABLE FEDERAL LAWS
MAY REDUCE OR DELAY MORTGAGE LOAN
COLLECTIONS...............................The loans may also be subject to
federal laws relating to the
origination and underwriting. These
laws
12
o require certain disclosures to
the borrowers regarding the
terms of the loans;
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status,
national origin, receipt of
public assistance or the
exercise of any right under the
consumer credit protection act,
in the extension of credit;
o regulate the use and reporting
of information related to the
borrower's credit experience;
and
o require additional application
disclosures, limit changes that
may be made to the loan
documents without the borrower's
consent and restrict a lender's
ability to declare a default or
to suspend or reduce a
borrower's credit limit to
certain enumerated events.
Loans may also be subject to federal
laws that impose additional disclosure
requirements on creditors for
non-purchase money loans with high
interest rates or high up-front fees
and charges. These laws can impose
specific statutory liabilities upon
creditors that fail to comply and may
affect the enforceability of the
related loans. In addition, any
assignee of the creditor (including
the trust) would generally be subject
to all claims and defenses that the
borrower could assert against the
creditor, including the right to
rescind the loan.
Loans relating to home improvement
contracts may be subject to federal
laws that protect the borrower from
defective or incomplete work by a
contractor. These laws permit the
borrower to withhold payment if the
work does not meet the quality and
durability standards agreed to between
the borrower and the contractor. These
laws have the effect of subjecting any
assignee of the seller (including the
trust) to all claims and defenses
which the borrower in a sale
transaction could assert against the
seller of defective goods.
If certain provisions of these federal
laws are violated, the master servicer
may be unable to collect all or part
of the principal or interest on the
loans. The trust also could be subject
to damages and administrative
enforcement.
13
PROCEEDS OF LIQUIDATED LOANS
GENERALLY ARE PAID FIRST TO
PROVIDERS OF TRUST SERVICES...............There is no assurance that the value
of the trust assets for any series of
securities at any time will equal or
exceed the principal amount of the
outstanding securities of that series.
If trust assets have to be sold
because of an event of default or
otherwise, providers of services to
the trust (including the trustee, the
master servicer and the credit
enhancer, if any) generally will be
entitled to receive the proceeds of
the sale to the extent of their unpaid
fees and other amounts due them before
any proceeds are paid to investors. As
a result, the proceeds of such a sale
may be insufficient to pay the full
amount of interest and principal of
the related securities.
MORTGAGED PROPERTIES MAY BE
SUBJECT TO ENVIRONMENTAL RISKS
THAT COULD RESULT IN LOSSES...............Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances,
these laws and regulations impose
obligations on owners or operators of
residential properties such as those
that secure the loans included in a
trust. Failure to comply with these
laws and regulations can result in
fines and penalties that could be
assessed against the trust as owner of
the related property.
In some states, a lien on the property
due to contamination has priority over
the lien of an existing mortgage.
Further, a mortgage lender may be held
liable as an "owner" or "operator" for
costs associated with the release of
petroleum from an underground storage
tank under certain circumstances. If
the trust is considered the owner or
operator of a property, it will suffer
losses as a result of any liability
imposed for environmental hazards on
the property.
YOU MAY HAVE DIFFICULTY SELLING
YOUR SECURITIES OR OBTAINING
YOUR DESIRED PRICE........................No market will exist for the
securities before they are issued. In
addition, there can be no assurance
that a secondary market will develop
following the issuance and sale of the
securities. Even if a secondary market
does develop, you may not be able to
sell your securities when you wish to
or at the price you want.
14
RATINGS OF THE SECURITIES DO NOT
ADDRESS ALL INVESTMENT RISKS AND
MUST BE VIEWED WITH CAUTION...............Any class of securities issued under
this prospectus and the accompanying
prospectus supplement will be rated in
one of the four highest generic rating
categories of a nationally recognized
rating agency. A rating is based on
the adequacy of the value of the trust
assets and any credit enhancement for
that class and reflects the rating
agency's assessment of how likely it
is that holders of the class of
securities will receive the payments
to which they are entitled. A rating
does not constitute an assessment of
how likely it is that principal
prepayments on the loans will be made,
the degree to which the rate of
prepayments might differ from that
originally anticipated or the
likelihood of early, optional
termination of the securities. You
must not view a rating as a
recommendation to purchase, hold or
sell securities because it does not
address the market price or
suitability of the securities for any
particular investor. There is no
assurance that any rating will remain
in effect for any given period of time
or that the rating agency will not
lower or withdraw it entirely in the
future. The rating agency could lower
or withdraw its rating due to:
o any decrease in the adequacy of
the value of the trust assets or
any related credit enhancement,
o an adverse change in the
financial or other condition of
a credit enhancement provider,
or
o a change in the rating of the
credit enhancement provider's
long-term debt.
BOOK-ENTRY REGISTRATION MAY LIMIT
YOUR ABILITY TO SELL SECURITIES
AND DELAY YOUR RECEIPT OF PAYMENTS........LIMIT ON LIQUIDITY OF SECURITIES.
Securities issued in book-entry form
may have only limited liquidity in the
resale market, since investors may be
unwilling to purchase securities for
which they cannot obtain physical
instruments.
LIMIT ON ABILITY TO TRANSFER OR
PLEDGE. Transactions in book-entry
securities can be effected only
through The Depository Trust Company,
its participating organizations, its
indirect participants and certain
banks. As a result, your ability to
transfer or pledge securities issued
in book-entry form may be limited.
15
DELAYS IN DISTRIBUTIONS. You may
experience some delay in the receipt
of distributions on book-entry
securities since the distributions
will be forwarded by the trustee to
DTC for DTC to credit the accounts of
its participants. In turn, these
participants will thereafter credit
the distributions to your account
either directly or indirectly through
indirect participants.
There is a Glossary of Terms beginning on page 159 of this prospectus where
you will find definitions of the capitalized terms used in this prospectus.
16
THE TRUST FUND
The trust fund for each series of certificates will be held by the trustee
named in the related prospectus supplement for the benefit of the related
securityholders. Each trust fund will consist of one or more pools of the
following asset types:
o Single Family Loans,
o Home Equity Loans,
o Multifamily Loans,
o Manufactured Housing Contracts,
o Home Improvement Contracts,
o Agency Securities or
o Private Label Securities,
in each case as specified in the related prospectus supplement, as well as
payments relating to the assets and other accounts, obligations or agreements,
as specified in the related prospectus supplement.
Whenever the terms "pool," "certificates" and "notes" are used in this
prospectus, these terms are intended to apply, unless the context indicates
otherwise, to a discrete asset pool and the certificates representing undivided
interests in, or the notes secured by the assets of, a particular trust fund
consisting primarily of the loans in that pool. Similarly, the term
"pass-through rate" refers to the pass-through rate borne by the certificates of
a particular series, the term "interest rate" refers to the coupon borne by
notes of a particular series and the term "trust fund" refers to the related
trust fund.
Unless the context indicates otherwise, the term "loan" includes Single
Family Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing
Contracts and Home Improvement Contracts. Unless the context indicates
otherwise, the term "underlying loan" refers to the Single Family Loans, Home
Equity Loans, Multifamily Loans, Manufactured Housing Contracts or Home
Improvement Contracts backing or securing Agency Securities or Private Label
Securities.
The securities will be entitled to payment from the assets of the related
trust fund or other assets pledged for the benefit of the securityholders as
specified in the related prospectus supplement. The securities will not be
entitled to payments from the assets of any other trust fund established by the
depositor.
The loans, Agency Securities and Private Label Securities will be acquired
by the applicable depositor, either directly or through affiliates, from sellers
and conveyed by that depositor to the trustee named in the related prospectus
supplement for the benefit of the holders
17
of the securities of the related series. Sellers may have originated or
purchased the assets. Loans acquired by the applicable depositor will have been
originated principally in accordance with the general underwriting criteria
specified in this prospectus under the heading "Loan Program--Underwriting
Standards" and as more specifically provided in a related prospectus supplement.
Because the securities issued by a trust will be secured by assets
transferred to that trust by one of the depositors you should construe all
references in this prospectus to the "depositor" as referring to the applicable
depositor that transfers assets to your trust under the applicable operative
documents.
The master servicer named in the related prospectus supplement will service
the trust fund assets, either directly or through sub-servicers, under a
servicing agreement for the related series of securities. If the securities are
certificates, the servicing agreement will be in the form of a pooling and
servicing agreement among the depositor, the master servicer and the trustee. If
the securities are notes, the servicing agreement generally will be between the
trustee and the master servicer.
The following sections contain a brief description of the assets expected
to be included in the trust funds. If specific information respecting the assets
is not known at the time the related series of securities initially is offered,
more general information of the nature described below will be provided in the
related prospectus supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the SEC within 15 days after the initial
issuance of the securities. A copy of the operative agreements with respect to
the related series of securities will be attached to the Form 8-K and will be
available for inspection at the corporate trust office of the trustee specified
in the related prospectus supplement. A schedule of the assets relating to the
series will be attached to the related servicing agreement delivered to the
trustee upon issuance of the securities.
THE MORTGAGE LOANS--GENERAL
The loans in each trust fund are secured by the related mortgaged
properties. Except in the case of Multifamily Loans, the related mortgaged
properties generally consist of detached or semi-detached one- to four-family
dwellings, town houses, rowhouses, individual units in condominiums, individual
units in planned unit developments and certain other dwelling units. In
addition, if the related prospectus supplement so provides, the mortgaged
properties may include mixed-use properties. Mixed-use properties consist of
structures principally containing residential units but also including other
space used for retail, professional and other commercial uses. Loans that are
secured by multifamily and mixed-use properties shall not in the aggregate
constitute 10% or more of any pool by principal balance.
The mortgaged properties may include vacation and second homes, investment
properties and leasehold interests as specified in the related prospectus
supplement. The mortgaged properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States. If a loan has a loan-to-value ratio or principal balance in
excess of a particular benchmark, it may be covered in whole or in part by a
primary mortgage insurance policy. If the loans in a pool are covered by this
type of policy, the related prospectus supplement will describe the existence,
extent and duration of the coverage.
18
Unless otherwise specified in the related prospectus supplement, all of the
loans in a pool will have monthly payments due on the first day of each month.
The payment terms of the mortgage loans to be included in a trust fund will be
described in the related prospectus supplement and may include one or more of
the following features or other features described in the related prospectus
supplement:
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to an index
that will be specified in the related prospectus supplement,
- a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to a fixed
rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations. Accrued
interest may be deferred and added to the principal of a loan for the periods
and under the circumstances specified in the related prospectus supplement. A
mortgage loan may provide for the payment of interest at a rate lower than the
specified interest rate borne by the loan for a period of time or for the life
of the loan, and the amount of any difference may be contributed from funds
supplied by the seller of the related mortgaged property or another source.
o Principal may be
- payable on a level debt service basis to fully amortize the loan
over its term,
- calculated on the basis of an assumed amortization schedule that
is significantly longer than the original term to maturity or on
an interest rate that is different from the loan rate, or
- nonamortizing during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due on maturity
in the form of a "balloon" payment. Principal may include interest that has been
deferred and added to the principal balance of the loan.
19
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time, or
- change from period to period.
Loans may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of monthly
payments.
o Prepayments of principal may be subject to a prepayment fee, which may
be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or during any lockout periods.
Some loans may permit prepayments after expiration of the applicable
lockout period and may require the payment of a prepayment fee in
connection with any subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The loans may include "due-on-sale"
clauses which permit the lender to demand payment of the entire loan
in connection with the sale or certain transfers of the related
mortgaged property. Other loans may be assumable by persons meeting
the then applicable underwriting standards of the related seller.
Each prospectus supplement will contain information, as of the date of the
prospectus supplement and to the extent then specifically known to the
depositor, with respect to the loans contained in the related pool, including
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the applicable
cut-off date,
o the type of mortgaged property securing each loan,
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal balance of
the loans,
o the earliest origination date and latest maturity date of the loans,
o the aggregate principal balance of loans having loan-to-value ratios
at origination exceeding 80%,
o the loan rates or fixed percentage rates (APRs) or range of loan rates
or APRs borne by the loans, and
o the geographical location of the related mortgaged properties on a
state-by-state basis.
If specific information respecting the loans is not known to the depositor at
the time the related securities are initially offered, more general information
of the nature described in the
20
immediately preceding sentence will be provided in the related prospectus
supplement, and specific information will be set forth in the Form 8-K to be
filed with the SEC within 15 days after issuance.
The loan-to-value ratio of a loan at any given time is the ratio, expressed
as a percentage, of the then outstanding principal balance of the loan to the
collateral value of the related mortgaged property. Unless otherwise specified
in the related prospectus supplement, the collateral value of a mortgaged
property, other than with respect to loans used to refinance an existing loan,
is the lesser of (a) the appraised value determined in an appraisal obtained by
the originator at origination of the loan and (b) the sales price for the
property. In the case of refinance loans, the collateral value of the related
mortgaged property is the appraised value of the property determined in an
appraisal obtained at the time of refinancing. Unless otherwise specified in the
related prospectus supplement, for purposes of calculating the loan-to-value
ratio of a Manufactured Housing Contract relating to a new manufactured home,
the collateral value is no greater than the sum of
o a fixed percentage of the list price of the unit actually billed by
the manufacturer to the dealer, net of freight to the dealer site but
including any accessories identified in the invoice (I.E., the
"manufacturer invoice price"),
o the actual cost of any accessories depending on the size of the unit,
and
o the cost of state and local taxes, filing fees and up to three years'
prepaid hazard insurance premiums.
Unless otherwise specified in the related prospectus supplement, the collateral
value of a used manufactured home is the least of the sales price, appraised
value, and National Automobile Dealers' Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a manufactured home
is based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
The loan-to-value ratio of a Home Improvement Contract will be computed in
the manner described in the related prospectus supplement.
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding principal balances
of the loans in a particular pool, and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors which may or may not
affect real property values may affect the timely payment by borrowers of
scheduled payments of principal and interest on the loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any pool.
In the case of Multifamily Loans, these other factors could include
21
o excessive building resulting in an oversupply of rental housing stock,
o a decrease in employment reducing the demand for rental units in an
area,
o federal, state or local regulations and controls affecting rents,
prices of goods and energy,
o environmental restrictions,
o increasing labor and material costs, and
o the relative attractiveness to tenants of the mortgaged properties.
To the extent that losses are not covered by subordination provisions or
alternative arrangements, losses will be borne, at least in part, by the
securityholders of the securities of the related series.
Unless otherwise specified in the related prospectus supplement, the only
obligations of the depositor with respect to a series of certificates will be to
obtain certain representations and warranties from the related seller and to
assign to the trustee for that series of certificates the depositor's rights
with respect to those representations and warranties. SEE "Operative
Agreements--Assignment of Trust Fund Assets" in this prospectus.
The obligations of the master servicer with respect to the mortgage loans
will consist principally of:
o its contractual servicing obligations under the related servicing
agreement, including its obligation to enforce the obligations of the
sub-servicers or sellers, or both, as more fully described in this
prospectus under the headings "Mortgage Loan Program--Representations
by Sellers; Repurchases" and "Operative Agreements--Sub-Servicing by
Sellers" and "--Assignment of Trust Fund Assets"; and
o its obligation to make certain cash advances in the event of
delinquencies in payments with respect to the mortgage loans in the
amounts described in this prospectus under the heading "Description of
the Certificates--Advances".
The obligations of the master servicer to make advances may be subject to
limitations, to the extent provided in this prospectus and in the related
prospectus supplement.
SINGLE FAMILY LOANS
Unless otherwise specified in the related prospectus supplement, Single
Family Loans will consist of loans or participations or other beneficial
interests in loans secured by mortgages or deeds of trust that create first
liens on one- to four-family residential properties. If specified in the related
prospectus supplement, Single Family Loans may include cooperative loans secured
by security interests in shares issued by private, non-profit, cooperative
housing corporations and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
cooperatives' buildings. If specified in the related prospectus
22
supplement, the assets of the related trust fund may include mortgage
participation certificates evidencing interests in Single Family Loans. Single
Family Loans may be conventional loans (loans that are not insured or guaranteed
by any governmental agency), loans insured by the Federal Housing Administration
(FHA) or partially guaranteed by the Veterans Administration (VA), as specified
in the related prospectus supplement. Unless otherwise specified in the related
prospectus supplement, Single Family Loans will have individual principal
balances at origination of not less than $25,000 and not more than $1,000,000,
and original terms to stated maturity of from ten to 40 years.
If specified in the related prospectus supplement, the mortgaged properties
securing Single Family Loans may include five- to eight-family residential
properties and small mixed-use properties. In the case of leasehold interests,
the term of the leasehold will exceed the scheduled maturity of the related
mortgage loan by at least five years, unless otherwise specified in the related
prospectus supplement.
HOME EQUITY LOANS
Unless otherwise specified in the related prospectus supplement, Home
Equity Loans will consist of closed-end and/or revolving home equity loans
generally secured by junior liens on one- to four-family residential properties.
As more fully described in the related prospectus supplement, interest on
each revolving credit line loan, excluding introductory rates offered from time
to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of the loan. Principal amounts on a
revolving credit line loan may be drawn down (up to the maximum amount specified
in the related prospectus supplement) or repaid from time to time, but may be
subject to a minimum periodic payment. Except to the extent provided in the
related prospectus supplement, the trust fund will not include any amounts
borrowed under a revolving credit line loan after the cut-off date. The full
amount of a closed-end loan is advanced at the inception of the loan and
generally is repayable in equal (or substantially equal) installments in an
amount necessary to fully amortize such loan at its stated maturity. Except to
the extent provided in the related prospectus supplement, the original terms to
stated maturity of closed-end loans will not exceed 360 months. Under certain
circumstances, under either a revolving credit line loan or a closed-end loan, a
borrower may choose an interest only payment option, in which event the borrower
is obligated to pay only the amount of interest which accrued on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
MULTIFAMILY LOANS
Multifamily Loans will consist of loans or participations or other
beneficial interests in loans secured by mortgages that create first liens on
rental apartment buildings or projects containing five or more residential
units. If specified in the related prospectus supplement, the mortgage assets of
a trust fund may include mortgage participation certificates evidencing
interests in Multifamily Loans. Multifamily Loans may be conventional loans or
FHA-insured loans, as specified in the related prospectus supplement. Unless
otherwise specified in the
23
related prospectus supplement, all Multifamily Loans will have original terms to
stated maturity of not more than 40 years.
Multifamily Loans shall not constitute 10% or more of any pool by principal
balance.
Mortgaged properties securing Multifamily Loans may include high-rise,
mid-rise and garden apartments. Multifamily Loans may be secured by apartment
buildings owned by cooperatives. A cooperative owns all the apartment units in
its building and all common areas and is owned by tenant-stockholders who,
through ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific apartments or units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for the cooperative's mortgage loan, real property taxes,
maintenance expenses and other capital or ordinary expenses. Those payments are
in addition to any payments of principal and interest the tenant-stockholder
must make on any loans to the tenant-stockholder secured by his shares in the
cooperative. The cooperative will be directly responsible for building
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. A cooperative's ability to meet debt service obligations on
a Multifamily Loan, as well as all other operating expenses, will be dependent
in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
MANUFACTURED HOUSING CONTRACTS
Manufactured Housing Contracts will consist of manufactured housing
conditional sales contracts and installment sales or loan agreements, each
secured by a manufactured home. Manufactured Housing Contracts may be
conventional, insured by the FHA or partially guaranteed by the VA, as specified
in the related prospectus supplement. Unless otherwise specified in the related
prospectus supplement, each Manufactured Housing Contract will be fully
amortizing and will bear interest at a fixed percentage rate or APR. Unless
otherwise specified in the related prospectus supplement, Manufactured Housing
Contracts will all have individual principal balances at origination of not less
than $10,000 and not more than $1,000,000 and original terms to stated maturity
of from five to 30 years.
When we use the term "manufactured home" in this prospectus, we mean, as
stated in 42 U.S.C. ss. 5402(6), "a structure, transportable in one or more
sections which, in the traveling mode, is eight body feet or more in width or
forty body feet or more in length or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
24
Each prospectus supplement will specify for the Manufactured Housing
Contracts contained in the related trust fund, among other things, the dates of
origination of the Manufactured Housing Contracts, the APRs on the Manufactured
Housing Contracts, the loan-to-value ratios of the Manufactured Housing
Contracts, the minimum and maximum outstanding principal balances as of the
cut-off date and the average outstanding principal balance, the outstanding
principal balances of the Manufactured Housing Contracts included in the related
trust fund, and the original maturities of the Manufactured Housing Contracts
and the last maturity date of any Manufactured Housing Contract.
HOME IMPROVEMENT CONTRACTS
Home Improvement Contracts are originated by home improvement contractors,
thrifts or commercial mortgage bankers in the ordinary course of business. As
specified in the related prospectus supplement, the Home Improvement Contracts
will either be unsecured or secured by mortgages or deeds of trust generally
creating a junior lien on the related mortgaged properties, or secured by
purchase money security interests in the financed home improvements. Unless
otherwise specified in the related prospectus supplement, the Home Improvement
Contracts will be fully amortizing and may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
described in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the home
improvements securing the Home Improvement Contracts will include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OR GINNIE MAE. The Government
National Mortgage Association (Ginnie Mae) is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. Section 306(g) of Title II of the National Housing Act of 1934, as
amended, authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates which represent an interest in a pool of FHA
loans, which are mortgage loans insured by the FHA under the National Housing
Act or under Title V of the Housing Act of 1949, or VA loans, which are mortgage
loans partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or Chapter 37 of Title 38 of the United States Code.
Section 306(g) of the National Housing Act provides that "the full faith
and credit of the United States is pledged to the payment of all amounts which
may be required to be paid under any guaranty under this subsection." In order
to meet its obligations under any such guarantee, Ginnie Mae may, under Section
306(d) of the National Housing Act, borrow from the United States Treasury in an
unlimited amount which is at any time sufficient to enable Ginnie Mae to perform
its obligations under its guarantee.
GINNIE MAE CERTIFICATES. Each Ginnie Mae Certificate held in a trust fund
will be a "fully modified pass-through" mortgage-backed certificate issued and
serviced by a Ginnie Mae issuer that is a mortgage banking company or other
financial concern approved by Ginnie Mae or
25
approved by Fannie Mae as a seller-servicer of FHA loans and/or VA loans. The
Ginnie Mae Certificates may be either Ginnie Mae I Certificates issued under the
Ginnie Mae I program or Ginnie Mae II Certificates issued under the Ginnie Mae
II program. The mortgage loans underlying the Ginnie Mae Certificates will
consist of FHA loans and/or VA loans. Each such mortgage loan is secured by a
one- to four-family or multifamily residential property. Ginnie Mae will approve
the issuance of each Ginnie Mae Certificate in accordance with a guaranty
agreement between Ginnie Mae and the Ginnie Mae issuer. Pursuant to its guaranty
agreement, a Ginnie Mae issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each Ginnie Mae Certificate,
even if the payments received by the Ginnie Mae issuer on the underlying FHA
loans or VA loans are less than the amounts due on the related Ginnie Mae
Certificate.
The full and timely payment of principal of and interest on each Ginnie Mae
Certificate will be guaranteed by Ginnie Mae, which obligation is backed by the
full faith and credit of the United States. Each Ginnie Mae Certificate will
have an original maturity of not more than 30 years, but may have original
maturities of substantially less than 30 years. Each Ginnie Mae Certificate will
be based on and backed by a pool of FHA loans or VA loans secured by one- to
four-family residential properties and will provide for the payment by or on
behalf of the Ginnie Mae issuer to the registered holder of the Ginnie Mae
Certificate scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
the Ginnie Mae Certificate, less the applicable servicing and guarantee fee
which together equal the difference between the interest on the FHA Loan or VA
Loan and the pass-through rate on the Ginnie Mae Certificate. In addition, each
payment will include proportionate pass-through payments of any prepayments of
principal on the FHA loans or VA loans underlying the Ginnie Mae Certificate and
liquidation proceeds in the event of a foreclosure or other disposition of any
such FHA loans or VA loans.
If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae
Certificate as they become due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of the Ginnie Mae Certificate.
In the event no payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer
fails to notify and request Ginnie Mae to make the payment, the holder of the
Ginnie Mae Certificate will have recourse only against Ginnie Mae to obtain
payment. The trustee or its nominee, as registered holder of the Ginnie Mae
Certificates held in a trust fund, will have the right to proceed directly
against Ginnie Mae under the terms of the guaranty agreements relating to those
Ginnie Mae Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular Ginnie Mae I Certificate must
have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on a Ginnie Mae
I Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the Ginnie Mae I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
26
Mortgage loans underlying a particular Ginnie Mae II Certificate may have
per annum interest rates that vary from one another by up to one percentage
point. The interest rate on each Ginnie Mae II Certificate will be between
one-half percentage point and one and one-half percentage points lower than the
highest interest rate on the mortgage loans included in the pool of mortgage
loans underlying the Ginnie Mae II Certificate (except for pools of mortgage
loans secured by manufactured homes).
Regular monthly installment payments on each Ginnie Mae Certificate held in
a trust fund will be comprised of interest due as specified on the Ginnie Mae
Certificate plus the scheduled principal payments on the FHA loans or VA loans
underlying the Ginnie Mae Certificate due on the first day of the month in which
the scheduled monthly installments on the Ginnie Mae Certificate are due.
Regular monthly installments on each Ginnie Mae Certificate are required to be
paid to the trustee as registered holder by the 15th day of each month in the
case of a Ginnie Mae I Certificate, and are required to be mailed to the trustee
by the 20th day of each month in the case of a Ginnie Mae II Certificate. Any
principal prepayments on any FHA loans or VA loans underlying a Ginnie Mae
Certificate held in a trust fund or any other early recovery of principal on
such loan will be passed through to the trustee as the registered holder of the
Ginnie Mae Certificate.
Ginnie Mae Certificates may be backed by graduated payment mortgage loans
or by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loans.
Payments due the registered holders of Ginnie Mae Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae Certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of the graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae Issuer will be the same irrespective of whether
the Ginnie Mae Certificates are backed by graduated payment mortgage loans or
"buydown" mortgage loans. No statistics comparable to the FHA's prepayment
experience on level payment, non-"buydown" mortgage loans are available in
respect of graduated payment or "buydown" mortgages. Ginnie Mae Certificates
related to a series of certificates may be held in book-entry form.
If specified in a prospectus supplement, Ginnie Mae Certificates may be
backed by multifamily mortgage loans having the characteristics specified in the
prospectus supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION OR FREDDIE MAC. The Federal Home
Loan Mortgage Corporation (Freddie Mac) is a shareholder-owned, government
sponsored enterprise created pursuant to Title III of the Emergency Home Finance
Act of 1970, as amended. Freddie Mac was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of Freddie
Mac currently consists of
27
the purchase of first lien conventional mortgage loans, or participation
interests in the mortgage loans, and the sale of the mortgage loans or
participations so purchased in the form of mortgage securities, primarily
Freddie Mac Certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FREDDIE MAC CERTIFICATES. Each Freddie Mac Certificate represents an
undivided interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA loans or VA loans. Freddie Mac Certificates are sold
under the terms of a mortgage participation certificate agreement. A Freddie Mac
Certificate may be issued under either Freddie Mac's Cash Program or its
Guarantor Program.
Mortgage loans underlying the Freddie Mac Certificates held by a trust fund
will consist of mortgage loans with original terms to maturity of from ten to 40
years. Each such mortgage loan must meet the applicable standards set forth in
the legislation that established Freddie Mac. The pool of loans backing a
Freddie Mac Certificate may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac pool. Under the Guarantor Program, however, the
pool of loans backing a Freddie Mac Certificate may include only whole loans or
participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans represented by that Freddie Mac Certificate, whether or not
received. Freddie Mac also guarantees to each registered holder of a Freddie Mac
Certificate that the holder will collect all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related prospectus supplement for a series of certificates, guarantee the
timely payment of scheduled principal. Under Freddie Mac's Gold PC Program,
Freddie Mac guarantees the timely payment of principal based on the difference
between the pool factor, published in the month preceding the month of
distribution, and the pool factor published in such month of distribution.
Pursuant to its guarantees, Freddie Mac indemnifies holders of Freddie Mac
Certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. Freddie Mac may remit the amount
due on account of its guaranty of collection of principal at any time after
default on an underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any mortgage
insurer or (iii) 30 days following the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the mortgagor for accelerated payment of principal. In taking
actions regarding the collection of principal after default on the mortgage
loans underlying Freddie Mac Certificates, including the timing of demand for
acceleration, Freddie Mac reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for Freddie Mac to
determine that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and Freddie Mac has not adopted standards which
require that the demand be made within any specified period.
28
Freddie Mac Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, or
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy such obligations, distributions to holders of Freddie Mac
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac Certificates would be affected by delinquent payments and defaults
on such mortgage loans.
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac Certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac pass-through rate and any other sums such as prepayment fees,
within 60 days of the date on which those payments are deemed to have been
received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac Certificate
may exceed the pass-through rate on the Freddie Mac Certificate. Under this
program, Freddie Mac purchases groups of whole mortgage loans from sellers at
specified percentages of their unpaid principal balances, adjusted for accrued
or prepaid interest, which, when applied to the interest rate of the mortgage
loans and participations purchased, results in the yield (expressed as a
percentage) required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a particular Freddie Mac pool under the Cash Program will
vary since mortgage loans and participations are purchased and assigned to a
Freddie Mac pool based upon their yield to Freddie Mac rather than on the
interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor
Program, the pass-through rate on a Freddie Mac Certificate is established based
upon the lowest interest rate on the underlying mortgage loans, minus a minimum
servicing fee and the amount of Freddie Mac's management and guaranty income as
agreed upon between the related seller and Freddie Mac.
Freddie Mac Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a Freddie Mac
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser becomes a registered
holder of the Freddie Mac Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to Freddie Mac Certificates sold by Freddie
Mac, and makes payments of principal and interest each month to the registered
Freddie Mac Certificateholders in accordance with the holders' instructions.
29
FEDERAL NATIONAL MORTGAGE ASSOCIATION OR FANNIE MAE. The Federal National
Mortgage Association (Fannie Mae) is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act, as amended. Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and
privately-managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide, Fannie
Mae helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
FANNIE MAE CERTIFICATES. Fannie Mae Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held by a trust fund will
consist of conventional mortgage loans, FHA loans or VA loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be from eight to 15
years or from 20 to 40 years. The original maturities of substantially all of
the fixed rate level payment FHA loans or VA loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae Certificate may have annual interest
rates that vary by as much as two percentage points from one another. The rate
of interest payable on a Fannie Mae Certificate is equal to the lowest interest
rate of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and Fannie Mae's guaranty fee.
Under a regular servicing option pursuant to which the mortgagee or each other
servicer assumes the entire risk of foreclosure losses, the annual interest
rates on the mortgage loans underlying a Fannie Mae Certificate will be between
25 basis points and 250 basis points greater than is its annual pass-through
rate. Under a special servicing option pursuant to which Fannie Mae assumes the
entire risk for foreclosure losses, the annual interest rates on the mortgage
loans underlying a Fannie Mae Certificate will generally be between 30 basis
points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the related prospectus supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae Certificate
that it will distribute amounts representing the holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by the Fannie Mae Certificate on the underlying mortgage loans,
whether or not received, and the holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not such principal amount is actually recovered. The obligations of
Fannie Mae under its
30
guarantees are obligations solely of Fannie Mae and are not backed by, or
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend Fannie Mae up to $2.25 billion outstanding at any time, neither the United
States nor any of its agencies or instrumentalities is obligated to finance
Fannie Mae's operations or to assist Fannie Mae in any other manner. If Fannie
Mae were unable to satisfy its obligations, distributions to holders of Fannie
Mae Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Fannie Mae Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae Certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
Certificate is entered in the books of the Federal Reserve Banks (or registered
on the Fannie Mae Certificate register in the case of fully registered Fannie
Mae Certificates) as of the close of business on the last day of the preceding
month. With respect to Fannie Mae Certificates issued in book-entry form,
distributions will be made by wire and, with respect to fully registered Fannie
Mae Certificates, distributions will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of one
or more stripped mortgage-backed securities as described in this prospectus and
in the related prospectus supplement. Each Agency Security of this type will
represent an undivided interest in all or part of the principal distributions -
but not the interest distributions, or the interest distributions - but not the
principal distributions, or in some specified portion of the principal and
interest distributions on certain Freddie Mac, Fannie Mae or Ginnie Mae
Certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae or Ginnie Mae, each as trustee, or by another trustee
named in the related prospectus supplement. Freddie Mac, Fannie Mae or Ginnie
Mae will guaranty each stripped Agency Security to the same extent as such
entity guarantees the underlying securities backing the stripped Agency
Security, unless otherwise specified in the related prospectus supplement.
OTHER AGENCY SECURITIES. If specified in the related prospectus supplement,
a trust fund may include other mortgage pass-through certificates issued or
guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. The characteristics of any
such mortgage pass-through certificates will be described in the related
prospectus supplement. If specified in the related prospectus supplement, a
combination of different types of Agency Securities may be held in a trust fund.
PRIVATE LABEL SECURITIES
GENERAL. Private Label Securities or PLS (I.E., private mortgage-backed or
asset-backed securities) may consist of
o pass-through certificates or participation certificates evidencing an
undivided interest in a pool of Single Family Loans, Home Equity Loans,
Multifamily Loans, Manufactured Housing Contracts or Home Improvement
Contracts,
31
o collateralized mortgage obligations secured by Single Family Loans, Home
Equity Loans, Multifamily Loans, Manufactured Housing Contracts or Home
Improvement Contracts, or
o other Private Label Securities.
Private Label Securities may include stripped mortgage-backed securities
representing an undivided interest in all or a part of the principal
distributions - but not the interest distributions, or the interest
distributions - but not the principal distributions, or in some specified
portion of the principal and interest distributions on certain mortgage loans.
The Private Label Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement. Unless otherwise
specified in the related prospectus supplement, the seller/servicer of the
underlying loans will have entered into a PLS Agreement with a trustee under
that agreement. The PLS trustee or its agent, or a custodian, will possess the
mortgage loans underlying the Private Label Securities. The loans underlying the
Private Label Securities will be serviced by a PLS servicer directly or by one
or more subservicers which may be subject to the supervision of the PLS
servicer. Unless otherwise specified in the related prospectus supplement, the
PLS servicer will be a Fannie Mae- or Freddie Mac-approved servicer and, if FHA
loans underlie the Private Label Securities, approved by HUD as an FHA
mortgagee.
The PLS issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending, a public agency or
instrumentality of a state, local or federal government, or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling housing loans to trusts and selling beneficial
interests in trusts. If specified in the related prospectus supplement, the PLS
issuer may be an affiliate of the depositor. The obligations of the PLS issuer
will generally be limited to certain representations and warranties with respect
to the assets it conveys to the related trust. Unless otherwise specified in the
related prospectus supplement, the PLS issuer will not have guaranteed any of
the assets conveyed to the related trust or any of the Private Label Securities
issued under the PLS agreement. Additionally, although the loans underlying the
Private Label Securities may be guaranteed by an agency or instrumentality of
the United States, the Private Label Securities themselves will not be so
guaranteed, unless the related prospectus supplement specifies otherwise.
Distributions of principal and interest will be made on the Private Label
Securities on the dates specified in the related prospectus supplement. The
Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase assets underlying the Private Label Securities after a particular
date or under other circumstances specified in the related prospectus
supplement.
UNDERLYING LOANS. The loans underlying the PMBS may consist of fixed rate,
level payment, fully amortizing loans or graduated payment mortgage loans,
buydown loans, adjustable rate mortgage loans, or loans having balloon or other
special payment features. The loans may be secured by one- to four-family
residential property, small mixed-use property, five-
32
to eight-family residential property, multifamily property, manufactured homes
or by an assignment of the proprietary lease or occupancy agreement relating to
a specific dwelling within a cooperative and the related shares issued by the
cooperative. Except as otherwise specified in the related prospectus supplement,
the loans will have the following characteristics:
o no loan will have had a loan-to-value ratio at origination in excess
of 95%;
o each Single Family Loan secured by a mortgaged property having a
loan-to-value ratio in excess of 80% at origination will be covered by
a primary mortgage insurance policy;
o each loan will have had an original term to stated maturity of not
less than five years and not more than 40 years;
o no loan that was more than 89 days delinquent as to the payment of
principal or interest will have been eligible for inclusion in the
assets under the related PLS agreement;
o each loan (other than a cooperative loan) will be required to be
covered by a standard hazard insurance policy (which may be a blanket
policy); and
o each loan (other than a cooperative loan or a Manufactured Housing
Contract) will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE LABEL SECURITIES. Credit support in the
form of reserve funds, subordination of other private label securities issued
under the PLS agreement, letters of credit, surety bonds, insurance policies or
other types of credit support may be provided with respect to the loans
underlying the Private Label Securities or with respect to the Private Label
Securities themselves.
ADDITIONAL INFORMATION. If the trust fund for a series of securities
includes Private Label Securities, the related prospectus supplement will
specify
o the aggregate approximate principal amount and type of Private Label
Securities to be included in the trust fund,
o the maximum original term-to-stated maturity of the PLS,
o the weighted average term-to-stated maturity of the PLS,
o the pass-through or certificate rate of the PLS,
o the weighted average pass-through or interest rate of the PLS,
o the PLS issuer, the PLS servicer (if other than the PLS issuer) and
the PLS trustee,
33
o certain characteristics of any credit support such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties
relating to the loans underlying the Private Label Securities
themselves,
o the terms on which the loans underlying the PLS may, or are required
to, be purchased prior to their stated maturity or the stated maturity
of the PLS and
o the terms on which mortgage loans may be substituted for those
originally underlying the PLS.
In addition, the related prospectus supplement will provide information
about the loans which comprise the underlying assets of the Private Label
Securities, including
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if known, of underlying
loans insured or guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
loans, and
o the minimum and maximum stated maturities of the underlying loans at
origination.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We incorporate in this prospectus by reference all documents and reports
filed by the applicable depositor, Greenwich Capital Acceptance, Inc. (GCA) or
Financial Acceptance Securities Corp. (FASCO), with respect to a trust fund
pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended, prior to the termination of the offering of certificates evidencing
interests in that trust fund. Upon request by any person to whom this prospectus
is delivered in connection with the offering of one or more classes of
certificates, the applicable depositor will provide without charge a copy of any
such documents and/or reports incorporated herein by reference, in each case to
the extent that the documents or reports relate to those classes of
certificates, other than the exhibits to the documents (unless the exhibits are
specifically incorporated by reference in such documents). Requests to the
depositors should be directed in writing to: Paul D. Stevelman, Greenwich
Capital Acceptance, Inc. or Financial Acceptance Securities Corp. as applicable,
600 Steamboat Road, Greenwich, Connecticut 06830, telephone number (203)
625-2700. Each depositor has determined that its financial statements are not
material to the offering of any of the securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, DC 20549. Investors may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a website at http:\\www.sec.gov
containing reports, proxy and information statements and other information
regarding issuers, including each trust fund, that file electronically with the
SEC.
34
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the applicable depositor to the purchase of trust fund assets or will
be used by the depositor for general corporate purposes. The depositors expect
to sell securities in series from time to time, but the timing and amount of
offerings of securities will depend on a number of factors, including the volume
of assets acquired by the depositors, prevailing interest rates, availability of
funds and general market conditions.
THE DEPOSITORS
Greenwich Capital Acceptance, Inc. is a Delaware corporation organized on
April 23, 1987, and Financial Asset Securities Corp. is a Delaware corporation
organized on August 2, 1995, in each case for the limited purpose of acquiring,
owning and transferring mortgage assets and selling interests in those assets or
bonds secured by those assets. Each of the depositors is an indirect, limited
purpose finance subsidiary of Royal Bank of Scotland Plc and an affiliate of
Greenwich Capital Markets, Inc. Greenwich Capital Markets, Inc. is a registered
broker-dealer engaged in the U.S. government securities market and related
capital markets business. Each of the depositors maintains its principal office
at 600 Steamboat Road, Greenwich, Connecticut 06830 and the telephone number is
(203) 625-2700.
Neither the depositors nor any of their affiliates will ensure or guarantee
distributions on the securities of any series.
LOAN PROGRAM
The depositor will have purchased the loans, either directly or through
affiliates, from sellers. Unless otherwise specified in the related prospectus
supplement, the loans acquired by the depositor will have been originated in
accordance with the underwriting criteria specified under the heading
"--Underwriting Standards" below.
UNDERWRITING STANDARDS
Unless otherwise specified in the related prospectus supplement, each
seller will represent and warrant that all the loans that it originated and/or
sold to the depositor or one of the depositor's affiliates will have been
underwritten in accordance with standards consistent with those utilized by
institutional lenders generally during the period of origination for similar
types of loans. As to any loan insured by the FHA or partially guaranteed by the
VA, the related seller will represent that it has complied with the underwriting
policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
a prospective borrower's credit standing and repayment ability, and the value
and adequacy of the mortgaged property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history of any senior lien loan on
the
35
related mortgaged property. As part of the description of the borrower's
financial condition, the borrower generally is required to provide a current
list of assets and liabilities and a statement of income and expenses, as well
as an authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
Generally, an employment verification is obtained from an independent source,
which is typically the borrower's employer. The verification reports the
borrower's length of employment with its employer, current salary, and
expectations of continued employment. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related prospectus
supplement.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good repair and that
construction, if new, has been completed. The appraisal generally is based on
the market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the subject home. In
connection with a Manufactured Housing Contract, the appraisal is based on
recent sales of comparable manufactured homes and, when deemed applicable, a
replacement cost analysis based on the cost of a comparable manufactured home.
In connection with a Multifamily Loan, the appraisal must specify whether an
income analysis, a market analysis or a cost analysis was used. An appraisal
employing the income approach to value analyzes a multifamily project's
cashflow, expenses, capitalization and other operational information in
determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available
o to meet the borrower's monthly obligations on the proposed loan,
generally determined on the basis of the monthly payments due in the
year of origination, and other expenses related to the mortgaged
property such as property taxes and hazard insurance, and
o to meet monthly housing expenses and other financial obligations and
monthly living expenses.
36
The underwriting standards applied by sellers, particularly with respect to the
level of loan documentation and the borrower's income and credit history, may be
varied in appropriate cases where factors such as low loan-to-value ratios or
other favorable credit exist.
In the case of a loan secured by a leasehold interest in real property, the
title to which is held by a third-party lessor, the related seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term of the
related mortgage note.
Some types of loans which may be included in the pools may involve
additional uncertainties not present in traditional types of loans. For example,
loans may provide for escalating or variable payments by the borrower. These
types of loans are generally underwritten on the basis of a judgment that
borrowers will have the ability to make the monthly payments required initially.
In some instances, however, their incomes may not be sufficient to permit
continued loan payments as payments increase. These types of loans may also be
underwritten primarily upon the basis of loan-to-value ratios or other favorable
credit factors.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related prospectus supplement, each
seller will be required to satisfy the qualifications set forth in the following
sentence. Each seller must
o be an institution experienced in originating and servicing loans of
the type contained in the related pool in accordance with accepted
practices and prudent guidelines,
o maintain satisfactory facilities to originate and service the loans,
o be a seller/servicer approved by either Fannie Mae or Freddie Mac, and
o be a mortgagee approved by the FHA or an institution the deposit
accounts in which are insured by the Federal Deposit Insurance
Corporation (FDIC).
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each seller will have made representations and warranties in respect of the
loans sold by that seller and evidenced by a series of securities. These
representations and warranties, unless otherwise provided in the related
prospectus supplement, generally include the following:
o Except in the case of a cooperative loan, each Single Family Loan,
Home Equity Loan or Multifamily Loan has a title insurance policy,
required hazard insurance policy and any required primary mortgage
insurance policy, each of which was in effect at the origination of
the loan and remained in effect on the date that the loan was
purchased from the seller by or on behalf of the depositor. If the
related mortgaged property is located in an area where title insurance
policies are generally not available, an attorney's certificate of
title may be substituted.
37
o The seller had good title to each loan and no loan was subject to
offsets, defenses, counterclaims or rights of rescission except to the
extent that any specified buydown agreement may forgive certain
indebtedness of a borrower.
o Each loan constituted a valid lien on, or a perfected security
interest with respect to, the related mortgaged property, subject only
to permissible title insurance exceptions, if applicable, and certain
other exceptions described in the related servicing agreement.
o The mortgaged property was free from damage and was in acceptable
condition.
o There were no delinquent tax or assessment liens against the mortgaged
property.
o No required payment on a loan was delinquent more than 30 days.
o Each loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations, in all
material respects.
If specified in the related prospectus supplement, the representations and
warranties of a seller in respect of a loan will be made not as of the related
cut-off date but as of the date on which the seller sold the loan to the
depositor or one of its affiliates. Under these circumstances, a substantial
period of time may have elapsed between that date and the date of initial
issuance of the series of securities evidencing an interest in, or secured by,
the loan. Since the representations and warranties of a seller do not address
events that may occur following the sale of the loan by that seller, the
repurchase obligation described in the following paragraph will not arise if the
relevant event that would otherwise have given rise to the obligation occurs
after the date when the seller sold the loan to the depositor or one of its
affiliates. However, the depositor will not include any loan in a trust fund if
anything has come to the depositor's attention that would cause it to believe
that the representations and warranties of the related seller regarding that
loan will not be accurate and complete in all material respects as of the date
when the related series of securities is issued. If the master servicer is also
a seller of loans for a particular series, these representations will be in
addition to the representations and warranties made by the master servicer in
its capacity as master servicer.
Unless otherwise specified in the related prospectus supplement, the seller
will make certain representations and warranties in connection with Manufactured
Housing Contracts included in the trust with respect to the enforceability of
coverage under any related insurance policy or hazard insurance policy. The
seller, if required by the rating agencies rating the related issue of
securities, will obtain a surety bond, guaranty, letter of credit or other
acceptable instrument to support its repurchase or substitution obligation
specified in the immediately following paragraph.
The master servicer, or the trustee if the master servicer is the seller,
will promptly notify the relevant seller of any breach of any representation or
warranty made by that seller in respect of a loan which materially and adversely
affects the interests of the securityholders in the loan. Unless otherwise
specified in the related prospectus supplement, if the seller cannot cure the
38
breach within 90 days after notice from the master servicer or the trustee, as
the case may be, then the seller will be obligated EITHER
o to repurchase that loan from the trust fund at a purchase price equal
to 100% of the loan's unpaid principal balance as of the date of the
repurchase plus accrued interest thereon to the first day of the month
following the month of repurchase at the related loan rate, less any
advances made by the seller or amount payable as related servicing
compensation if the seller is the master servicer, OR
o substitute for that loan a replacement loan that satisfies the
requirements set forth in the related prospectus supplement.
This repurchase or substitution obligation will constitute the sole remedy
available to the securityholders or the trustee for a breach of representation
or warranty by the seller.
Except in those cases in which the master servicer is the seller, the
master servicer will be required under the applicable servicing agreement to
enforce this obligation for the benefit of the trustee and the related
securityholders, following the practices it would employ in its good faith
business judgment were it the owner of the loan.
If a REMIC election is to be made with respect to a trust fund, unless
otherwise provided in the related prospectus supplement, the master servicer or
a holder of the related residual certificate will be obligated to pay any
prohibited transaction tax which may arise in connection with a repurchase or
substitution. Unless otherwise specified in the related prospectus supplement,
the master servicer will be entitled to reimbursement for any such payment from
the assets of the related trust fund or from any holder of the related residual
certificate. SEE "Description of the Securities--General" in this prospectus.
Neither the depositor nor the master servicer - unless the master servicer
is the seller - will be obligated to purchase a loan if the seller defaults on
its obligation to do so. No assurance can be given that sellers will carry out
their respective repurchase or substitution obligations with respect to the
loans. However, to the extent that a breach of a representation and warranty of
a seller may also constitute a breach of a representation made by the master
servicer, the master servicer may have a repurchase or substitution obligation
as described under the heading "Operative Agreements--Assignment of Trust Fund
Assets" in this prospectus.
DESCRIPTION OF THE SECURITIES
Either Greenwich Capital Acceptance, Inc. or Financial Asset Securities
Corp., as depositor, will establish a trust fund for each series of securities.
A particular series of securities will consist of mortgage-backed or
asset-backed certificates or notes or both certificates and notes.
Each series of certificates will be issued pursuant to a pooling and
servicing agreement or a trust agreement, dated as of the related cut-off date,
among the depositor, the trustee and, if the trust includes loans, the related
master servicer. The provisions of each pooling and servicing agreement or trust
agreement will vary depending upon the nature of the related certificates and
39
the related trust fund. Forms of pooling and servicing and trust agreements are
exhibits to the Registration Statement of which this prospectus forms a part.
Each series of notes will be issued under an indenture between the related
trust fund and the trustee named in the prospectus supplement for that series.
If the trust fund includes loans, the trust fund and the servicer of the loans
will also enter into a servicing agreement. Forms of indenture and servicing
agreement have been filed as an exhibit to the registration statement of which
this prospectus forms a part.
The following summaries describe the material provisions which may appear
in each pooling and servicing agreement or trust agreement, in the case of a
series of certificates, and in each indenture and servicing agreement, in the
case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the operative agreements relating to
that series which materially differs from the description contained in this
prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
related agreements and prospectus supplement. The applicable depositor will
provide a copy of the operative agreements (without exhibits) relating to any
series without charge, upon written request of a holder of record of a
certificate or note of the series, addressed to Greenwich Capital Acceptance,
Inc. or Financial Asset Securities Corp., as applicable, 600 Steamboat Road,
Greenwich, Connecticut 06830, Attention: Asset Backed Finance Group.
GENERAL
Unless otherwise specified in the related prospectus supplement, the
securities of each series will
o be issued in fully registered form only, in the authorized
denominations specified in the prospectus supplement,
o evidence specified beneficial ownership interests in the trust fund
assets, in the case of a series of certificates, or be secured by the
pledge of the trust fund assets, in the case of a series of notes, and
o not be entitled to payments in respect of the assets included in any
other trust fund established by the depositor.
The securities will not represent obligations of the depositor or any of its
affiliates. The loans will not be insured or guaranteed by any governmental
entity or other person, unless otherwise specified in the related prospectus
supplement.
To the extent provided in the related operative agreements, each trust fund
will consist of the following:
o the assets as from time to time are subject to the related agreement,
exclusive of any amounts specified in the related prospectus
supplement as "retained interest";
40
o those assets as from time to time are required to be deposited in the
related security account as defined under the heading "Operative
Agreements--Payments on Loans; Deposits to Security Account" in this
prospectus;
o property which secured a loan and which is acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure; and
o primary mortgage insurance policies, FHA insurance and VA guarantees,
if any, and any other insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related
agreement.
If specified in the related prospectus supplement, a trust fund may also include
one or more of the following:
o reinvestment income on payments received on the trust fund assets,
o a reserve fund,
o a pool insurance policy,
o a special hazard insurance policy,
o a bankruptcy bond,
o one or more letters of credit,
o a surety bond,
o guaranties, or
o similar instruments or other agreements.
Each series of securities will be issued in one or more classes. Each class
of securities of a series will evidence beneficial ownership of a specified
portion or percentage - which may be 0% - of future interest payments and a
specified portion or percentage - which may be 0% - of future principal payments
on the assets in the related trust fund. A series of securities may include one
or more classes that are senior in right to payment to one or more other classes
of securities of the series. A series or classes of securities may be covered by
insurance policies, surety bonds or other forms of credit enhancement, in each
case as described in this prospectus and in the related prospectus supplement.
Distributions on one or more classes of a series of securities may be made prior
to being made on one or more other classes, after the occurrence of specified
events, in accordance with a schedule or formula, on the basis of collections
from designated portions of the trust fund assets or on a different basis, in
each case as specified in the related prospectus supplement. The timing and
amounts of distributions may vary among classes or over time as specified in the
related prospectus supplement.
Unless otherwise specified in the related prospectus supplement,
distributions of principal and interest, or, where applicable, of principal only
or interest only, on the related securities will
41
be made by the trustee on each distribution date. Distributions will be made
monthly, quarterly, semi-annually, or at such other intervals and on the dates
as are specified in the related prospectus supplement, in proportion to the
percentages specified in the prospectus supplement. Distributions will be made
to the persons in whose names the securities are registered at the close of
business on the applicable record date specified in the related prospectus
supplement. Distributions will be made in the manner specified in the related
prospectus supplement to the persons entitled to them at the address appearing
in the register maintained for the securityholders. In the case of the final
distribution in retirement of the securities, payment will be made only upon
presentation and surrender of the securities at the office or agency of the
trustee or other person specified in the notice to securityholders of the final
distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee named in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of securities of any series but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law, the purchase and holding of certain classes of
certificates by or on behalf of an employee benefit plan or other retirement
arrangement subject to the provisions of ERISA or the Internal Revenue Code may
result in "prohibited transactions" within the meaning of ERISA and the Code.
SEE "ERISA Considerations" in this prospectus.
As to each series of securities, an election may be made to treat the
related trust fund, or designated portion of the trust fund, as a "real estate
mortgage investment conduit" (REMIC) as defined in the Internal Revenue Code.
The related prospectus supplement will specify whether a REMIC election is to be
made. Alternatively, the operative agreement for a series may provide that a
REMIC election may be made at the discretion of the depositor or the master
servicer and may only be made if certain conditions are satisfied. As to any
series of securities for which a REMIC election will be made, the terms and
provisions applicable to the making of the REMIC election, as well as any
material federal income tax consequences to securityholders not otherwise
described in this prospectus, will be set forth in the related prospectus
supplement. If a REMIC election is made with respect to a series, one of the
classes will be designated as evidencing the sole class of "residual interests"
in the related REMIC, as defined in the Code. All other classes of securities in
that series will constitute "regular interests" in the related REMIC, as defined
in the Code. As to each series with respect to which a REMIC election is to be
made, the master servicer or a holder of the related residual certificate will
be obligated to take all actions required in order to comply with applicable
laws and regulations and will be obligated to pay any prohibited transaction
taxes. Unless otherwise specified in the related prospectus supplement, the
master servicer will be entitled to reimbursement for any such payment from the
assets of the trust fund or from any holder of the related residual certificate.
DISTRIBUTIONS ON SECURITIES
GENERAL. In general, the method of determining the amount of distributions
on a particular series of securities will depend on the type of credit support,
if any, that is used with respect to that series. SEE "Credit Enhancement" in
this prospectus. Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the secur-
42
ities of a particular series. The prospectus supplement for each series of
securities will describe the method to be used in determining the amount of
distributions on the securities of that series.
The trustee will make distributions allocable to principal and interest on
the securities out of, and only to the extent of, funds in the related security
account, including any funds transferred from any reserve account. As between
securities of different classes and as between distributions of principal (and,
if applicable, between distributions of principal prepayments and scheduled
payments of principal) and interest, distributions made on any distribution date
will be applied as specified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, distributions to any
class of securities will be made pro rata to all securityholders of that class.
AVAILABLE FUNDS. All distributions on the securities of each series on each
distribution date will be made from Available Funds in accordance with the terms
described in the related prospectus supplement and specified in the related
operative agreement. Unless otherwise provided in the related prospectus
supplement, the term "Available Funds" for each distribution date will equal the
sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account of
principal, including principal prepayments, if any, and prepayment
penalties, if so provided in the related prospectus supplement, and
interest on the mortgage loans in the related trust fund (including
Liquidation Proceeds and Insurance Proceeds and amounts drawn under
letters of credit or other credit enhancement instruments as permitted
thereunder and as specified in the related operative agreement)
received by the master servicer after the cut-off date and on or prior
to the related determination date specified in the prospectus
supplement except:
o all payments which were due on or before the cut-off date;
o all Liquidation Proceeds and all Insurance Proceeds, all
principal prepayments and all other proceeds of any loan
purchased by the depositor, the master servicer, any sub-servicer
or any seller pursuant to the related operative agreement that
were received after the prepayment period specified in the
prospectus supplement and all related payments of interest
representing interest for any period after the related collection
period;
o all scheduled payments of principal and interest due on a date or
dates subsequent to the first day of the month of distribution;
o amounts received on particular loans as late payments of
principal or interest or other amounts required to be paid by
borrowers, but only to the extent of any unreimbursed advance in
respect of those loans made by the master servicer, the related
sub-servicers, support servicers or the trustee;
o amounts representing reimbursement, to the extent permitted by
the related operative agreement and as described under the
heading "--Advances" immediately below, for advances made by the
master servicer, sub-servicers,
43
support servicers or the trustee that were deposited into the
security account, and amounts representing reimbursement for
certain other losses and expenses incurred by the master servicer
or the depositor and described below; and
o that portion of each collection of interest on a particular loan
in the trust fund which represents servicing compensation payable
to the master servicer or retained interest which is to be
retained from such collection or is permitted to be retained from
related Insurance Proceeds, Liquidation Proceeds or proceeds of
loans purchased pursuant to the related operative agreement;
(ii) the amount of any advance made by the master servicer, sub-servicer,
support servicer or the trustee as described under "--Advances"
immediately below and deposited by it in the security account;
(iii) if applicable, amounts withdrawn from a reserve account;
(iv) any applicable, amounts provided under a letter of credit, insurance
policy, surety bond or other third-party credit enhancement; and
(v) if applicable, the amount of any prepayment interest shortfall.
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the related
prospectus supplement, interest will accrue on the aggregate principal balance
of each class of securities or the aggregate notional principal balance of each
class of securities entitled to distributions of interest only at the
pass-through rate (or interest rate) and for the periods specified in the
prospectus supplement. Except in the case of a class of accrual securities that
provides for interest that accrues but is not currently payable, the
pass-through rate may be a fixed rate or an adjustable rate that adjusts as
specified in the prospectus supplement. Interest accrued during each specified
period on each class of securities entitled to interest will be distributable on
the distribution dates specified in the related prospectus supplement, to the
extent that funds are available, until the aggregate principal balance of the
securities of that class has been distributed in full or, in the case of a class
of securities entitled only to distributions allocable to interest, until the
aggregate notional principal balance of that class is reduced to zero or for the
period of time designated in the related prospectus supplement. The original
principal balance of each security will equal the aggregate distributions
allocable to principal to which that security is entitled. Unless otherwise
specified in the related prospectus supplement, distributions allocable to
interest on each security that is not entitled to distributions allocable to
principal will be calculated based on the notional principal balance of that
security. The notional principal balance of a security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
With respect to any class of accrual securities, if specified in the
related prospectus supplement, any interest that has accrued but is not paid on
any distribution date will be added to the aggregate principal balance of that
class on that distribution date. Unless otherwise specified in the related
prospectus supplement, distributions of interest on each class of accrual
securities will commence only after the occurrence of the events specified in
the prospectus supplement.
44
Unless otherwise specified in the related prospectus supplement, the beneficial
ownership interest of a class of accrual securities in the trust fund will
increase on each distribution date, as reflected in the aggregate principal
balance of that class, by the amount of interest that accrued on that class
during the preceding interest accrual period but was not required to be
distributed to the class on the distribution date. Each class of accrual
securities will thereafter accrue interest on the outstanding aggregate
principal balance of that class as so increased.
DISTRIBUTIONS OF PRINCIPAL. Unless otherwise specified in the related
prospectus supplement, the aggregate principal balance of any class of
securities entitled to distributions of principal will equal
o the original aggregate principal balance of that class as specified in
the related prospectus supplement
REDUCED BY
o all distributions reported to securityholders of that class as
allocable to principal
INCREASED BY
o in the case of a class of accrual securities, all interest accrued but
not then distributable on that class and
SUBJECT TO
o in the case of adjustable rate certificates, the effect of any
negative amortization.
The related prospectus supplement will specify the method by which the amount of
principal to be distributed on the securities on each distribution date will be
calculated and the manner in which the amount will be allocated among the
classes of securities entitled to distributions of principal.
If so provided in the related prospectus supplement, one or more classes of
senior securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments in the
percentages and under the circumstances or for the periods specified in the
prospectus supplement. Any allocation of principal prepayments to a class or
classes of senior securities will have the effect of accelerating the
amortization of the senior securities while increasing the interests evidenced
by the subordinated securities in the related trust fund. Increasing the
interests of the subordinated securities relative to that of the senior
securities is intended to preserve the availability of the subordination
provided by the subordinated securities. SEE "Credit Enhancement--Subordination"
in this prospectus.
UNSCHEDULED DISTRIBUTIONS. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described in this paragraph and the following
45
paragraph and in the prospectus supplement. The trustee will be required to make
such unscheduled distributions on the day and in the amount specified in the
related prospectus supplement if, due to substantial payments of principal -
including principal prepayments - on the trust fund assets, the trustee or the
master servicer determines that the funds available or anticipated to be
available from the security account and, if applicable, from any reserve account
may be insufficient to make required distributions on the securities on that
distribution date. Unless otherwise specified in the related prospectus
supplement, the amount of any unscheduled distribution that is allocable to
principal will not exceed the amount that would otherwise have been required to
be distributed as principal on the securities on the next distribution date.
Unless otherwise specified in the related prospectus supplement, all unscheduled
distributions will include interest at the applicable pass-through rate, if any,
on the amount of the unscheduled distribution allocable to principal for the
period and to the date specified in the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
securities would have been made on the next distribution date, and with respect
to securities of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the trustee prior to the date of distribution.
ADVANCES
Unless otherwise provided in the related prospectus supplement, the master
servicer will be required to make advances, from its own funds, from funds
advanced by sub-servicers or support servicers or from funds held in the
security account for future distributions to the securityholders. On each
distribution date, the amount of any advances will be equal to the aggregate of
payments of principal and interest that were delinquent on the related
determination date and were not advanced by any sub-servicer, subject to the
master servicer's determination that these advances will be recoverable from
late payments by borrowers, Liquidation Proceeds, Insurance Proceeds or
otherwise. In the case of cooperative loans, the master servicer also will be
required to advance any unpaid maintenance fees and other charges under the
related proprietary leases as specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to the securityholders rather
than to guarantee or insure against losses. If advances are made by the master
servicer from cash being held for future distribution to securityholders, the
master servicer will replace those funds on or before any future distribution
date to the extent that funds in the applicable security account on a
distribution date would be less than the amount required to be available for
distributions to securityholders on that date. Any funds advanced by the master
servicer will be reimbursable to the master servicer out of recoveries on the
specific loans with respect to which the advances were made (E.G., late payments
made by the related borrower, any related Insurance Proceeds, Liquidation
Proceeds or proceeds of any loan purchased by a sub-servicer or a seller under
the circumstances described in this prospectus). Advances by the master servicer
and any advances by a sub-servicer or a support servicer also will be
reimbursable to the master servicer or sub-
46
servicer or support servicer, as applicable, from cash otherwise distributable
to securityholders, including the holders of senior securities, to the extent
that the master servicer determines that any advances previously made are not
ultimately recoverable as described in this paragraph. The master servicer also
will be obligated to make advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by borrowers on a timely basis. Funds so advanced
are reimbursable to the master servicer to the extent permitted by the related
operative agreement. If specified in the related prospectus supplement, the
obligations of the master servicer to make advances may be supported by a cash
advance reserve fund, a surety bond or other arrangement, in each case as
described in the related prospectus supplement.
The master servicer or sub-servicer may enter into a support agreement with
a support servicer pursuant to which the support servicer agrees to provide
funds on behalf of the master servicer or sub-servicer in connection with the
obligation of the master servicer or sub-servicer, as the case may be, to make
advances. The support agreement will be delivered to the trustee and the trustee
will be authorized to accept a substitute support agreement in exchange for an
original support agreement, provided that the substitution of the support
agreement will not adversely affect the rating or ratings assigned to the
securities by each rating agency named in the related prospectus supplement.
Unless otherwise provided in the prospectus supplement, in the event the
master servicer, a sub-servicer or a support servicer fails to make an advance,
the trustee will be obligated to make the advance in its capacity as successor
servicer. If the trustee makes an advance, it will be entitled to be reimbursed
for that advance to the same extent and degree as the master servicer, a
sub-servicer or a support servicer is entitled to be reimbursed for advances.
SEE "--Distributions on Securities" above.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a distribution date and
except as otherwise set forth in the related prospectus supplement, the master
servicer or the trustee will furnish to each securityholder of record of the
related series a statement setting forth, to the extent applicable to that
series of securities, among other things:
o the amount of the distribution that is allocable to principal,
separately identifying the aggregate amount of any principal prepayments
and, if specified in the prospectus supplement, any prepayment penalties
included in the distribution;
o the amount of the distribution allocable to interest;
o the amount of any advances;
o the aggregate amount (a) otherwise allocable to the subordinated
securityholders on that distribution date and (b) withdrawn from the
reserve fund, if any, that is included in the amounts distributed to the
senior securityholders;
47
o the outstanding aggregate principal balance or notional principal
balance of each class after giving effect to the distribution of
principal on that distribution date;
o the percentage of principal payments on the loans (excluding
prepayments), if any, which each class will be entitled to receive on
the following distribution date;
o the percentage of principal prepayments on the mortgage loans, if any,
which each class will be entitled to receive on the following
distribution date;
o the amount of the servicing compensation retained or withdrawn from the
security account by the master servicer and the amount of additional
servicing compensation received by the master servicer attributable to
penalties, fees, excess Liquidation Proceeds and other similar charges
and items;
o the number and aggregate principal balance of mortgage loans delinquent,
but not in foreclosure, (i) from 30 to 59 days, (ii) from 60 to 89 days
and (iii) 90 days or more, as of the close of business on the last day
of the calendar month preceding that distribution date;
o the number and aggregate principal balance of mortgage loans delinquent
and in foreclosure (i) from 30 to 59 days, (ii) from 60 to 89 days and
(iii) 90 days or more, as of the close of business on the last day of
the calendar month preceding that distribution date;
o the book value of any real estate acquired through foreclosure or grant
of a deed in lieu of foreclosure and, if the real estate secured a
Multifamily Loan, any additional information specified in the prospectus
supplement;
o if a class is entitled only to a specified portion of interest payments
on the loans in the related pool, the pass-through rate, if adjusted
from the date of the last statement, of the loans expected to be
applicable to the next distribution to that class;
o if applicable, the amount remaining in any reserve account at the close
of business on that distribution date;
o the pass-through rate as of the day prior to the immediately preceding
distribution date; and
o the amounts remaining under any letters of credit, pool policies or
other forms of credit enhancement applicable to the certificates.
Where applicable, any amount set forth in the above list may be expressed
as a dollar amount per single security of the relevant class having the
percentage interest specified in the prospectus supplement. The report to
securityholders for any series of securities may include additional or other
information of a similar nature to that specified in the above list.
48
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail, to each
securityholder of record at any time during such calendar year, a report setting
forth:
o the aggregate of the amounts for that calendar year reported pursuant
to the first two bullet points in the immediately preceding list or,
in the event that the recipient was a securityholder of record only
during a portion of the calendar year, for the applicable portion of
the year; and
o other customary information as may be deemed necessary or desirable
for securityholders to have in order to prepare their tax returns.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
series of securities or with respect to the assets in the related trust fund.
Credit enhancement may take the form of one or more of the following:
o a limited financial guaranty policy issued by an entity named in the
related prospectus supplement,
o the subordination of one or more classes of the securities of that
series,
o the establishment of one or more reserve accounts,
o the use of a cross-support feature,
o a pool insurance policy, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment contract,
or
o any other method of credit enhancement described in the related
prospectus supplement.
Unless otherwise specified in the related prospectus supplement, any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the securities and
interest. If losses occur which exceed the amount covered by the credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of deficiencies.
SUBORDINATION
If specified in the related prospectus supplement, protection afforded to
holders of one or more classes of the senior securities of a series by means of
the subordination feature will be accomplished by the holders of one or more
other classes of that series having a preferential right to distributions in
respect of scheduled principal, principal prepayments, interest or any
49
combination thereof that otherwise would have been payable to the holders of one
or more other subordinated classes of securities of that series under the
circumstances and to the extent specified in the prospectus supplement. If
specified in the related prospectus supplement, protection may also be afforded
to the holders of the senior securities of a series by:
o reducing the ownership interest of the holders of the related
subordinated securities,
o a combination of the subordination feature and reducing the ownership
interest of the subordinated securityholders, or
o as otherwise described in the related prospectus supplement.
If specified in the related prospectus supplement, delays in receipt of
scheduled payments on the loans and losses on defaulted loans will be borne
first by the various classes of subordinated securities and thereafter by the
various classes of senior securities, in each case under the circumstances and
subject to the limitations specified in that prospectus supplement.
The related prospectus supplement may also limit the following:
o the aggregate distributions in respect of delinquent payments on the
loans over the lives of the securities or at any time,
o the aggregate losses in respect of defaulted loans which must be borne
by the subordinated securities by virtue of their subordination, and
o the amount of the distributions otherwise distributable to the
subordinated securityholders that will be distributable to senior
securityholders on any distribution date.
If aggregate distributions in respect of delinquent payments on the loans or
aggregate losses in respect of the loans were to exceed the amount specified in
the related prospectus supplement, holders of the senior securities would
experience losses on their securities.
In addition to or in lieu of the foregoing, if specified in the related
prospectus supplement, all or any portion of distributions otherwise payable to
holders of the subordinated securities on any distribution date may instead be
deposited into one or more reserve accounts established with the trustee. The
related prospectus supplement may specify that deposits in any reserve account
may be made
o on each distribution date,
o for specified periods, or
o until the balance in the reserve account has reached a specified
amount and, following payments from the reserve account to holders of
the senior securities or otherwise, thereafter to the extent necessary
to restore the balance in the reserve account to the specified level.
50
If specified in the related prospectus supplement, amounts on deposit in the
reserve account may be released to the holders of the class or classes of
securities specified in the prospectus supplement at the times and under the
circumstances specified in the prospectus supplement.
If specified in the related prospectus supplement, various classes of
senior securities and subordinated securities may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated securities, respectively, through a cross-support mechanism or
otherwise.
As among classes of senior securities and as among classes of subordinated
securities, distributions may be allocated among these classes as follows:
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events or otherwise,
in each case as specified in the related prospectus supplement. As among classes
of subordinated securities, the related prospectus supplement will specify the
allocation of payments to holders of the related senior securities on account of
delinquencies or losses and the allocation payments to any reserve account.
POOL INSURANCE POLICIES
The related prospectus supplement may specify that a separate pool
insurance policy will be obtained for the pool. This policy will be issued by
the pool insurer named in the prospectus supplement. Subject to the limits
described in this section, each pool insurance policy will cover loss by reason
of default in payment on loans in the related pool in an amount equal to a
percentage, which is specified in the related prospectus supplement, of the
aggregate principal balances of the loans on the cut-off date which are not
covered as to their entire outstanding principal balances by primary mortgage
insurance policies. As more fully described in the following paragraph, the
master servicer will present claims to the pool insurer on behalf of itself, the
trustee and the securityholders. However, the pool insurance policies are not
blanket policies against loss, since claims under the policies may only be made
respecting particular defaulted loans and only upon satisfaction of the
conditions precedent described in the following paragraph. Unless otherwise
specified in the related prospectus supplement, no pool insurance policy will
cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy.
Unless otherwise specified in the related prospectus supplement, the pool
insurance policy will provide that no claims may be validly presented unless the
following conditions are satisfied:
o any required primary mortgage insurance policy is in effect for the
defaulted loan and a claim under that policy has been submitted and
settled;
51
o hazard insurance on the related mortgaged property has been kept in
force and real estate taxes and other protection and preservation
expenses have been paid;
o if there has been physical loss or damage to the mortgaged property,
the property has been restored to its physical condition, reasonable
wear and tear excepted, at the time of issuance of the policy; and
o the insured has acquired good and merchantable title to the mortgaged
property free and clear of liens except certain permitted
encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the option
EITHER
o to purchase the property securing the defaulted loan at a price equal
to the loan's principal balance plus accrued and unpaid interest at
the loan rate to the date of purchase plus certain expenses incurred
by the master servicer on behalf of the trustee and securityholders,
OR
o to pay the amount by which the sum of the principal balance of the
defaulted loan plus accrued and unpaid interest at the loan rate to
the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the mortgaged
property,
in either case net of amounts paid or assumed to have been paid under the
related primary mortgage insurance policy.
If any property securing a defaulted loan is damaged and proceeds, if any,
from the related hazard insurance policy or any applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the pool insurance policy, the master
servicer will not be required to expend its own funds to restore the damaged
property unless it determines that
o the restoration will increase the proceeds to securityholders on
liquidation of the related loan after reimbursement to the master
servicer of its expenses, and
o the master servicer will be able to recover its expenses from proceeds
of the sale of the property or proceeds of the related pool insurance
policy or any related primary mortgage insurance policy.
Unless otherwise specified in the related prospectus supplement, no pool
insurance policy will insure against losses sustained by reason of a default
arising, among other things, from
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or persons
involved in the origination of the loan, or
o failure to construct a mortgaged property in accordance with plans and
specifications.
52
Many primary mortgage insurance policies also do not insure against these types
of losses. Nevertheless, a failure of coverage attributable to one of the
foregoing events might result in a breach of the related seller's
representations and, in that event, might give rise to an obligation on the part
of the seller to purchase the defaulted loan if the breach cannot be cured. No
pool insurance policy will cover a claim in respect of a defaulted loan that
occurs when the loan's servicer, at the time of default or thereafter, was not
approved by the insurer. Many primary mortgage insurance policies also do not
cover claims in this case.
Unless otherwise specified in the related prospectus supplement, the
original amount of coverage under the pool insurance policy will be reduced over
the life of the related securities by the aggregate dollar amount of claims
paid, less the aggregate of the net amounts realized by the pool insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
certain expenses incurred by the master servicer as well as accrued interest on
delinquent loans to the date of payment of the claim, unless otherwise specified
in the related prospectus supplement. Accordingly, if aggregate net claims paid
under any pool insurance policy reach the original policy limit, coverage under
that pool insurance policy will be exhausted and any further losses will be
borne by the securityholders.
The terms of any pool insurance policy relating to a pool of Manufactured
Housing Contracts or Home Improvement Contracts will be described in the related
prospectus supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related prospectus supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. These mortgage loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured by
the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time the loan was originated.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by the Department of Housing and Urban Development
(HUD), or by the master servicer or any sub-servicer, and are paid to the FHA.
The regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged property to HUD or
upon assignment of the defaulted mortgage loan to HUD. With respect to a
defaulted FHA-insured Single Family Loan, the master servicer or any
sub-servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined by the master servicer or sub-servicer or HUD that the default
was caused by circumstances beyond the mortgagor's control, the master servicer
or such sub-servicer is expected to make an effort to avoid foreclosure by
entering, if feasible, into one of a number of available forms of forbearance
plans with the mortgagor. These
53
plans may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made up on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the maturity date. In addition, when this type of default is
accompanied by certain other criteria, HUD may provide relief by making payments
to the master servicer or sub-servicer in partial or full satisfaction of
amounts due under the mortgage loan or by accepting assignment of the loan from
the master servicer or sub-servicer. Any payments made by HUD are to be repaid
by the mortgagor to HUD. With certain exceptions, at least three full monthly
installments must be due and unpaid under the mortgage loan, and HUD must have
rejected any request for relief from the mortgagor, before the master servicer
or sub-servicer may initiate foreclosure proceedings.
In most cases, HUD has the option to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash. Claims have
not been paid in debentures since 1965. HUD debentures issued in satisfaction of
FHA insurance claims bear interest at the applicable HUD debentures' interest
rate. The master servicer or sub-servicer of each FHA-insured Single Family Loan
will be obligated to purchase any HUD debenture issued in satisfaction of a
mortgage loan upon default for an amount equal to the debenture's principal
amount.
The amount of insurance benefits paid by the FHA generally is equal to the
entire unpaid principal amount of the defaulted mortgage loan adjusted to
reimburse the master servicer or sub-servicer for certain costs and expenses and
to deduct certain amounts received or retained by the master servicer or
sub-servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
property to HUD, the master servicer or sub-servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to the conveyance date generally only to the extent
allowed pursuant to the related forbearance plan approved by HUD. When
entitlement to insurance benefits results from assignment of the mortgage loan
to HUD, the insurance payment includes full compensation for interest accrued
and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA-insured Single Family Loan, bears interest from the date
which is 30 days after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the mortgage loan and, upon assignment,
from the date of assignment to the date of payment of the claim, in each case at
the same interest rate as the applicable HUD debenture interest rate.
Single Family Loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended, which permits a veteran, the
spouse of a veteran in certain cases, to obtain a mortgage loan guaranteed by
the VA covering financing of the purchase of a one- to four-family dwelling unit
at interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no Single Family Loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for that mortgage loan.
The maximum guarantee that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38
54
U.S.C. Section 1803(a), as amended. As of November 1, 1998 the maximum guarantee
that may be issued by the VA under a VA-guaranteed mortgage loan of more than
$144,000 is the lesser of 25% of the original principal amount of the mortgage
loan and $50,570. The liability on the guarantee is reduced or increased, pro
rata, with any reduction or increase in the amount of indebtedness, but in no
event will the amount payable under the guaranty exceed the amount of the
original guaranty. The VA may, at its option and without regard to the guaranty,
make full payment to a mortgage holder of unsatisfied indebtedness on a mortgage
loan upon the loan's assignment to the VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the master
servicer or sub-servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim under the guaranty is submitted after
liquidation of the mortgaged property.
The amount payable under the guaranty will be the percentage of the
VA-guaranteed Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that these amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related prospectus supplement, a separate special
hazard insurance policy will be obtained for the pool and will be issued by the
special hazard insurer named in the prospectus supplement. Subject to the
limitations described in the immediately following sentence, each special hazard
insurance policy will protect holders of the related securities from
o loss by reason of damage to mortgaged properties caused by certain
hazards -including earthquakes and, to a limited extent, tidal waves
and related water damage or as otherwise specified in the prospectus
supplement - not insured against under the standard form of hazard
insurance policy for the respective states in which the mortgaged
properties are located or under a flood insurance policy if the
mortgaged property is located in a federally designated flood area,
and
o loss caused by reason of the application of the coinsurance clause
contained in hazard insurance policies.
SEE "Operative Agreements--Hazard Insurance" in this prospectus. No special
hazard insurance policy will cover losses occasioned by fraud or conversion by
the trustee or master servicer, war, insurrection, civil war, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear or chemical reaction, flood (if the
mortgaged property is located in a federally designated flood area), nuclear or
chemical contamination and certain other risks. The amount of coverage under any
special hazard insurance policy will be specified in the related prospectus
supplement. Each special hazard
55
insurance policy will provide that no claim may be paid unless hazard insurance
and, if applicable, flood insurance on the related mortgaged property have been
kept in force and other protection and preservation expenses have been paid.
Subject to the limitations set forth in the immediately preceding
paragraph, and unless otherwise specified in the related prospectus supplement,
each special hazard insurance policy will provide coverage where there has been
damage to property securing a foreclosed mortgage loan, and title to the
mortgaged property has been acquired by the insured, to the extent that the
damage is not covered by the hazard insurance policy or flood insurance policy,
if any, maintained by the borrower or the master servicer. In this circumstance,
the special hazard insurer will pay the LESSER of
o the cost to repair or replace the mortgaged property, and
o upon transfer of the property to the special hazard insurer, the
unpaid principal balance of the loan at the time the property is
acquired by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement, together with certain
expenses incurred by the master servicer with respect to the property.
If the unpaid principal balance of a loan plus accrued interest and certain
servicing expenses are paid by the special hazard insurer, the amount of further
coverage under the related special hazard insurance policy will be reduced by
that amount less any net proceeds from the sale of the property. Any amount paid
as the cost to repair the damaged property will also reduce coverage by such
amount. So long as a pool insurance policy remains in effect, the payment by the
special hazard insurer to cover the unpaid principal balance of a loan plus
accrued interest and certain servicing expenses or to cover the cost to repair a
mortgaged property will not affect the total insurance proceeds paid to
securityholders, but will affect the relative amounts of coverage remaining
under the special hazard insurance policy and the pool insurance policy.
Since each special hazard insurance policy will be designed to permit full
recovery under the mortgage pool insurance policy in circumstances in which
recoveries would otherwise be unavailable because mortgaged properties have been
damaged by a cause not insured against by a standard hazard policy and thus
would not be restored, each operative agreement will provide that, unless
otherwise specified in the related prospectus supplement, the master servicer
will be under no obligation to maintain the special hazard insurance policy once
the related pool insurance policy has been terminated or been exhausted due to
payment of claims.
To the extent specified in the related prospectus supplement, the master
servicer may deposit in a special trust account, cash, an irrevocable letter of
credit or any other instrument acceptable to each rating agency named in the
prospectus supplement, in order to provide protection in lieu of or in addition
to that provided by a special hazard insurance policy. The amount of any special
hazard insurance policy or of the deposit to the special trust account relating
to securities may be reduced so long as the reduction will not result in a
downgrading of the rating of the securities by any rating agency named in the
prospectus supplement.
56
The terms of any special hazard insurance policy relating to a pool of
Manufactured Housing Contracts or Home Improvement Contracts will be described
in the related prospectus supplement.
BANKRUPTCY BONDS
If specified in the related prospectus supplement, a bankruptcy bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in the prospectus supplement. Each bankruptcy bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a loan or a reduction by the court of the principal
amount of a loan. The bankruptcy bond will also cover unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under any bankruptcy bond will be set
forth in the related prospectus supplement. Coverage under a bankruptcy bond may
be cancelled or reduced by the master servicer if the cancellation or reduction
would not adversely affect the then current rating of the securities by any
rating agency named in the prospectus supplement. SEE "Material Legal Aspects of
the Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on
Lenders" in this prospectus.
To the extent specified in the related prospectus supplement, the master
servicer may deposit in a special trust account, cash, an irrevocable letter of
credit or any other instrument acceptable to each rating agency named in the
prospectus supplement, to provide protection in lieu of or in addition to that
provided by a bankruptcy bond. The amount of any bankruptcy bond or of the
deposit to the special trust account relating to the securities may be reduced
so long as the reduction would not result in a downgrading of the rating of the
securities by any rating agency named in the prospectus supplement.
The terms of any bankruptcy bond relating to a pool of Manufactured Housing
Contracts or Home Improvement Contracts will be described in the related
prospectus supplement.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the National Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of mortgage loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of a mortgage loan may be up to 40 years and the ratio of loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the National Housing Act allows HUD to insure mortgage
loans made for the purchase or refinancing of existing apartment projects which
are at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work but repairs may be
made for, generally up to the greater of 15% of the value of the project or a
dollar amount per apartment unit established from time to time by HUD. In
general the loan term may
57
not exceed 35 years and a loan-to-value ratio of no more than 85% is required
for the purchase of a project and a loan-to-value ratio of no more than 70% for
the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. The insurance does not cover 100% of the mortgage loan
but is subject to certain deductions and certain losses of interest from the
date of the default.
RESERVE ACCOUNTS
If specified in the related prospectus supplement, credit support with
respect to a series of securities may be provided by the establishment and
maintenance of one or more reserve accounts for that series, in trust, with the
related trustee. The prospectus supplement will specify whether or not a reserve
accounts will be included in the related trust fund.
The reserve account for a series of securities will be funded in one of the
following ways:
o by a deposit of cash, U.S. Treasury securities, instruments evidencing
ownership of principal or interest payments on U.S. Treasury
securities, letters of credit, demand notes, securities of deposit or
a combination of these, in the aggregate amount specified in the
related prospectus supplement;
o by deposit from time to time of amounts specified in the related
prospectus supplement to which the subordinated securityholders, if
any, would otherwise be entitled; or
o in such other manner as the prospectus supplement may specify.
Any amounts on deposit in the reserve account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in permitted
investments. Unless otherwise specified in the related prospectus supplement,
"permitted investments" will include obligations of the United States and
certain of its agencies, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks and certain
repurchase agreements of United States government securities with eligible
commercial banks. If a letter of credit is deposited with the trustee, the
letter of credit will be irrevocable. Unless otherwise specified in the related
prospectus supplement, any instrument deposited in a reserve account will name
the trustee, in its capacity as trustee for the securityholders, as beneficiary
and will be issued by an entity acceptable to each rating agency named in the
prospectus supplement. Additional information with respect to instruments
deposited in the reserve account will be set forth in the related prospectus
supplement.
Any amounts deposited, and payments on instruments deposited, in a reserve
account will be available for withdrawal from the reserve account for
distribution to securityholders, for the purposes, in the manner and at the
times specified in the related prospectus supplement.
58
CROSS SUPPORT
If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of securities. In this case, credit support may be provided by
a cross support feature which requires that distributions be made with respect
to securities evidencing a beneficial ownership interest in, or secured by,
other asset groups within the same trust fund. The related prospectus supplement
for a series which includes a cross support feature will describe the manner and
conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided and the application of the
coverage to the identified trust funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
If specified in the related prospectus supplement, a trust fund may also
include insurance, guaranties, surety bonds, letters of credit or similar
arrangements for the following purposes:
o to maintain timely payments or provide additional protection against
losses on the assets included in the trust fund,
o to pay administrative expenses, or
o to establish a minimum reinvestment rate on the payments made in
respect of the assets included in the trust fund or principal payment
rate on the assets.
These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the prospectus supplement.
FINANCIAL INSTRUMENTS
If specified in the related prospectus supplement, the trust fund may
include one or more swap arrangements or other financial instruments that are
intended to meet the following goals:
o to convert the payments on some or all of the assets from fixed to
floating payments, or from floating to fixed, or from floating based
on a particular index to floating based on another index;
o to provide payments in the event that any index rises above or falls
below specified levels; or
59
o to provide protection against interest rate changes, certain types of
losses, including reduced market value, or other payment shortfalls to
one or more classes of the related series.
If a trust fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the certificates will
be affected primarily by the amount and timing of principal payments received on
or in respect of the assets included in the related trust fund. The original
terms to maturity of the loans in a given pool will vary depending upon the
types of loans included. Each prospectus supplement will contain information
with respect to the types and maturities of the loans in the related pool.
Unless otherwise specified in the related prospectus supplement, loans may be
prepaid, without penalty, in full or in part at any time. Multifamily Loans may
prohibit prepayment for a specified period after origination, may prohibit
partial prepayments entirely, and may require the payment of a prepayment
penalty upon prepayment in full or in part. The prepayment experience of the
loans in a pool will affect the life of the related series of securities.
The rate of prepayments on the loans cannot be predicted. A number of
factors, including homeowner mobility, economic conditions, the presence and
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds may affect the prepayment experience of loans.
Some of these factors, as well as other factors including limitations on
prepayment and the relative tax benefits associated with the ownership of
income-producing real property, may affect the prepayment experience of
Multifamily Loans.
Home Equity Loans and Home Improvement Contracts have been originated in
significant volume only during the past few years and neither depositor is aware
of any publicly available studies or statistics on the rate of prepayment of
these types of loans. Generally, Home Equity Loans and Home Improvement
Contracts are not viewed by borrowers as permanent financing. Accordingly, these
loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because Home Equity Loans that are revolving credit
line loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgages. The prepayment
experience of the related trust fund may also be affected by the frequency and
amount of any future draws on any revolving credit line loans. Other factors
that might be expected to affect the prepayment rate of a pool of Home Equity
Loans or Home Improvement Contracts include the amounts of, and interest rates
on, the underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and junior mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as
60
automobiles. Accordingly, these types of loans may experience a higher rate of
prepayment than traditional fixed-rate mortgage loans. In addition, any future
limitations on the right of borrowers to deduct interest payments on Home Equity
Loans for federal income tax purposes may further increase the rate of
prepayments of these loans.
Collections on Home Equity Loans that are revolving credit line loans may
vary because, among other things, borrowers may
o make payments during any month as low as the minimum monthly payment
for that month or, during the interest-only period for revolving
credit line loans and, in more limited circumstances, closed-end
loans, as to which an interest-only payment option has been selected,
the interest and the fees and charges for that month; or
o make payments as high as the entire outstanding principal balance plus
accrued interest and related fees and charges.
It is possible that borrowers may fail to make the required periodic payments.
In addition, collection on these loans may vary due to seasonal purchasing and
the payment habits of borrowers.
Unless otherwise provided in the related prospectus supplement, all
conventional loans other than Multifamily Loans will contain due-on-sale
provisions permitting the mortgagee or holder of the contract to accelerate the
maturity of the related loan upon the sale or certain other transfers of the
related mortgaged property by the borrower. As described in the related
prospectus supplement, conventional Multifamily Loans may contain due-on-sale
provisions, due-on-encumbrance provisions or both. Loans insured by the FHA, and
loans partially guaranteed by the VA, are assumable with the consent of the FHA
and the VA, respectively. Thus, the rate of prepayments of these loans may be
lower than that of conventional mortgage loans bearing comparable interest
rates. Unless otherwise provided in the related prospectus supplement, the
master servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the mortgaged
property and reasonably believes that it is entitled to do so under applicable
law. However, the master servicer will not take any enforcement action that
would impair or threaten to impair any recovery under any related insurance
policy. SEE "Operative Agreements--Collection Procedures" and "Material Legal
Aspects of the Mortgage Loans" in this prospectus for a description of certain
provisions of each operative agreement and certain legal matters that may affect
the prepayment experience of the loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, prepayment rates may be influenced by
a variety of economic, geographic, social and other factors, including changes
in housing needs, job transfers, unemployment and servicing decisions. In
general, however, if prevailing rates fall significantly below the loan rate
borne by a loan, that loan is likely to be subject to a higher prepayment rate
than would be the case if prevailing interest rates remain at or above its rate.
Conversely, if prevailing interest rates rise appreciably above the loan rate
borne by a loan, that loan is likely to experience a lower prepayment rate than
would be the case if prevailing rates remain at or below
61
its loan rate. However, there can be no assurance that these generalities will
hold true in particular cases. The rate of prepayment of Multifamily Loans may
also be affected by other factors including loan terms including the existence
of lockout periods, due-on-sale and due-on-encumbrance clauses and prepayment
changes, relative economic conditions in the area where the mortgaged properties
are located, the quality of management of the mortgaged properties and possible
changes in tax laws.
When a loan is prepaid in full, the borrower is charged interest on the
principal amount of the loan only for the number of days in the month actually
elapsed up to the date of the prepayment rather than for a full month. Unless
otherwise specified in the related prospectus supplement, the effect of a
prepayment in full will be to reduce the amount of interest passed through in
the following month to securityholders, because interest on the principal
balance of the prepaid loan will be paid only to the date of prepayment. Partial
prepayments in a given month may be applied to the outstanding principal
balances of the prepaid loans either on the first day of the month of receipt or
of the month following receipt. In the latter case, partial prepayments will not
reduce the amount of interest passed through in that month. Unless otherwise
specified in the related prospectus supplement, neither prepayments in full nor
partial prepayments will be passed through until the month following receipt.
Prepayment charges collected with respect to Multifamily Loans will be
distributed to securityholders, or to other persons entitled to them, as
described in the related prospectus supplement.
If so specified in the related prospectus supplement, the master servicer
will be required to remit to the trustee, with respect to each loan in the
related trust as to which a principal prepayment in full or a principal payment
which is in excess of the scheduled monthly payment and is not intended to cure
a delinquency was received during any due period, an amount, from and to the
extent of amounts otherwise payable to the master servicer as servicing
compensation, equal to the EXCESS, if any, of
o 30 days' interest on the principal balance of the related loan at the
loan rate net of the annual rate at which the master servicer's
servicing fee accrues, OVER
o the amount of interest actually received on that loan during the due
period, net of the master servicer's servicing fee.
If the rate at which interest is passed through to the holders of
securities of a series is calculated on a loan by loan basis, disproportionate
principal prepayments with respect to loans bearing different loan rates will
affect the yield on the securities. In general, the effective yield to
securityholders will be slightly lower than the yield otherwise produced by the
applicable security pass-through rate and purchase price because, while interest
generally will accrue on each loan from the first day of the month, the
distribution of interest generally will not be made earlier than the month
following the month of accrual.
Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any other person named in the related
prospective supplement may have the option to purchase the assets of a trust
fund to effect early retirement of the related series of securities. SEE
"Operative Agreements--Termination; Optional Termination; Optional Calls" in
this prospectus.
62
Factors other than those identified in this prospectus and in the related
prospectus supplement could significantly affect principal prepayments at any
time and over the lives of the securities. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of trust fund assets at
any time or over the lives of the securities.
The prospectus supplement relating to a series of securities will discuss
in greater detail the effect of the rate and timing of principal payments
including prepayments, delinquencies and losses on the yield, weighted average
lives and maturities of the securities.
In the event that a receiver, bankruptcy trustee, debtor in possession or
similar entity (each, an "insolvency trustee") is appointed with respect to a
seller due to its insolvency or a seller becomes a debtor under the federal
Bankruptcy Code or any similar insolvency law, the insolvency trustee may
attempt to characterize the transfer of the related mortgage loans from the
seller to the depositor as a pledge to secure a financing rather than as a sale.
In the event that this attempt were successful, the insolvency trustee might
elect, among other remedies, to accelerate payment of the related securities and
liquidate the related loans, with each securityholder being entitled to receive
its allocable share of the principal balance of the loans, together with its
allocable share of interest on the loans at the applicable pass-through rate, or
weighted average "strip rate" as defined in the related prospectus supplement,
as the case may be, to the date of payment. In this event, the related
securityholders might incur reinvestment losses with respect to principal
received and investment losses attendant to the liquidation of the loans and the
resulting early retirement of the related security. In addition, certain delays
in distributions might be experienced by the securityholders in connection with
any such insolvency proceedings.
OPERATIVE AGREEMENTS
Set forth below is a summary of the material provisions of each operative
agreement that are not described elsewhere in this prospectus. This summary does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each operative agreement applicable to a
particular series of certificates. Where particular provisions or terms used in
the operative agreements are referred to, those provisions or terms are as
specified in the agreements. Except as otherwise specified, the operative
agreements described in this prospectus contemplate a trust fund that is
comprised of loans. Although an agreement governing a trust fund that consists
of Agency Securities or Private Label Securities may contain provisions that are
similar to those described below, they will be described more fully in the
related prospectus supplement.
ASSIGNMENT OF TRUST FUND ASSETS
ASSIGNMENT OF THE TRUST FUND LOANS. When the securities of a series are
issued, the depositor named in the prospective supplement will cause the loans
comprising the related trust fund to be assigned to the trustee, together with
all principal and interest received by or on behalf of the depositor with
respect to those loans after the cut-off date, other than principal and interest
due on or before the cut-off date and other than any retained interest specified
in the related
63
prospectus supplement. Concurrently with this assignment, the trustee will
deliver the securities to the depositor in exchange for the loans. Each loan
will be identified in a schedule appearing as an exhibit to the related
agreement. The schedule will include information as to the outstanding principal
balance of each loan after application of payments due on the cut-off date, as
well as information regarding the loan rate or APR, the current scheduled
monthly payment of principal and interest, the maturity of the loan, its
loan-to-value ratio or combined loan-to-value ratio at origination and certain
other information.
In addition, the depositor will deliver to the trustee or a custodian the
following items in connection with each loan in the related trust fund:
o the original mortgage note or contract, endorsed without recourse in
blank or to the order of the trustee;
o in the case of Single Family Loans, Home Equity Loans or Multifamily
Loans, the mortgage, deed of trust or similar instrument (each, a
"mortgage") with evidence of recording indicated on the mortgage;
however, in the case of any mortgage not returned from the public
recording office, the depositor will deliver or cause to be delivered
a copy of the mortgage together with a certificate stating that the
original mortgage was delivered to the recording office;
o in the case of a contract, other than an unsecured contract, the
security interest in the mortgaged property securing the contract;
o an assignment of the mortgage or contract to the trustee, which
assignment will be in recordable form in the case of a mortgage
assignment; and
o any other security documents as may be specified in the related
prospectus supplement, including those relating to any senior
lienholder interests in the related mortgaged property.
Unless otherwise specified in the related prospectus supplement, the
depositor will promptly cause the assignments of any Single Family Loan, Home
Equity Loan and Multifamily Loan to be recorded in the appropriate public office
for real property records, except in states in which, in the opinion of counsel
acceptable to the trustee, recording is not required to protect the trustee's
interest in the loans against the claim of any subsequent transferee or any
successor to, or creditor of, the depositor or the originator of the loans.
Unless otherwise specified in the related prospectus supplement, the depositor
will promptly make or cause to be made an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the trustee's
ownership of the contracts.
With respect to any loans which are cooperative loans, the depositor will
deliver the following items to the trustee:
o the related original cooperative note endorsed, without recourse, in
blank or to the order of the trustee,
64
o the original security agreement,
o the proprietary lease or occupancy agreement,
o the recognition agreement,
o an executed financing agreement and the relevant stock certificate,
o related blank stock powers, and
o any other document specified in the related prospectus supplement.
The depositor will cause to be filed in the appropriate office an assignment and
a financing statement evidencing the trustee's security interest in each
cooperative loan.
The trustee or custodian will review the mortgage loan documents, upon
receipt, within the time period specified in the related prospectus supplement.
The trustee will hold the documents in trust for the benefit of the
securityholders. Unless otherwise specified in the related prospectus
supplement, if any of these documents are found to be missing or defective in
any material respect, the trustee or custodian will notify the master servicer
and the depositor, and the master servicer will notify the related seller. If
the seller cannot cure the omission or defect within a specified member of days
after receipt of notice, the seller will be obligated either to purchase the
loan from the trustee or to substitute a qualified substitute loan for the
defective loan. There can be no assurance that a seller will fulfill this
obligation. Although the master servicer may be obligated to enforce the
seller's obligation to the extent described in this prospectus under "Mortgage
Loan Program--Representations by Sellers; Repurchases", neither the master
servicer nor the depositor will be obligated to purchase the mortgage loan if
the seller defaults on its obligation, unless the breach also constitutes a
breach of the representations or warranties of the master servicer or the
depositor, as the case may be. Unless otherwise specified in the related
prospectus supplement, the seller's obligation to cure, purchase or substitute
constitutes the sole remedy available to the securityholders or the trustee for
the omission of, or a material defect in, a constituent loan document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
The master servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the agreement. Upon a breach of any representation of the
master servicer which materially and adversely affects the interests of the
securityholders in a loan, the master servicer will be obligated either to cure
the breach in all material respects or to purchase the loan. Unless otherwise
specified in the related prospectus supplement, this obligation to cure,
purchase or substitute constitutes the sole remedy available to the
securityholders or the trustee for a breach of representation by the master
servicer.
65
Notwithstanding the provisions of the foregoing two paragraphs, with
respect to a trust fund for which a REMIC election is to be made, unless the
related prospectus supplement otherwise provides, no purchase or substitution of
a loan will be made if the purchase or substitution would result in a prohibited
transaction tax under the Internal Revenue Code.
ASSIGNMENT OF AGENCY SECURITIES. The applicable depositor will cause any
Agency Securities included in a trust fund to be registered in the name of the
trustee or its nominee, and the trustee concurrently will execute, countersign
and deliver the securities. Each Agency Security will be identified in a
schedule appearing as an exhibit to the related pooling and servicing agreement,
which will specify as to each Agency Security its original principal amount,
outstanding principal balance as of the cut-off date, annual pass-through rate,
if any, and the maturity date.
ASSIGNMENT OF PRIVATE LABEL SECURITIES. The applicable depositor will cause
any Private Label Securities included in a trust fund to be registered in the
name of the trustee. The trustee or custodian will have possession of any
Private Label Securities that are in certificated form. Unless otherwise
specified in the related prospectus supplement, the trustee will not be in
possession, or be assignee of record, of any assets underlying the Private Label
Securities. SEE "The Trust Fund--Private Label Securities." The Private Label
Securities will be identified in a schedule appearing as an exhibit to the
related agreement, which will specify the original principal amount, the
outstanding principal balance as of the cut-off date, the annual pass-through
rate or interest rate, the maturity date and other pertinent information for the
Private Label Securities conveyed to the trustee.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each sub-servicer servicing a loan pursuant to a sub-servicing agreement
will establish and maintain a subservicing account which meets the requirements
and is otherwise acceptable to the master servicer. A sub-servicing account must
be established with a Federal Home Loan Bank or with a depository institution
(including the sub-servicer if it is a depository institution), the accounts in
which are insured by the Federal Deposit Insurance Corporation (FDIC). If a
sub-servicing account is maintained at an institution that is a Federal Home
Loan Bank or an FDIC-insured institution and, in either case, the amount on
deposit in the sub-servicing account exceeds the FDIC insurance coverage amount,
then such excess amount must be remitted to the master servicer within one
business day after receipt. In addition, the sub-servicer must maintain a
separate account for escrow and impound funds relating to the loans. Each
sub-servicer is required to deposit into its sub-servicing account on a daily
basis all amounts that it receives in respect of the loans described immediately
below under "--Sub-Servicing by Sellers", less its servicing or other
compensation. On or before the date specified in the sub-servicing agreement,
the sub-servicer will remit to the master servicer or the trustee all funds held
in the sub-servicing account with respect to the loans that are required to be
remitted. The sub-servicer is also required to advance, on the scheduled
remittance date, an amount corresponding to any monthly installment of principal
and interest, less its servicing or other compensation, on any loan the payment
of which was not received from the borrower. Unless otherwise specified in the
related prospectus supplement, this obligation of each sub-servicer to advance
continues up to and including the first of the month following the date on which
the related mortgaged property is
66
sold at a foreclosure sale or is acquired on behalf of the securityholders by
deed in lieu of foreclosure, or until the related loan is liquidated.
The master servicer will establish and maintain with respect to the related
trust fund a security account which is a separate account or accounts for the
collection of payments on the assets in the trust fund. Unless otherwise
specified in the related prospectus supplement, each security account shall meet
one of the requirements listed below.
o It must be maintained with a depository institution the debt
obligations of which (or in the case of a depository institution that
is the principal subsidiary of a holding company, the obligations of
which) are rated in one of the two highest rating categories by each
rating agency rating(s) named in the prospectus supplement.
o It must be an account the deposits in which are fully insured by the
FDIC.
o It must be an account or accounts the deposits in which are insured by
the FDIC to its established limits and the uninsured deposits in which
are otherwise secured such that, as evidenced by an opinion of
counsel, the securityholders have a claim with respect to the funds in
the security account or a perfected first priority security interest
against any collateral securing those funds that is superior to the
claims of any other depositors or general creditors of the depository
institution with which the security account is maintained.
o It must be an account otherwise acceptable to each rating agency named
in the prospectus supplement.
The collateral eligible to secure amounts in the security account is limited to
United States government securities and other high-quality permitted investments
.. A security account may be maintained as an interest-bearing account or the
funds held in the account may be invested pending each succeeding distribution
date in permitted investments. Unless otherwise specified in the related
prospectus supplement, the master servicer or its designee will be entitled to
receive any interest or other income earned on funds in the security account as
additional compensation and will be obligated to deposit in the security account
the amount of any loss immediately as realized. The security account may be
maintained with the master servicer or with a depository institution that is an
affiliate of the master servicer, provided that the master servicer or its
affiliate, as applicable, meets the standards set forth above.
On a daily basis, the master servicer will deposit in the certificate
account for each trust fund, to the extent applicable and unless otherwise
specified in the related prospectus supplement and provided in the pooling and
servicing agreement, the following payments and collections received, or
advances made, by the master servicer or on its behalf subsequent to the cut-off
date, other than payments due on or before the cut-off date and exclusive of any
amounts representing a retained interest:
o all payments on account of principal, including principal prepayments
and, if specified in the related prospectus supplement, prepayment
penalties, on the loans;
67
o all payments on account of interest on the loans, net of applicable
servicing compensation;
o Insurance Proceeds;
o Liquidation Proceeds;
o any net proceeds received on a monthly basis with respect to any
properties acquired on behalf of the securityholders by foreclosure or
deed in lieu of foreclosure;
o all proceeds of any loan or mortgaged property purchased by the master
servicer, the depositor, any sub-servicer or any seller as described
in this prospectus under "Loan Program--Representations by Sellers;
Repurchases or Substitutions" or "--Assignment of Trust Fund Assets"
above and all proceeds of any loan repurchased as described in this
prospectus under "--Termination; Optional Termination" below;
o all payments required to be deposited in the security account with
respect to any deductible clause in any blanket insurance policy
described in this prospectus under "--Hazard Insurance" below;
o any amount required to be deposited by the master servicer in
connection with losses realized on investments of funds held in the
security account made for the benefit of the master servicer; and
o all other amounts required to be deposited in the security account
pursuant to the related agreement.
PRE-FUNDING ACCOUNT
If so provided in the related prospectus supplement, the master servicer
will establish and maintain a pre-funding account in the name of the trustee on
behalf of the related securityholders into which the applicable depositor will
deposit the pre-funded amount on the related closing date. The trustee will use
the pre-funded amount to purchase subsequent loans from the depositor from time
to time during the funding period which generally runs from the closing date to
the date specified in the related prospectus supplement. At the end of the
funding period, any amounts remaining in the pre-funding account will be
distributed to the related securityholders in the manner and priority specified
in the related prospectus supplement as a prepayment of principal of the related
securities.
SUB-SERVICING OF LOANS
Each seller of a loan or any other servicing entity may act as the
sub-servicer for that loan pursuant to a sub-servicing agreement which will not
contain any terms inconsistent with the related operative agreement. While each
sub-servicing agreement will be a contract solely between the master servicer
and the related sub-servicer, the operative agreement pursuant to which a series
of securities is issued will provide that, the trustee or any successor master
servicer must recognize the sub-servicer's rights and obligations under the
sub-servicing
68
agreement, if for any reason the master servicer for that series is no longer
the master servicer of the related loans.
With the approval of the master servicer, a sub-servicer may delegate its
servicing obligations to third-party servicers, but the sub-servicer will remain
obligated under its sub-servicing agreement. Each sub-servicer will be required
to perform the customary functions of a servicer of mortgage loans. These
functions generally include
o collecting payments from borrowers and remitting collections to the
master servicer;
o maintaining hazard insurance policies as described in this prospectus
and in any related prospectus supplement, and filing and settling
claims under those policies, subject in certain cases to the master
servicer's right to approve settlements in advance;
o maintaining borrower escrow or impoundment accounts for payment of
taxes, insurance and other items required to be paid by the borrower
under the related loan;
o processing assumptions or substitutions, although, unless otherwise
specified in the related prospectus supplement, the master servicer is
generally required to enforce due-on-sale clauses to the extent their
enforcement is permitted by law and would not adversely affect
insurance coverage;
o attempting to cure delinquencies;
o supervising foreclosures;
o inspecting and managing mortgaged properties under certain
circumstances;
o maintaining accounting records relating to the loans; and
o to the extent specified in the related prospectus supplement,
maintaining additional insurance policies or credit support
instruments and filing and settling claims under them.
A sub-servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on loans, as described more fully in this
prospectus under "--Payments on Loans; Deposits to Security Account" above, and
in respect of certain taxes and insurance premiums not paid on a timely basis by
borrowers.
As compensation for its servicing duties, each sub-servicer will be
entitled to a monthly servicing fee, to the extent the scheduled payment on the
related loan has been collected, in the amount set forth in the related
prospectus supplement. Each sub-servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the note or related instruments. Each sub-servicer will be reimbursed by the
master servicer for certain expenditures which it makes, generally to the same
extent the master servicer would be reimbursed under the agreement. The master
servicer may purchase the servicing of loans if
69
the sub-servicer elects to release the servicing of the loans to the master
servicer. SEE "--Servicing and Other Compensation and Payment of Expenses"
below.
Each sub-servicer may be required to agree to indemnify the master servicer
for any liability or obligation sustained by the master servicer in connection
with any act or failure to act by the sub-servicer in its servicing capacity.
Each sub-servicer will be required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the master servicer.
Each sub-servicer will be required to service each loan pursuant to the
terms of its sub-servicing agreement for the entire term of the loan, unless the
sub-servicing agreement is earlier terminated by the master servicer or unless
servicing is released to the master servicer. The master servicer may terminate
a sub-servicing agreement without cause, upon written notice to the sub-servicer
in the manner specified in that sub-servicing agreement.
The master servicer may agree with a sub-servicer to amend a sub-servicing
agreement or, upon termination of the sub-servicing agreement, the master
servicer may act as servicer of the related loans or enter into new
sub-servicing agreements with other sub-servicers. If the master servicer acts
as servicer, it will not assume liability for the representations and warranties
of the sub-servicer which it replaces. Each sub-servicer must be a seller or
meet the standards for becoming a seller or have such servicing experience as to
be otherwise satisfactory to the master servicer and the depositor. The master
servicer will make reasonable efforts to have the new sub-servicer assume
liability for the representations and warranties of the terminated sub-servicer,
but no assurance can be given that an assumption of liability will occur. In the
event of an assumption of liability, the master servicer may in the exercise of
its business judgment, release the terminated sub-servicer from liability in
respect of such representations and warranties. Any amendments to a
sub-servicing agreement or new sub-servicing agreements may contain provisions
different from those which are in effect in the original sub-servicing
agreement. However, each sub-servicing agreement will provide that any amendment
or new agreement may not be inconsistent with or violate the original
sub-servicing agreement.
COLLECTION PROCEDURES
The master servicer, directly or through one or more sub-servicers, will
make reasonable efforts to collect all payments called for under the loans and
will, consistent with each agreement and any mortgage pool insurance policy,
primary mortgage insurance policy, FHA insurance, VA guaranty and bankruptcy
bond or alternative arrangements, follow such collection procedures as are
customary with respect to loans that are comparable to the loans included in the
related trust fund. Consistent with the preceding sentence, the master servicer
may, in its discretion,
o waive any assumption fee, late payment or other charge in connection
with a loan; and
o to the extent not inconsistent with the coverage of the loan by a pool
insurance policy, primary mortgage insurance policy, FHA insurance, VA
guaranty or bankruptcy bond or alternative arrangements, arrange with
the borrower a schedule for the liquidation
70
of delinquencies running for no more than 125 days after the
applicable due date for each payment.
Both the sub-servicer and the master servicer remain obligated to make advances
during any period when an arrangement of this type is in effect.
In certain instances in which a mortgage loan is in default (or if default
is reasonably foreseeable), the master servicer may, acting in accordance with
procedures specified in the applicable pooling and servicing agreement, permit
certain modifications of the mortgage loan rather than proceeding with
foreclosure. Modifications of this type may have the effect of reducing the
mortgage rate, forgiving the payment of principal or interest or extending the
final maturity date of the mortgage loan. Any such modified mortgage loan 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. If no satisfactory arrangement can be made for the
collection of such delinquent payments, the master servicer will continue to
follow procedures specified in the applicable pooling and servicing agreement.
These procedures could result, among other possible outcomes, in the sale of the
delinquent mortgage loan by the master servicer on behalf of the related trust
fund.
Unless otherwise specified in the related prospectus supplement, in any
case in which property securing a loan has been, or is about to be, conveyed by
the borrower, the master servicer will, to the extent it has knowledge of the
conveyance or proposed conveyance, exercise its rights to accelerate the
maturity of the loan under any applicable due-on-sale clause, but only if the
exercise of its rights is permitted by applicable law and will not impair or
threaten to impair any recovery under any primary mortgage insurance policy. If
these conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce the due-on-sale clause, or if the loan is
insured by the FHA or partially guaranteed by the VA, the master servicer will
enter into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed. Pursuant to the assumption
agreement, the transferee of the property becomes liable for repayment of the
loan and, to the extent permitted by applicable law, the original borrower also
remains liable on the loan. Any fee collected by or on behalf of the master
servicer for entering into an assumption agreement will be retained by or on
behalf of the master servicer as additional servicing compensation. In the case
of Multifamily Loans and unless otherwise specified in the related prospectus
supplement, the master servicer will agree to exercise any right it may have to
accelerate the maturity of a Multifamily Loan to the extent it has knowledge of
any further encumbrance of the related mortgaged property effected in violation
of any applicable due-on-encumbrance clause. SEE "Material Legal Aspects of the
Mortgage Loans--Due-on-Sale Clauses" in this prospectus. In connection with any
assumption, the terms of the original loan may not be changed.
With respect to cooperative loans, any prospective purchaser of a
cooperative unit will generally have to obtain the approval of the board of
directors of the relevant cooperative before purchasing the shares and acquiring
rights under the related proprietary lease or occupancy agreement. SEE "Material
Legal Aspects of the Loans" in this prospectus. This approval is usually based
on the purchaser's income and net worth and numerous other factors. Although the
71
cooperative's approval is unlikely to be unreasonably withheld or delayed, the
need to acquire approval could limit the number of potential purchasers for
those shares and otherwise limit the trust fund's ability to sell and realize
the value of those shares.
In general, a "tenant-stockholder," as defined in section 216(b)(2) of the
Internal Revenue Code, of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of section 216(b)(1) of the Code is allowed a
deduction for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and real
estate taxes allowable as a deduction under section 216(a) of the Code to the
cooperative corporation under sections 163 and 164 of the Code. In order for a
corporation to qualify under Section 216(b)(1) of the Code for the taxable year
in which these items are allowable as a deduction to the corporation, section
216(b)(1) requires, among other things, that at least 80% of the gross income of
the cooperative corporation be derived from its tenant-stockholders. By virtue
of this requirement, the status of a corporation for purposes of section
216(b)(1) of the Code must be determined on a year-to-year basis. Consequently,
there can be no assurance that cooperatives relating to particular cooperative
loans will qualify under this section for any given year. In the event that a
cooperative fail to qualify for one or more years, the value of the collateral
securing the related cooperative loan could be significantly impaired because no
deduction would be allowable to tenant-stockholders under section 216(a) of the
Code with respect to those years. In view of the significance of the tax
benefits accorded tenant-stockholders of a corporation that qualifies under
section 216(b)(1) of the Code, the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
HAZARD INSURANCE
The master servicer will require each borrower to maintain a hazard
insurance policy providing for no less than the coverage of the standard form of
fire insurance policy with extended coverage customary for the type of mortgaged
property in the state where the property is located. This coverage will be in an
amount not less than the replacement value of the improvements or manufactured
home securing the loan or the principal balance owing on the loan, whichever is
less. All amounts collected by the master servicer under any hazard policy will
be deposited in the related security account, except for amounts to be applied
to the restoration or repair of the mortgaged property or released to the
borrower in accordance with the master servicer's normal servicing procedures.
In the event that the master servicer maintains a blanket policy insuring
against hazard losses on all the loans comprising part of a trust fund, it will
conclusively be deemed to have satisfied its obligation to maintain hazard
insurance. A blanket policy may contain a deductible clause, in which case the
master servicer will be required to deposit into the related security account
from its own funds the amounts which would have been deposited in the security
account but for the deductible clause. Any additional insurance coverage for
mortgaged properties with respect to a pool of Multifamily Loans will be
specified in the related prospectus supplement.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements or manufactured home
securing a loan by fire, lightning, explosion, smoke, windstorm and hail, riot,
strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Although the policies relating to the
72
loans may have been underwritten by different insurers under different state
laws in accordance with different applicable forms and therefore may not contain
identical terms and conditions, the basic policy terms are dictated by
respective state laws. In addition, most policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the mortgaged property
securing a loan is located in a federally designated special flood area at the
time of origination, the master servicer will require the borrower to obtain and
maintain flood insurance.
The hazard insurance policies covering mortgaged properties typically
contain a clause which have the effect of requiring the insured at all times to
carry insurance of a specified percentage -generally 80% to 90% - of the full
replacement value of the mortgaged property in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of
o the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the
improvements damaged or destroyed, generally defined to equal
replacement cost at the time and place of the loss less physical
depreciation; and
o such proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance that the master servicer may cause to be
maintained on the improvements securing the loans will decline as the principal
balances owing on the loans decrease, and since improved real estate generally
has appreciated in value over time in the past, the effect of this requirement
may be that, in the event of a partial loss, hazard insurance proceeds will be
insufficient to restore the damaged property fully. If specified in the related
prospectus supplement, a special hazard insurance policy will be obtained to
insure against certain of the uninsured risks described. SEE "Credit
Enhancement--Special Hazard Insurance Policies" in this prospectus.
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's cooperative dwelling or the
cooperative's building could significantly reduce the value of the collateral
securing the cooperative loan to the extent not covered by other credit support.
73
REALIZATION UPON DEFAULTED MORTGAGE LOANS
PRIMARY MORTGAGE INSURANCE POLICIES. To the extent specified in the related
prospectus supplement, the master servicer will maintain, or cause each
sub-servicer to maintain, in full force and effect, a primary mortgage insurance
policy with regard to each loan for which coverage is required. The master
servicer will not cancel or refuse to renew any primary mortgage insurance
policy in effect at the time of the initial issuance of a series of securities
that is required to be kept in force under the applicable agreement unless the
primary mortgage insurance policy that replaces the cancelled or nonrenewed
policy is maintained with an insurer whose claims-paying ability is sufficient
to maintain the current rating of the classes of securities of that series by
each rating agency named in the related prospectus supplement.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a primary mortgage insurance policy
covering a loan will consist of the insured percentage of the unpaid principal
amount of the covered loan, accrued and unpaid interest thereon and
reimbursement of certain expenses, less the following amounts:
o all rents or other payments collected or received by the insured other
than the proceeds of hazard insurance that are derived from or in any
way related to the mortgaged property,
o hazard insurance proceeds in excess of the amount required to restore
the mortgaged property and which have not been applied to the payment
of the loan,
o amounts expended but not approved by the issuer of the related primary
mortgage insurance policy,
o claim payments previously made by the primary insurer, and
o unpaid premiums.
Primary mortgage insurance policies generally reimburse losses sustained by
reason of defaults in payments by borrowers. Primary mortgage insurance policies
do not insure against, and exclude from coverage, a loss sustained by reason of
a default arising from or involving the following matters, among others:
o fraud or negligence in origination or servicing of the loan, including
misrepresentation by the originator, borrower or other persons
involved in the origination of the loan,
o failure to construct the related mortgaged property in accordance with
specified plans,
o physical damage to the mortgaged property and
o lack of approval by the primary mortgage insurance policy insurer of
the master servicer or sub-servicer to act as servicer of the loan.
74
RECOVERIES UNDER A PRIMARY MORTGAGE INSURANCE POLICY. As conditions
precedent to the filing or payment of a claim under a primary mortgage insurance
policy covering a loan, the insured will be required
o to advance or discharge all hazard insurance policy premiums;
o to advance
- real estate property taxes,
- all expenses required to maintain the related mortgaged property
in at least as good a condition as existed at the effective date
of the policy, ordinary wear and tear excepted,
- mortgaged property sales expenses,
- any outstanding liens on the mortgaged property (as defined in
the policy) and
- foreclosure costs, including court costs and reasonable
attorneys' fees,
in each case as necessary and approved in advance by the primary
mortgage insurance policy insurer;
o in the event of any physical loss or damage to the mortgaged property,
to have the mortgaged property restored and repaired to at least as
good a condition as existed at the effective date of the policy,
ordinary wear and tear excepted; and
o to tender to the primary mortgage insurance policy carrier good and
merchantable title to and possession of the mortgaged property.
In those cases in which a loan is serviced by a sub-servicer, the
sub-servicer, on behalf of itself, the trustee and securityholders, will present
claims to the primary mortgage insurance policy carrier, and all collections
under the policy will be deposited in the sub-servicing account. In all other
cases, the master servicer, on behalf of itself, the trustee and the
securityholders, will present claims to the carrier of each primary mortgage
insurance policy and will take such reasonable steps as are necessary to receive
payment or to permit recovery under the policy with respect to defaulted loans.
As set forth above, all collections by or on behalf of the master servicer under
any primary mortgage insurance policy and, when the mortgaged property has not
been restored, the hazard insurance policy are to be deposited in the security
account, subject to withdrawal as previously described.
If the mortgaged property securing a defaulted loan is damaged and any
proceeds from the related hazard insurance policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any
related primary mortgage insurance policy, the master servicer is not required
to expend its own funds to restore the damaged property unless it determines
that
75
o the restoration will increase the proceeds to securityholders upon
liquidation of the loan after reimbursement of the master servicer for
its expenses, and
o the master servicer will be able to recover its expenses from related
Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted loan is not available under the primary mortgage
insurance policy for the reasons set forth in the preceding paragraph, or if the
defaulted loan is not covered by a primary mortgage insurance policy, the master
servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon the defaulted loan. If the proceeds
of any liquidation of the related mortgaged property are less than the principal
balance of the loan plus accrued interest that is payable to securityholders,
the trust fund will realize a loss in the amount of that difference plus the
amount of expenses that it incurred in connection with the liquidation and that
are reimbursable under the agreement. In the unlikely event that proceedings
result in a total recovery which, after reimbursement to the master servicer of
its expenses, is in excess of the principal balance of the defaulted loan plus
accrued interest that is payable to securityholders, the master servicer will be
entitled to withdraw or retain from the security account amounts representing
its normal servicing compensation with respect to that loan and, unless
otherwise specified in the related prospectus supplement, amounts representing
the balance of the excess amount, exclusive of any amount required by law to be
forwarded to the related borrower , as additional servicing compensation.
If the master servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the master servicer, exceed the principal balance of
the related loan plus accrued interest that is payable to securityholders, the
master servicer will be entitled to withdraw or retain from the security account
amounts representing its normal servicing compensation with respect to that
loan. In the event that the master servicer has expended its own funds to
restore the damaged mortgaged property and those funds have not been reimbursed
under the related hazard insurance policy, the master servicer will be entitled
to withdraw from the security account, out of related Liquidation Proceeds or
Insurance Proceeds, an amount equal to the expenses that it incurred, in which
event the trust fund may realize a loss up to the amount of those expenses.
Since Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the master servicer, no payment or recovery will result in a
recovery to the trust fund that exceeds the principal balance of the defaulted
loan together with accrued interest. SEE "Credit Enhancement" in this prospectus
supplement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The master servicer's primary servicing compensation with respect to a
series of securities will come from the payment to it each month, out of each
interest payment on a loan, of an amount equal to the annual percentage
specified in the related prospectus supplement of the outstanding principal
balance of that loan. Since the master servicer's primary compensation is a
percentage of the outstanding principal balance of each mortgage loan, this
amount will decrease as the mortgage loans amortize. In addition to this primary
servicing compensation, the master servicer or the sub-servicers will be
entitled to retain all assumption fees and late payment
76
charges to the extent collected from borrowers and, if so provided in the
related prospectus supplement, any prepayment charges and any interest or other
income which may be earned on funds held in the security account or any
sub-servicing account. Unless otherwise specified in the related prospectus
supplement, any sub-servicer will receive a portion of the master servicer's
primary compensation as its sub-servicing compensation.
Unless otherwise specified in the related prospectus supplement, the master
servicer will pay from its servicing compensation, in addition to amounts
payable to any sub-servicer, certain expenses incurred in connection with its
servicing of the loans, including, without limitation
o payment of any premium for any insurance policy, guaranty, surety or
other form of credit enhancement as specified in the related
prospectus supplement;
o payment of the fees and disbursements of the trustee and independent
accountants;
o payment of expenses incurred in connection with distributions and
reports to securityholders; and
o payment of any other expenses described in the related prospectus
supplement.
EVIDENCE AS TO COMPLIANCE
Each operative agreement will provide that a firm of independent public
accountants will furnish a statement to the trustee, on or before a specified
date in each year, to the effect that, on the basis of the examination by the
firm conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced for Freddie
Mac, the servicing by or on behalf of the master servicer of loans, the Agency
Securities or the Private Label Securities, under agreements substantially
similar to one another (including the governing agreement), was conducted in
compliance with those agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced by Freddie Mac
requires it to report. In rendering this statement the accounting firm may rely,
as to matters relating to the direct servicing of mortgage loans, Agency
Securities or Private Label Securities by sub-servicers, upon comparable
statements of firms of independent public accountants rendered within one year
with respect to the sub-servicers for examinations conducted substantially in
compliance with the Uniform Single Audit Program for Mortgage Bankers or the
Audit Program for Mortgages Serviced for Freddie Mac.
Each operative agreement will also provide for delivery to the related
trustee, on or before a specified date in each year, of an annual statement
signed by two officers of the master servicer to the effect that the master
servicer has fulfilled its obligations under the agreement throughout the
preceding year.
Copies of the annual accountants' statement and the statement of officers
of the master servicer may be obtained by securityholders of the related series
without charge upon written request to the master servicer at the address set
forth in the related prospectus supplement.
77
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITORS
The master servicer under each operative agreement will be named in the
related prospectus supplement. The entity serving as master servicer may have
normal business relationships with the depositor or the depositor's affiliates.
Each operative agreement will provide that the master servicer may not
resign from its obligations and duties under the agreement except (i) upon a
determination that it is no longer permissible to perform them under applicable
law or (ii) if so provided in the related operative agreement, a determination
by the master servicer that it will no longer engage in the business of
servicing mortgage loans. In no event will the master servicer's resignation
become effective until the trustee or a successor servicer has assumed the
master servicer's obligations and duties under the agreement.
Each operative agreement will further provide that none of the master
servicer, the depositor or any director, officer, employee or agent of the
master servicer or of the depositor will be under any liability to the related
trust fund or the securityholders for any action taken, or for refraining from
the taking of any action, in good faith pursuant to the agreement, or for errors
in judgment. However, none of the master servicer, the depositor or any
director, officer, employee or agent of the master servicer or of the depositor
will be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of
duties under the agreement or by reason of reckless disregard of obligations and
duties under the agreement. Each operative agreement will further provide that
the master servicer, the depositor and any director, officer, employee or agent
of the master servicer or of the depositor will be entitled to indemnification
by the related trust fund and will be held harmless against any loss, liability
or expense incurred in connection with (i) any legal action relating to the
agreement or the securities or (ii) a breach of a representation or warranty
regarding the loan or loans, other than
o any loss, liability or expense related to any specific loan in the
trust fund or the loans in general except for any loss, liability or
expense otherwise reimbursable under the agreement, and
o any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of duties
under the agreement or by reason of reckless disregard of obligations
and duties under the agreement.
In addition to the foregoing, if so provided in the agreement, the master
servicer, the depositor and any director, officer, employee or agent of the
master servicer or of the depositor may be entitled to indemnification by the
related trust fund and may be held harmless against any loss, liability or
expense in connection with any actions taken under the agreement.
In addition, each operative agreement will provide that neither the master
servicer nor the depositor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its responsibilities under
the agreement and which, in its opinion, may involve it in any expense or
liability. However, the master servicer or the depositor may, in its discretion,
undertake any action which it may deem necessary or desirable with respect to
the agreement
78
and the rights and duties of the parties and the interests of the
securityholders. In that event, the legal expenses and costs of the action and
any resulting liability will be expenses, costs and liabilities of the trust
fund, and the master servicer or the depositor, as the case may be, will be
entitled to reimbursement from funds otherwise distributable to securityholders.
Any entity into which the master servicer may be merged or consolidated, or
any entity resulting from any merger or consolidation to which the master
servicer is a party, or any entity succeeding to the business of the master
servicer, will be the successor of the master servicer under each agreement,
provided that the successor entity is qualified to sell loans to, and service
loans on behalf of, Fannie Mae or Freddie Mac and that the merger, consolidation
or succession does not adversely affect the then current rating of the
securities rated by each rating agency named in the related prospectus
supplement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Unless otherwise
specified in the related prospectus supplement, the following will be deemed
"events of default" under each agreement:
o any failure by the master servicer to distribute to security holders
of any class any required payment - other than an advance - which
failure continues unremedied for five business days after the giving
of written notice to the master servicer by the trustee or the
depositor, or to the master servicer, the depositor and the trustee by
the holders of securities of that class evidencing not less than 25%
of the aggregate percentage interests evidenced by that class;
o any failure by the master servicer to make an advance as required
under the agreement, unless cured as specified in the agreement;
o any failure by the master servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the
agreement, which failure continues unremedied for 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 securities
of any class evidencing not less than 25% of the aggregate percentage
interests constituting that class; and
o events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by or on behalf
of the master servicer indicating its insolvency, reorganization or
inability to pay its obligations.
If specified in the related prospectus supplement, the agreement will
permit the trustee to sell the assets of the trust fund in the event that
payments are insufficient to make the payments required under the agreement. The
assets of the trust fund will be sold only under the circumstances and in the
manner specified in the related prospectus supplement.
So long as an event of default under the related agreement remains
unremedied, the depositor or the trustee may, and, at the direction of holders
of securities of any class evidencing
79
not less than 51% of the aggregate percentage interests constituting that class
and under such other circumstances as may be specified in the agreement, the
trustee shall, terminate all of the rights and obligations of the master
servicer relating to the trust fund and in and to the related loans. Thereupon
the trustee will succeed to all of the responsibilities, duties and liabilities
of the master servicer under the agreement, including, if specified in the
related prospectus supplement, the obligation to make advances, and the trustee
will be entitled to similar compensation arrangements. In the event that the
trustee is unwilling or unable to act in this way, it may appoint, or petition a
court of competent jurisdiction to appoint, a loan servicing institution with a
net worth of at least $10,000,000 to act as successor to the master servicer
under the agreement. Pending the appointment, the trustee is obligated to act in
this capacity. The trustee and any successor master servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the master servicer under the agreement.
No securityholder, solely by virtue of its status as a securityholder, will
have any right under any agreement to institute any proceeding with respect to
that agreement, unless
o the holder has previously given to the trustee written notice of
default;
o the holders of securities of any class evidencing not less than 25% of
the aggregate percentage interests constituting that class have made
written request upon the trustee to institute the proceeding in its
own name as trustee and have offered a reasonable indemnity to the
trustee; and
o the trustee for 60 days has neglected or refused to institute any such
proceeding.
INDENTURE. Unless otherwise specified in the related prospectus supplement,
the following will be deemed "events of default" under the indenture for each
series of notes:
o failure to pay for five days or more any principal or interest on any
note of that series;
o failure by the depositor or the trust to perform any other covenant in
the indenture, which failure continues unremedied for 30 days after
notice is given in accordance with the procedures described in the
related prospectus supplement;
o the material breach of any representation or warranty made by the
depositor or the trust in the indenture or in any document delivered
under the indenture, which breach continues uncured for 30 days after
notice is given in accordance with the procedures described in the
related prospectus supplement;
o events of bankruptcy insolvency, receivership or liquidation of the
depositor in the trust; or
o any other event of default specified in the indenture.
If an event of default with respect to the notes of a series (other than
principal only notes) occurs and is continuing, either the trustee or the
holders of a majority of the then aggregate
80
outstanding amount of the notes of that series may declare the principal amount
of all the notes of that series to be due and payable immediately. In the case
of principal only notes, the portion of the principal amount necessary to make
such a declaration will be specified in the related prospective supplement. This
declaration may, under certain circumstances, be rescinded and annulled by the
holders of more than 50% of the percentage ownership interest of the notes of
that series.
If, following an event of default with respect to any series of notes, the
notes of that series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of that series and to continue
to apply distributions on the collateral as if there had been no declaration of
acceleration so long as the collateral continues to provide sufficient funds for
the payment of principal and interest on the notes as they would have become due
if there had not been a declaration. In addition, the trustee may not sell or
otherwise liquidate the collateral securing the notes of a series following an
event of default, unless one of the following conditions precedent has occurred:
o the holders of 100% of the percentage ownership interest in the
related notes consent to the sale or liquidation;
o the proceeds of the sale or liquidation are sufficient to pay the full
amount of principal and accrued interest, due and unpaid, on the
related notes at the date of the sale or liquidation; or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on the related notes as they
would have become due if the notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 66% of
the percentage ownership interest of each class of the related notes.
Unless otherwise specified in the related prospectus supplement, in the
event the principal of the notes of a series is declared due and payable as
described above, the holders of any of those notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount of those notes less the amount of the unamortized discount.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default shall occur and be continuing with respect
to a series of notes, the trustee shall be under no obligation to exercise any
of the rights or powers under the indenture at the request or direction of any
of the holder of the related notes, unless the holders offer to the trustee
satisfactory security or indemnity against the trustee's costs, expenses and
liabilities which might be incurred in complying with their request or
direction. Subject to the indemnification provisions and certain limitations
contained in the indenture, the holders of a majority of the then aggregate
outstanding amount of the related notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee with respect to the related notes, and holders of a majority of the then
aggregate outstanding amount of the related notes may, in certain cases, waive
any default other than a
81
default in the payment of principal or interest or a default in respect of a
covenant or provision of the indenture that cannot be modified without the
waiver or consent of all the holders of the affected notes.
AMENDMENT
Unless otherwise specified in the related prospectus supplement, each
operative agreement may be amended by the depositor, the master servicer and the
trustee, without the consent of any of the securityholders, for the following
purposes:
o to cure any ambiguity,
o to correct or supplement any provision in the agreement which may be
defective or inconsistent with any other provision, or
o to make any other revisions with respect to matters or questions
arising under the agreement which are not inconsistent with its other
provisions.
In no event, however, shall any amendment adversely affect in any material
respect the interests of any securityholder as evidenced by either (i) an
opinion of counsel or (ii) confirmation by the rating agencies that such
amendment will not result in the downgrading of the securities. No amendment
shall be deemed to adversely affect in any material respect the interests of any
securityholder who shall have consented thereto, and no opinion of counsel or
written notice from the rating agencies shall be required to address the effect
of any such amendment on any such consenting securityholder. In addition, an
agreement may be amended without the consent of any of the securityholders to
change the manner in which the security account is maintained, so long as the
amendment does not adversely affect the then current ratings of the securities
rated by each rating agency named in the prospectus supplement. In addition, if
a REMIC election is made with respect to a trust fund, the related agreement may
be amended to modify, eliminate or add to any of its provisions to such extent
as may be necessary to maintain the qualification of the trust fund as a REMIC,
but the trustee shall have first received an opinion of counsel to the effect
that the action is necessary or helpful to maintain the REMIC qualification.
Unless otherwise specified in the related prospectus supplement, each
operative agreement may also be amended by the depositor, the master servicer
and the trustee with consent of holders of securities evidencing not less than
66% of the aggregate percentage ownership interests of each affected class for
the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, the agreement or of modifying in any
manner the rights of the holders of the related securities. In no event,
however, shall any amendment
o reduce in any manner the amount of, or delay the timing of, payments
received on loans which are required to be distributed on any security
without the consent of the holder of that security, or
o reduce the percentage of the securities of any class the holders of
which are required to consent to any amendment without the consent of
the holders of all securities of that class then outstanding.
82
If a REMIC election is made with respect to a trust fund, the trustee will not
be entitled to consent to an amendment to the agreement without having first
received an opinion of counsel to the effect that the amendment will not cause
the trust fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION; CALLS
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise
specified in the related prospectus supplement, the obligations created by the
pooling and servicing agreement and trust agreement for the related series of
securities will terminate upon the payment to the securityholders of all amounts
held in the security account or held by the master servicer, and required to be
paid to the securityholders under the agreement, following the later to occur of
the following:
o the final payment or other liquidation of the last of the assets of
the trust fund subject to the agreement or the disposition of all
property acquired upon foreclosure of any assets remaining in the
trust fund, and
o the purchase from the trust fund by the master servicer, or such other
party as may be specified in the related prospectus supplement, of all
of the remaining trust fund assets and all property acquired in
respect of those assets.
SEE "Material Federal Income Tax Consequences" in this prospectus.
Unless otherwise specified in the related prospectus supplement, any
purchase of trust fund assets and property acquired in respect of trust fund
assets will be made at the option of the related master servicer or, if
applicable, another designated party, at a price, and in accordance with the
procedures, specified in the related prospectus supplement. The exercise of this
right will effect early retirement of the securities of that series. However,
this right can be exercised only at the times and upon the conditions specified
in the related prospectus supplement. If a REMIC election has been made with
respect to the trust fund, any repurchase pursuant to the second bullet point in
the immediately preceding paragraph will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of section 860F(g)(4) of
the Internal Revenue Code.
INDENTURE. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the trustee for cancellation of all the notes of
that series or, with certain limitations, upon deposit with the trustee of funds
sufficient for the payment in full of all of the notes of that series.
If specified for the notes of any series, the indenture will provide that
the related trust fund will be discharged from any and all obligations in
respect of the notes of that series (except for certain obligations relating to
temporary notes and exchange of notes, registering the transfer or exchange
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the trustee, in
trust, of money and/or direct obligations of or obligations guaranteed by the
United States which, through the payment of interest and principal in accordance
with their terms, will provide money in an amount sufficient to pay the
principal and each installment of interest on the related notes on the last
83
scheduled distribution date for the notes and any installment of interest on the
notes in accordance with the terms of the indenture and the notes of that
series. In the event of any such defeasance and discharge of a series of notes,
holders of the related notes would be able to look only to such money and/or
direct obligations for payment of principal and interest, if any, on their notes
until maturity.
CALLS. One or more classes of securities may be subject to a mandatory
or optional call at the times and subject to the conditions specified in the
related prospectus supplement. In the case of a mandatory call or in the event
an optional call is exercised with respect to one or more classes of securities,
holders of each affected class of securities will receive the outstanding
principal balance of their securities together with accrued and unpaid interest
at the applicable pass-through rate, subject to the terms specified in the
related prospectus supplement.
THE TRUSTEE
The trustee under each agreement will be named in the related prospectus
supplement. The commercial bank or trust company serving as trustee may have
normal banking relationships with the depositor, the master servicer and any of
their respective affiliates.
MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion contains general summaries of material legal
matters relating to the loans. Because the legal matters are determined
primarily by applicable state law and because state laws may differ
substantially, the summaries do not purport to be complete, to reflect the laws
of any particular state or to encompass the laws of all states in which security
for the loans may be situated. The summaries are qualified in their entirety by
reference to the applicable laws of the states in which loans may be originated.
GENERAL
SINGLE FAMILY LOANS, MULTIFAMILY LOANS AND HOME EQUITY LOANS. The loans may
be secured by deeds of trust, mortgages, security deeds or deeds to secure debt,
depending upon the prevailing practice in the state in which the property
subject to the loan is located. A mortgage creates a lien upon the real property
encumbered by the mortgage. The mortgage lien generally is not prior to the lien
for real estate taxes and assessments. Priority between mortgages depends on
their terms and generally on the order of recording with a state or county
office. There are two parties to a mortgage: the mortgagor, who is the borrower
and owner of the mortgaged property, and the mortgagee, who is the lender. Under
the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust formally has three parties: the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys to the
grantee title to, as opposed to
84
merely creating a lien upon, the subject property until such time as the
underlying debt is repaid. The trustee's authority under a deed of trust, the
mortgagee's authority under a mortgage and the grantee's authority under a
security deed or deed to secure debt are governed by law and, with respect to
some deeds of trust, the directions of the beneficiary.
COOPERATIVE LOANS. Certain of the loans may be cooperative loans. The
cooperative owns all the real property that comprises the related project,
including the land, separate dwelling units and all common areas. The
cooperative is directly responsible for project management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If, as is
generally the case, there is a blanket mortgage on the cooperative and/or
underlying land, the cooperative, as project mortgagor, is also responsible for
meeting these mortgage obligations. A blanket mortgage is ordinarily incurred by
the cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under proprietary
leases or occupancy agreements to which the cooperative is a party are generally
subordinate to the interest of the holder of the blanket mortgage in that
building. If the cooperative is unable to meet the payment obligations arising
under its blanket mortgage, the mortgagee holding the blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements. In addition, the blanket mortgage on a cooperative may
provide financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of a trust fund
including cooperative loans, the collateral securing the cooperative loans.
A cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and the accompanying rights are financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or against the
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of cooperative shares.
85
MANUFACTURED HOUSING CONTRACTS. Each Manufactured Housing Contract
evidences both
o the obligation of the borrower to repay the loan it represents, and
o the grant of a security interest in a manufactured home to secure
repayment of the loan.
The Manufactured Housing Contracts generally are "chattel paper" as defined
in the Uniform Commercial Code in effect in the states in which the manufactured
homes initially were registered. Pursuant to the UCC, the rules governing the
sale of chattel paper are similar to those governing the perfection of a
security interest in chattel paper. Under the related pooling and servicing
agreement, the depositor will transfer physical possession of the Manufactured
Housing Contracts to the trustee or its custodian. In addition the depositor
will file UCC-1 financing statements in the appropriate states to give notice of
the trustee's ownership of the Manufactured Housing Contracts. Under the laws of
most states, manufactured housing constitutes personal property and is subject
to the motor vehicle registration laws of the state or other jurisdiction in
which the unit is located. In a few states, where certificates of title are not
required for manufactured homes, security interests are perfected by the filing
of a financing statement under Article 9 of the UCC which has been adopted by
all states. The certificate of title laws adopted by the majority of states
provide that ownership of motor vehicles and manufactured housing shall be
evidenced by a certificate of title generally issued by the motor vehicles
department of the state. In states which have enacted certificate of title laws,
a security interest in a unit of manufactured housing, so long as it is not
attached to land in so permanent a fashion as to become a fixture, is generally
perfected by the recording of the interest on the certificate of title to the
unit in the appropriate motor vehicle registration office or by delivery of the
required documents and payment of a fee to that office, depending on state law.
Unless otherwise specified in the related prospectus supplement, the master
servicer will be required to effect such notation or delivery of the required
documents and fees and to obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home is
registered. If the master servicer fails to effect such notation or delivery,
due to clerical errors or otherwise, or files the security interest under the
wrong law (for example, under a motor vehicle title statute rather than under
the UCC, in a few states), the trustee may not have a first priority security
interest in the manufactured home securing the affected Manufactured Housing
Contract. As manufactured homes have become larger and have often been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a manufactured home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the manufactured home is located. These
filings must be made in the real estate records office of the county where the
manufactured home is located. Generally, Manufactured Housing Contracts will
contain provisions prohibiting the borrower from permanently attaching the
manufactured home to its site. So long as the borrower does not violate this
agreement, a
86
security interest in the manufactured home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site,
other parties could obtain an interest in the manufactured home which is prior
to the security interest originally retained by the seller and transferred to
the depositor.
The depositor will assign to the trustee, on behalf of the securityholders,
a security interest in the manufactured homes. Unless otherwise specified in the
related prospectus supplement, none of the depositor, the master servicer or the
trustee will amend the certificates of title to identify the trustee, on behalf
of the securityholders, as the new secured party and, accordingly, the depositor
or the seller will continue to be named as the secured party on the certificates
of title relating to the manufactured homes. In most states, the assignment is
an effective conveyance of the security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the depositor's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
assignment of the security interest might not be held effective against
creditors of the depositor or seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the home owner, or administrative error by
state recording officials, the notation of the lien of the trustee on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
the manufactured home or subsequent lenders who take a security interest in the
manufactured home. In the case of any manufactured home as to which the security
interest assigned to the depositor and the trustee is not perfected, the
security interest would be subordinate to, among others, subsequent purchasers
for value of the manufactured home and holders of perfected security interests
in the home. There also exists a risk that, in not identifying the trustee, on
behalf of the securityholders, as the new secured party on the certificate of
title, the security interest of the trustee could be released through fraud or
negligence.
If the owner of a manufactured home moves it to a state other than the
state in which it initially is registered, the perfected security interest in
the manufactured home under the laws of most states would continue for four
months after relocation and thereafter until the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and re-register the manufactured home in the new state,
and if steps are not taken to re-perfect the trustee's security interest in the
new state, the security interest in the manufactured home would cease to be
perfected. A majority of states generally require surrender of a certificate of
title to re-register a manufactured home. Accordingly, the trustee must
surrender possession if it holds the certificate of title to the manufactured
home or, in the case of manufactured homes registered in states which provide
for notation of lien, the master servicer would receive notice of surrender if
the security interest in the manufactured home is noted on the certificate of
title. Accordingly, the trustee would have the opportunity to re-perfect its
security interest in the manufactured home in the new state. In states which do
not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. Similarly, when a borrower under a
Manufactured Housing Contract sells a manufactured home,
87
the lender must surrender possession of the certificate of title or it will
receive notice as a result of its lien noted thereon and accordingly will have
an opportunity to require satisfaction of the related Manufactured Housing
Contract before the lien is released. The master servicer will be obligated, at
its own expense, to take all steps necessary to maintain perfection of security
interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home take priority even over a perfected security interest. The
depositor will obtain the representation of the seller that it has no knowledge
of any repair liens with respect to any manufactured home securing a
Manufactured Housing Contract. However, repair liens could arise at any time
during the term of a Manufactured Housing Contract. No notice will be given to
the trustee or securityholders in the event a repair lien arises.
FORECLOSURE
SINGLE FAMILY LOANS, MULTI-FAMILY LOANS AND HOME EQUITY LOANS. Foreclosure
of a deed of trust is generally accomplished by a non-judicial sale under a
specific provision in the deed of trust which authorizes the trustee to sell the
mortgaged property at public auction upon any default by the borrower under the
terms of the note or deed of trust. In some states, such as California, the
trustee must record a notice of default and send a copy to the borrower-trustor,
to any person who has recorded a request for a copy of any notice of default and
notice of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. Before
such non-judicial sale takes place, typically a notice of sale must be posted in
a public place and published during a specific period of time in one or more
newspapers, posted on the property and sent to parties having an interest of
record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the mortgaged property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings are often not contested by any of the parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorneys'
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated,
a notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
88
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
When the beneficiary under a junior mortgage or deed of trust cures the
default on the related senior mortgage or reinstates or redeems the senior
mortgage by paying it in full, the amount paid by the beneficiary to cure,
reinstate or redeem the senior mortgage becomes part of the indebtedness secured
by the junior mortgage or deed of trust. SEE "--Junior Mortgages, Rights of
Senior Mortgages" below.
COOPERATIVE LOANS. Cooperative shares owned by a tenant-stockholder and
pledged to a lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's articles of incorporation and
by-laws, as well as in the proprietary lease or occupancy agreement, and may be
cancelled by the cooperative if the tenant-stockholder fails to pay rent or
other obligations or charges owed, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the cooperative to
terminate such lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. Typically, the
lender and the cooperative enter into a recognition agreement which establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides, that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest.
Recognition agreements also provide that, in the event of a foreclosure on
a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the
89
proprietary lease before transferring the cooperative shares or assigning the
proprietary lease. Generally, lenders are not limited in any rights they may
have to dispossess tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account for the surplus to subordinate lenders or the
tenant-stockholder as provided in the UCC. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. SEE "--Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
cooperative when the building was so converted.
REPOSSESSION OF MANUFACTURED HOMES
Repossession of manufactured housing is governed by state law. A number of
states have enacted legislation that requires that the debtor be given an
opportunity to cure a monetary default (typically 30 days to bring the account
current) before repossession can commence. So long as a manufactured home has
not become attached to real estate in such way that it may be treated as a part
of the real estate under applicable state law, repossession in the event of a
default by the obligor will generally be governed by the UCC. Article 9 of the
UCC provides the statutory framework for the repossession of manufactured
housing. While the UCC as adopted by the various states may vary in certain
particulars, the general repossession procedure is discussed below.
Because manufactured homes generally depreciate in value, it is unlikely
that repossession and resale of a manufactured home will result in the full
recovery of the outstanding principal and unpaid interest on the related
defaulted Manufactured Housing Contract.
Except in those states where the debtor must receive notice of the right to
cure a default, repossession can commence immediately upon default without prior
notice. Repossession may be effected either through self-help (peaceable
retaking without court order), voluntary repossession or through judicial
process (repossession pursuant to court-issued writ of replevin).
90
The self-help and/or voluntary repossession methods, which are more commonly
employed, are accomplished simply by retaking possession of the manufactured
home. In cases in which the debtor objects or raises a defense to repossession,
a court order must be obtained from the appropriate state court, and the
manufactured home must then be repossessed in accordance with that order.
Whether the method employed is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an actual physical
removal of the manufactured home to a secure location for refurbishment and
resale or by removing the occupants and their belongings from the manufactured
home and maintaining possession of the manufactured home on the location where
the occupants were residing. Various factors may affect whether the manufactured
home is physically removed or left on location, such as the nature and term of
the lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may be by
public or private sale provided the method, manner, time, place and other terms
of the sale are commercially reasonable.
Sale proceeds are to be applied first to reasonable repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the indebtedness.
While some states impose prohibitions or limitations on deficiency judgments if
the net proceeds from resale do not cover the full amount of the indebtedness,
the remainder may be sought from the debtor in the form of a deficiency judgment
in those states that do not prohibit or limit such judgments. The deficiency
judgment is a personal judgment against the debtor for the shortfall.
Occasionally, after resale of a manufactured home and payment of all expenses
and indebtedness, there is a surplus of funds. In that case, the UCC requires
the party suing for the deficiency judgment to remit the surplus to the
subordinate creditors or the debtor, as provided in the UCC. Because the
defaulting owner of a manufactured home generally has very little capital or
income available following repossession, a deficiency judgment may not be sought
in many cases or, if obtained, will be settled at a significant discount in
light of the defaulting owner's strained financial condition.
Any contract secured by a manufactured home located in Louisiana will be
governed by Louisiana Revised Statutes in addition to Article 9 of the UCC.
Louisiana law provides similar mechanisms for perfection and enforcement of a
security interest in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all
91
mortgagees under real estate mortgages on the property and the land to which it
was affixed file releases with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished only after the
obligor's abandonment or with the obligor's consent given after or in
contemplation of default, or pursuant to judicial process and seizure by the
sheriff.
RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS, MULTIFAMILY LOANS AND HOME EQUITY LOANS. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the mortgaged property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan plus accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
MANUFACTURED HOUSING CONTRACTS. While state laws do not usually require
notice to be given debtors prior to repossession, many states do require
delivery of a notice of default and of the debtor's right to cure defaults
before repossession. The law in most states also requires that the debtor be
given notice of sale prior to the resale of a manufactured home so that the
owner may redeem at or before resale. In addition, the sale generally must
comply with the requirements of the UCC.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to maintain the property adequately or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee
92
under a deed of trust or by a mortgagee under a mortgage having a power of sale,
there is insufficient state action to afford constitutional protections to the
borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Certain states,
including California, have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the master servicer will not seek deficiency
judgments against defaulting borrowers. Under the laws applicable in most
states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a manufactured home. However, some
states impose prohibitions or limitations on deficiency judgments in these
cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code, the
federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws affording
relief to debtors, may interfere with or affect the ability of the secured
mortgage lender to realize upon its security. For example, in a proceeding under
the Bankruptcy Code, a lender may not foreclose on the mortgaged property
without the permission of the bankruptcy court. If the mortgaged property is not
the debtor's principal residence and the bankruptcy court determines that the
value of the mortgaged property is less than the principal balance of the
mortgage loan, the rehabilitation plan proposed by the debtor may
o reduce the secured indebtedness to the value of the mortgaged property
as of the date of the commencement of the bankruptcy thereby rendering
the lender a general unsecured creditor for the difference,
o reduce the monthly payments due under the mortgage loan,
o change the rate of interest of the mortgage loan, and
o alter the mortgage loan repayment schedule.
The effect of proceedings under the Bankruptcy Code, including but not limited
to any automatic stay, could result in delays in receiving payments on the
mortgage loans underlying a series of certificates and possible reductions in
the aggregate amount of payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, or TILA, as implemented by
Regulation Z, Real Estate Settlement Procedures Act, as implemented
93
by Regulation Z, Real Estate Settlement Procedures Act, as implemented by
Regulation X, Equal Credit Opportunity Act, as implemented by Regulation B, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans. In particular,
an originator's failure to comply with certain requirements of the federal TILA,
as implemented by Regulation Z, could subject both originators and assignees of
such obligations to monetary penalties and could result in borrowers' rescinding
the mortgage loans either against the originators or assignees.
HOMEOWNERSHIP ACT AND SIMILAR STATE LAWS
Some of the mortgage loans, known as High Cost Loans, may be subject to the
Home Ownership and Equity Protection Act of 1994, or Homeownership Act, which
amended TILA to provide new requirements applicable to loans that exceed certain
interest rate and/or points and fees thresholds. Purchasers or assignees of any
High Cost Loan, including any trust, could be liable under federal law for all
claims and be subject to all defenses that the borrower could assert against the
originator of the High Cost Loan. Remedies available to the borrower include
monetary penalties, as well as rescission rights if the appropriate disclosures
were not given as required. The maximum damages that may be recovered under
theses provisions from an assignee, including the trust, is the remaining amount
of indebtedness plus the total amount paid by the borrower in connection with
the mortgage loan.
In addition to the Homeownership Act, a number of legislative proposals
have been introduced at both the federal and state levels that are designed to
discourage predatory lending practices. Some states have enacted, and other
state or local governments may enact, laws that impose requirements and
restrictions greater than those in the Homeownership Act. These laws prohibit
inclusion of some provisions in mortgage loans that have interests rate or
origination costs in excess of prescribed levels, and require that borrowers be
given certain disclosures prior to the consummation of the mortgage loans.
Purchasers or assignees of a mortgage loan, including the related trust, could
be exposed to all claims and defenses that the borrower could assert against the
originator of the mortgage loan for a violation of state law. Claims and
defenses available to the borrower could included monetary penalties, recession
and defenses to foreclosure action or an action to collect.
Some of the mortgage loans in a mortgage pool may be "home loans" and also
may be "covered home loans" under the Georgia Fair Lending Act, or Georgia Act.
The Georgia Act applies to any mortgage loan which is secured by a property
located in the State of Georgia that is the borrower's principal residence, and
which has a principal amount not in excess of the conforming loan balance limit
established by Fannie Mae. These loans are referred to under the Georgia Act as
"home loans." Certain home loans, which are referred to as "covered home loans"
have met certain fee and finance-charge criteria. Certain covered home loans,
which are referred to as "Georgia high-cost home loans," have met higher limits
regarding fees and finance charges. The Georgia Act prohibits certain activities
and charges in connection with home loans. Additional prohibitions apply to
cover home loans and further prohibitions apply to Georgia high-cost home loans.
94
Purchasers or assignees of a Georgia high-cost home loan, including the
related trust, could be exposed to all claims and defenses that the borrower
could assert against the originator of the home loan. Purchasers or assignees of
a covered home loan, including the related trust, could be subject to defenses
to prevent a foreclosure or action to collect or counterclaims of a borrower if
the loan is in violation of the Georgia Act. Remedies available to a borrower
include actual, statutory and punitive damages, costs and attorneys' fees,
rescission rights and other unspecified equitable remedies. No maximum penalty
has been set with respect to violations of the Georgia Act, and courts have been
given discretion under the statute to fashion equitable remedies as they deem
appropriate.
There are some uncertainties in making a determination as to whether a
particular Georgia loan is a covered home loan or a Georgia high-cost home loan,
and in determining whether a loan complies with all of the provisions of the
Georgia Act.
The Georgia Act was amended on March 7, 2003. Mortgage loans originated on
or after that date are subject to a less stringent version of the Georgia Act.
Lawsuits have been brought in various states making claims against
assignees of High Cost Loans for violations of federal and state law allegedly
committed by the originator. Named defendants in these cases include numerous
participants within the secondary mortgage market, including some securitization
trusts.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission has
the effect of subjecting a seller and certain related creditors and their
assignees in a consumer credit transaction, and any assignee of the creditor, to
all claims and defenses which the debtor in the transaction could assert against
the seller of the goods. Liability under this FTC Rule is limited to the amounts
paid by a debtor on a Manufactured Housing Contract, and the holder of the
Manufactured Housing Contract may also be unable to collect amounts still due
under the Manufactured Housing Contract.
Most of the Manufactured Housing Contracts in a pool will be subject to the
requirements of this FTC Rule. Accordingly, the trustee, as holder of the
Manufactured Housing Contracts, will be subject to any claims or defenses that
the purchaser of the related manufactured home may assert against the seller of
the manufactured home, or that the purchaser of the home improvements may assert
against the contractor, subject to a maximum liability equal to the amounts paid
by the obligor on the Manufactured Housing Contract. If an obligor is successful
in asserting any such claim or defense, and if the seller had or should have had
knowledge of such claim or defense, the master servicer will have the right to
require the seller to repurchase the Manufactured Housing Contract because of a
breach of its representation and warranty that no claims or defenses exist which
would affect the borrower's obligation to make the required payments under the
Manufactured Housing Contract.
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials including such manufactured housing components as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component
95
parts and others in the distribution process. Plaintiffs have won judgments in
some of these lawsuits.
Under the FTC Rule discussed above, the holder of a Manufactured Housing
Contract secured by a manufactured home with respect to which a formaldehyde
claim has been asserted successfully may be liable to the borrower for the
amount paid by the borrower on that Manufactured Housing Contract and may be
unable to collect amounts still due under that Manufactured Housing Contract.
Because the successful assertion of this type of claim would constitute the
breach of a representation or warranty of the seller, the related
securityholders would suffer a loss only to the extent that
o the seller fails to perform its obligation to repurchase that
Manufactured Housing Contract, and
o the seller, the applicable depositor or the trustee is unsuccessful in
asserting a claim of contribution or subrogation on behalf of the
securityholders against the manufacturer or other who are directly
liable to the plaintiff for damages.
Typical product liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities from the presence of
formaldehyde in manufactured housing. As a result, recoveries from manufacturers
and component suppliers may be limited to their corporate assets without the
benefit of insurance.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related prospectus supplement, each
conventional loan will contain a due-on-sale clause which will generally provide
that, if the mortgagor or obligor sells, transfers or conveys the mortgaged
property, the loan may be accelerated by the mortgagee or secured party. Unless
otherwise provided in the related prospectus supplement, the master servicer
will, to the extent it has knowledge of the sale, transfer or conveyance,
exercise its rights to accelerate the maturity of the related loans through
enforcement of the due-on-sale clauses, subject to applicable state law. SECTION
341(B) of the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St.
Germain) permits a lender, subject to certain conditions, to "enter into or
enforce a contract containing a due-on-sale clause with respect to a real
property loan," notwithstanding any contrary state law. Garn-St. Germain gave
states that previously had enacted "due-on-sale" restrictions a three-year
window to reenact the previous restrictions or enact new restrictions. Only six
states acted within this window period: Arizona, Florida, Michigan, Minnesota,
New Mexico and Utah. Consequently, due-on-sale provisions in documents governed
by the laws of those state are NOT preempted by federal law. With respect to
loans secured by an owner-occupied residence including a manufactured home, the
Garn-St Germain Act sets forth nine specific instances in which a mortgagee
covered by the act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the
mortgaged property to an uncreditworthy person, which could increase the
likelihood of default, or may result in a mortgage bearing an interest rate
below the current market rate being assumed by a new home buyer, which may
affect the average life of the loans and the number of loans which may extend to
maturity.
96
In addition, under the federal Bankruptcy Code, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and under certain circumstances may be
eliminated in a resulting loan modification.
PREPAYMENT CHARGES; LATE FEES
Under certain state laws, prepayment charges with respect to prepayments on
loans secured by liens encumbering owner-occupied residential properties may not
be imposed after a certain period of time following the origination of a loan.
Since many of the mortgaged properties will be owner-occupied, it is anticipated
that prepayment charges may not be imposed with respect to many of the loans.
The absence of this type of a restraint on prepayment, particularly with respect
to fixed rate loans having higher loan rates or APRs, may increase the
likelihood of refinancing or other early retirement of the loans. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related prospectus supplement.
Loans may also contain provisions obligating the borrower to pay a late fee
if payments are not timely made. In some states there may be specific
limitations on the late charges that a lender may collect from the borrower for
delinquent payments. Unless otherwise specified in the related prospectus
supplement, late fees will be retained by the applicable servicer as additional
servicing compensation.
Some state laws restrict the imposition of prepayment charges and late fees
even when the loans expressly provide for the collection of those charges.
Although the Alternative Mortgage Transaction Parity Act 1982, or the Parity
Act, permits the collection of prepayment charges and late fees in connection
with some types of eligible loans preempting any contrary state law
prohibitions, some states may not recognize the preemptive authority of the
Parity Act or have formally opted out of the Parity Act. As a result, it is
possible that prepayment charges may not be collected even on loans that provide
for the payment of those charges unless otherwise specified in the accompanying
prospectus supplement. The master servicer or any entity identified in the
accompanying prospectus supplement will be entitled to all prepayment charges
and late payment charges received on the loans and these amounts will not be
available for payment on the securities. The Office of Thrift Supervision or
OTS, the agency that administers the Parity Act for unregulated housing
creditors, has withdrawn its favorable Parity Act regulations and chief counsel
opinions that authorized lenders to charge prepayment charges and late fees in
certain circumstances notwithstanding contrary state law, effective July 1,
2003. However, the OTS's ruling does not have retroactive effect on loans
originated before July 1, 2003.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that state usury limitations shall not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. The Office of Thrift Supervision, as successor to the Federal
Home Loan Bank Board, is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose limitations on interest rates and finance
charges by adopting before April 1, 1983 a law or constitutional provision which
expressly rejects application of the federal law. Fifteen
97
states adopted such a law prior to the April 1, 1983 deadline. In addition, even
where Title V was not rejected, any state is authorized to adopt a provision
limiting discount points or other charges on loans covered by Title V. No
Manufactured Housing Contract secured by a manufactured home located in any
state in which application of Title V was expressly rejected or a provision
limiting discount points or other charges has been adopted will be included in
any trust fund if the Manufactured Housing Contract imposes finance charges or
provides for discount points or charges in excess of permitted levels.
Title V also provides that state usury limitations will not apply to any
loan which is secured by a first lien on certain kinds of manufactured housing
provided that certain conditions are satisfied. These conditions relate to the
terms of any prepayment, balloon payment, late charges and deferral fees and the
requirement of a 30-day notice period prior to instituting any action leading to
repossession of or foreclosure with respect to the related unit.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended, borrowers who enter military service after the origination
of their mortgage loan may not be charged interest above an annual rate of 6%
during the period of active duty status, unless a court orders otherwise upon
application of the lender. The Relief Act also applies to borrowers who are
members of the National Guard or are on reserve status at the time their
mortgage is originated and are later called to active duty. It is possible that
the interest rate limitation could have an effect, for an indeterminate period
of time, on the ability of the master servicer to collect full amounts of
interest on affected mortgage loans. Unless otherwise provided in the related
prospectus supplement, any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the related
securityholders. In addition, the Relief Act imposes limitations which would
impair the ability of the master servicer to foreclose on an affected mortgage
loan during the borrower's period of active duty status. Thus, in the event that
a mortgage loan goes into default, the application of the Relief Act could cause
delays and losses occasioned by the lender's inability to realize upon the
mortgaged property in a timely fashion.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), the United States Environmental Protection Agency (EPA) may impose a
lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states and under CERCLA, there is a possibility that
a lender may be held liable as an "owner" or "operator" for costs of addressing
releases or threatened releases of hazardous substances at a property,
regardless of whether or not the environmental damage or threat was caused by a
current or prior owner or operator. CERCLA imposes liability for such costs on
any and all "responsible parties," including owners or operators. However,
98
CERCLA excludes from the definition of "owner or operator" a secured creditor
who holds indicia of ownership primarily to protect its security interest but
does not "participate in the management" of the property. Thus, if a lender's
activities begin to encroach on the actual management of a contaminated facility
or property, the lender may incur liability as an "owner or operator" under
CERCLA. Similarly, if a lender forecloses and takes title to a contaminated
facility or property, the lender may incur CERCLA liability in various
circumstances, including, but not limited to, when it holds the facility or
property as an investment, including leasing the facility or property to a third
party, or fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a property so that the lender would lose the protection of the
secured creditor exclusion referred to in the preceding paragraph, has been a
matter of judicial interpretation of the statutory language, and court decisions
have historically been inconsistent. In 1990, the United States Court of Appeals
for the Eleventh Circuit suggested, in UNITED STATES V. FLEET FACTORS CORP.,
that the mere capacity of the lender to influence a borrower's decisions
regarding disposal of hazardous substances was sufficient participation in the
management of the borrower's business to deny the protection of the secured
creditor exclusion to the lender, regardless of whether the lender actually
exercised such influence. Other judicial decisions did not interpret the secured
creditor exclusion as narrowly as did the Eleventh Circuit.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996. The
Asset Conservation Act provides that in order to be deemed to have participated
in the management of a secured property, a lender must actually participate in
the operational affairs of the property or of the borrower. The Asset
Conservation Act also provides that participation in the management of the
property does not include "merely having the capacity to influence, or
unexercised right to control" operations. Rather, a lender will lose the
protection of the secured creditor exclusion only if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the secured property.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment-proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that the costs arising from the
circumstances set forth above would result in a loss to the related
securityholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act, which regulates underground petroleum storage tanks other than
heating oil tanks. The EPA has adopted a lender liability rule for underground
storage tanks under Subtitle I of the Resource Conservation Act. Under this
rule, a holder of a security interest in an underground storage tank or real
property containing an underground storage tank is not considered an operator of
the underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Asset Conservation Act, the
protections accorded to lenders under CERCLA are also accorded to
99
holders of security interests in underground petroleum storage tanks. It should
be noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protection for
secured creditors.
The Asset Conservation Act specifically addresses the potential liability
under CERCLA of lenders that hold mortgages or similar conventional security
interests in real property, as the trust fund generally does in connection with
the loans. However, the Asset Conservation Act does not clearly address the
potential liability of lenders who retain legal title to a property and enter
into an agreement with the purchaser for the payment of the purchase price and
interest over the term of the contract as is the case with the installment
contracts.
If a lender (including a lender under an installment contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, these persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the loans (or at a
property subject to an installment contract), would be imposed on the trust
fund, and thus occasion a loss to the securityholders, depends on the specific
factual and legal circumstances at issue.
Except as otherwise specified in the applicable prospectus supplement, at
the time the mortgage loans were originated, no environmental assessment or a
very limited environment assessment of the mortgage properties was conducted.
The pooling and servicing agreement will provide that the master servicer,
acting on behalf of the trust fund, may not acquire title to a multifamily
residential property or mixed-use property underlying a loan or take over its
operation unless the master servicer has previously determined, based upon a
report prepared by a person who regularly conducts environmental audits, that
the mortgaged property is in compliance with applicable environmental laws and
regulations or that the acquisition would not be more detrimental than
beneficial to the value of the mortgaged property and the interests of the
related securityholders.
THE HOME IMPROVEMENT CONTRACTS
GENERAL. The Home Improvement Contracts, other than those that are
unsecured or secured by mortgages on real estate, generally are "chattel paper"
or constitute "purchase money security interests" each as defined in the UCC.
Under the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related agreement,
the depositor will transfer physical possession of these contracts to the
trustee or a designated custodian or may retain possession of them as custodian
for the trustee. In addition, the depositor will file a UCC-1 financing
statement in the appropriate states to give notice of the trustee's ownership of
the contracts. Unless otherwise specified in the related prospectus supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the depositor to the trustee. Therefore, if through negligence,
fraud or otherwise, a
100
subsequent purchaser were able to take physical possession of the contracts
without notice of such assignment, the trustee's interest in the contracts could
be defeated.
SECURITY INTERESTS IN HOME IMPROVEMENTS. The Home Improvement Contracts
that are secured by the related home improvements grant to the originator a
purchase money security interest in the home improvements to secure all or part
of the purchase price of the home improvements and related services. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods and the purchase money security interests
are assignable. In general, a purchase money security interest grants to the
holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of the collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in the home improvement must generally be perfected by a timely fixture filing.
In general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the home improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS. So long as the home
improvement has not become subject to the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before the resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
INSTALLMENT CONTRACTS
Under an installment contract the seller retains legal title to the
property and enters into an agreement with the purchaser/borrower for the
payment of the purchase price, plus interest, over the term of the contract.
Only after full performance by the borrower of the contract is the
101
lender obligated to convey title to the property to the purchaser. As with
mortgage or deed of trust financing, during the effective period of the
installment contract, the borrower is generally responsible for maintaining the
property in good condition and for paying real estate taxes, assessments and
hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the installment contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an installment contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the loans comprising the trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and
102
all awards made in connection with condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the mortgage, in such order
as the mortgagee may determine. Thus, in the event improvements on the property
are damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to affect
the property or the rights of the mortgagee under the mortgage. Upon a failure
of the mortgagor to perform any of these obligations, the mortgagee is given the
right under certain mortgages to perform the obligation itself, at its election,
with the mortgagor agreeing to reimburse the mortgagee for any sums expended by
the mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee
become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
cut-off date with respect to any mortgage will not be included in the trust
fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
THE TITLE I PROGRAM
GENERAL. Certain of the loans contained in a trust fund may be loans
insured under the FHA Title I Insurance program created pursuant to Sections 1
and 2(a) of the National Housing
103
Act of 1934. Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up to
90% of certain losses incurred on an individual insured loan, including the
unpaid principal balance of the loan, but only to the extent of the insurance
coverage available in the lender's FHA insurance coverage reserve account. The
owner of the loan bears the uninsured loss on each loan.
Title I loan means a loan made to finance actions or items that
substantially protect or improve the basic livability or utility of a one- to
four-family residential property.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties to the
transaction. With respect to a dealer Title I loan, a dealer may include a
seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and generally provide for equal installment payments due weekly, biweekly,
semi-monthly or monthly, except that a loan may be payable quarterly or
semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated and
agreed to by the borrower and the lender and must be fixed for the term of the
loan and recited in the note. Interest on an insured loan must accrue from the
date of the loan and be calculated according to the actuarial method. The lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD unless the lender determines and documents in
the loan file the existence of compensating factors concerning the borrower's
creditworthiness which support approval of the loan.
104
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS. The maximum principal amount for Title I
loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I loans with respect to multiple properties, and a borrower may
obtain more than one Title I loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I loans in the same
property does not exceed the maximum loan amount for the type of Title I loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I loan or a recorded land installment contract for the purchase of
the real property. In the case of a Title I loan with a total principal balance
in excess of $15,000, if the property is not occupied by the owner, the borrower
must have equity in the property being improved at least equal to the principal
amount of the loan, as demonstrated by a current appraisal. Any Title I loan in
excess of $7,500 must be secured by a recorded lien on the improved property
which is evidenced by a mortgage or deed of trust executed by the borrower and
all other owners in fee simple.
The proceeds from a Title I loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I loan where the
principal obligation is $7,500 or more, and on any direct Title I loan where the
borrower fails to submit a completion certificate.
FHA INSURANCE COVERAGE. Under the Title I Program, the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I contract of insurance. The amount of insurance coverage in this account
is a maximum of 10% of the amount
105
disbursed, advanced or expended by the lender in originating or purchasing
eligible loans registered with the FHA for Title I insurance, with certain
adjustments. The balance in the insurance coverage reserve account is the
maximum amount of insurance claims the FHA is required to pay to the Title I
lender. Loans to be insured under the Title I Program will be registered for
insurance by the FHA and the insurance coverage attributable to such loans will
be included in the insurance coverage reserve account for the originating or
purchasing lender following the receipt and acknowledgment by the FHA of a loan
report on the prescribed form pursuant to the Title I regulations. For each
eligible loan reported and acknowledged for insurance, the FHA charges a
premium. For loans having a maturity of 25 months or less, the FHA bills the
lender for the entire premium in an amount equal to the product of 0.50% of the
original loan amount and the loan term. For home improvement loans with a
maturity greater than 25 months, each year that a loan is outstanding the FHA
bills the lender for a premium in an amount equal to 0.50% of the original loan
amount. If a loan is prepaid during the year, the FHA will not refund or abate
the premium paid for that year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of new
eligible loans will continue to increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer insurance
coverage between insurance coverage reserve accounts with earmarking with
respect to a particular insured loan or group of insured loans when a
determination is made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide transaction)
insured loans and loans reported for insurance only to another qualified lender
under a valid Title I contract of insurance. Unless an insured loan is
transferred with recourse or with a guaranty or repurchase agreement, the FHA,
upon receipt of written notification of the transfer of such loan in accordance
with the Title I regulations, will transfer from the transferor's insurance
coverage reserve account to the transferee's insurance coverage reserve account
an amount, if available, equal to 10% of the actual purchase price or the net
unpaid principal balance of such loan (whichever is less). However, under the
Title I Program not more than $5,000 in insurance coverage shall be transferred
to or from a lender's insurance coverage reserve account during any October 1 to
September 30 period without the prior approval of the Secretary of HUD. Amounts
which may be recovered by the Secretary of HUD after payment of an insurance
claim are not added to the amount of insurance coverage in the related lender's
insurance coverage reserve account.
106
CLAIMS PROCEDURES UNDER TITLE I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender chooses
to proceed against the property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the property), the lender may file an
insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I loan must be filed
with the FHA no later than 9 months after the date of default of the loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lien of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. Although the FHA may contest
any insurance claim and make a demand for repurchase of the loan at any time up
to two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender,
the FHA has expressed an intention to limit the period of time within which it
will take such action to one year from the date the claim was certified for
payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the claimable amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "claimable
amount" means an amount equal to 90% of the sum of:
o the unpaid loan obligation (net unpaid principal and the uncollected
interest earned to the date of default) with adjustments thereto if
the lender has proceeded against property securing the loan;
107
o the interest on the unpaid amount of the loan obligation from the date
of default to the date of the claim's initial submission for payment
plus 15 calendar days (but not to exceed 9 months from the date of
default), calculated at the rate of 7% per year;
o the uncollected court costs;
o the attorney's fees not to exceed $500; and
o the expenses for recording the assignment of the security to the
United States.
The Secretary of HUD may deny a claim for insurance in whole or in part for
any violations of the regulations governing the Title I Program; however, the
Secretary of HUD may waive such violations if it determines that enforcement of
the regulations would impose an injustice upon a lender which has substantially
complied with the regulations in good faith.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material federal income tax consequences of
the purchase, ownership and disposition of certificates is based on the opinion
of tax counsel to the depositor, either Sidley Austin Brown & Wood LLP or
Thacher Proffitt & Wood, as specified in the related prospectus supplement. This
summary is based on the provisions of the Internal Revenue Code of 1986, as
amended, and the regulations, including the REMIC Regulations, rulings and
decisions promulgated thereunder and, where applicable, proposed regulations,
all of which are subject to change either prospectively or retroactively. This
summary does not address the material federal income tax consequences of an
investment in securities applicable to certain financial institutions, banks,
insurance companies, tax exempt organizations, dealers in options, currency or
securities, traders in securities that elect to mark to market, or persons who
hold positions other than securities such that the securities are treated as
part of a hedging transaction, straddle, conversion or other integrated
transaction which are subject to special rules. Because of the complexity of the
tax issues involved, we strongly suggest that prospective investors consult
their tax advisors regarding the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of securities.
GENERAL
The federal income tax consequences to securityholders will vary depending
on whether an election is made to treat the trust fund relating to a particular
series of securities as a REMIC under the Code. The prospectus supplement for
each series of securities will specify whether a REMIC election will be made. In
the discussion that follows, all references to a "section" or "sections" shall
be understood to refer, unless otherwise specifically indicated, to a section or
sections of the Code.
If a REMIC election is not made, in the opinion of tax counsel:
o the trust fund will not be classified as an association taxable as a
corporation;
108
o the trust fund will be classified as a grantor trust under subpart E,
part I of subchapter J of the Code;
o as a grantor trust, the trust fund as such will not be subject to
federal income tax; and
o owners of certificates will be treated for federal income tax purposes
as owners of a portion of the trust fund's assets as described below.
With respect to each trust fund that elects REMIC status, in the opinion of
tax counsel, assuming compliance with all provisions of the related agreement,
the trust fund will qualify as a REMIC and the related certificates will be
considered to be regular interests or residual interests in the REMIC. The
related prospectus supplement for each series of securities will indicate
whether the trust fund will make a REMIC election and whether a class of
securities will be treated as a regular or residual interest in the REMIC.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service or any third party.
TAXATION OF DEBT SECURITIES
STATUS AS REAL PROPERTY LOANS. Except to the extent otherwise provided in
the related prospectus supplement, if the securities are regular interests in a
REMIC or represent interests in a grantor trust, in the opinion of tax counsel:
o securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A) of the
Code and interest on securities will be considered "interest on
obligations secured by mortgages on real property or on interests in
real property" within the meaning of section 856(c)(3)(B) of the Code.
INTEREST AND ACQUISITION DISCOUNT. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the securities that are REMIC regular interests will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the holder's normal accounting method. Interest (other than
original issue discount) on securities (other than securities that are REMIC
regular interests) which are characterized as indebtedness for federal income
tax purposes will be includible in income by their holders in accordance with
their usual methods of accounting. When we refer to "debt securities" in this
section, we mean securities characterized as debt for federal income tax
purposes and securities that are REMIC regular interests.
In the opinion of tax counsel, "compound interest securities" (I.E., debt
securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other debt
securities issued at a discount may, be issued with
109
"original issue discount" or OID. The following discussion is based in part on
the OID Regulations. A holder should be aware, however, that the OID Regulations
do not adequately address certain issues relevant to prepayable securities, such
as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of debt securities is sold for cash on
or prior to the closing date, the issue price for that class will be treated as
the fair market value of that class on the closing date. The issue price of a
debt security also includes the amount paid by an initial debt security holder
for accrued interest that relates to a period prior to the issue date of the
debt security. The stated redemption price at maturity of a debt security
includes the original principal amount of the debt security, but generally will
not include distributions of interest if the distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below), provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Although the matter is not free
from doubt, the trustee intends to treat interest on such debt securities as
unconditionally payable and as constituting qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such debt securities includes all distributions
of interest as well as principal thereon. Where the interval between the issue
date and the first distribution date on a debt security is longer than the
interval between subsequent distribution dates, the greater of (i) the interest
foregone and (ii) the excess of the stated principal amount over the issue price
will be included in the stated redemption price at maturity and tested under the
DE MINIMIS rule described below. Where the interval between the issue date and
the first distribution date on a debt security is shorter than the interval
between subsequent distribution dates, all of the additional interest will be
included in the stated redemption price at maturity and tested under the DE
MINIMIS rule described below. In the case of a debt security with a long first
period that has non-DE MINIMIS OID, all stated interest in excess of interest
payable at the effective interest rate for the long first
110
period will be included in the stated redemption price at maturity and the debt
security will generally have OID. Holders of debt securities should consult
their own tax advisors to determine the issue price and stated redemption price
at maturity of a debt security.
Under the DE MINIMIS rule, OID on a debt security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity of
the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (I.E., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report DE MINIMIS OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, accrual method holders may elect to accrue
all DE MINIMIS OID as well as market discount under a constant interest method.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective rate,"
or a combination of "qualified floating rates" that do not operate in
a manner that significantly accelerates or defers interest payments on
the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, the trustee intends to base its computation on
section 1272(a)(6) and the OID Regulations as described in this prospectus.
However, because no regulatory guidance currently exists under section
1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
111
The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the debt security, the
sum of the "daily portions" of OID. The amount of OID includible in income by a
holder will be computed by allocating to each day during a taxable year a pro
rata portion of the original issue discount that accrued during the relevant
accrual period. In the case of a debt security that is not a Regular Interest
Security and the principal payments on which are not subject to acceleration
resulting from prepayments on the loans, the amount of OID includible in income
of a holder for an accrual period (generally the period over which interest
accrues on the debt instrument) will equal the product of the yield to maturity
of the debt security and the adjusted issue price of the debt security, reduced
by any payments of qualified stated interest. The adjusted issue price is the
sum of its issue price plus prior accruals of OID, reduced by the total payments
made with respect to the debt security in all prior periods, other than
qualified stated interest payments.
Certain classes of the debt securities may be "pay-through securities,"
which are debt instruments that are subject to acceleration due to prepayments
on other debt obligations securing those instruments. The amount of OID to be
included in the income of a pay-through security is computed by taking into
account the prepayment rate assumed in pricing the debt instrument. The amount
of OID that will accrue during an accrual period on a pay-through security is
the EXCESS, if any, of the
o sum of
- the present value of all payments remaining to be made on the
pay-through security as of the close of the accrual period and
- the payments during the accrual period of amounts included in the
stated redemption price of the pay-through security,
OVER
o the adjusted issue price of the pay-through security at the beginning
of the accrual period.
The present value of the remaining payments is to be determined on the
basis of three factors:
o the original yield to maturity of the pay-through security (determined
on the basis of compounding at the end of each accrual period and
properly adjusted for the length of the accrual period),
o events that have occurred before the end of the accrual period, and
o the assumption that the remaining payments will be made in accordance
with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect to
the loans at a rate that exceeds the
112
prepayment assumption, and to decrease (but not below zero for any period) the
portions of OID required to be included in income by a holder of a pay-through
security to take into account prepayments with respect to the loans at a rate
that is slower than the prepayment assumption. Although OID will be reported to
holders of pay-through securities based on the prepayment assumption, no
representation is made to holders that loans will be prepaid at that rate or at
any other rate.
The depositor may adjust the accrual of OID on a class of securities that
are regular REMIC interests (or other regular interests in a REMIC) in a manner
that it believes to be appropriate, to take account of realized losses on the
loans, although the OID Regulations do not provide for such adjustments. If the
IRS were to require that OID be accrued without such adjustments, the rate of
accrual of OID for a class of securities that are regular REMIC interests could
increase.
Certain classes of securities that are regular REMIC interests may
represent more than one class of REMIC regular interests. Unless otherwise
provided in the related prospectus supplement, the applicable trustee intends,
based on the OID Regulations, to calculate OID on such securities as if, solely
for the purposes of computing OID, the separate regular interests were a single
debt instrument.
A subsequent holder of a debt security will also be required to include OID
in gross income, but the holder who purchases the debt security for an amount
that exceeds its adjusted issue price will be entitled (as will an initial
holder who pays more than a debt security's issue price) to offset such OID by
comparable economic accruals of portions of the excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
INTEREST WEIGHTED SECURITIES. An "interest weighted security" is a security
that is a REMIC regular interest or a "stripped" security (as discussed under
"--Tax Status as a Grantor Trust; General" below) the payments on which consist
solely or primarily of a specified portion of the interest payments on qualified
mortgages held by the REMIC or on loans underlying pass-through securities. It
is not clear how income should be accrued with respect to interest weighted
securities. The trustee intends to take the position that all of the income
derived from an interest weighted security should be treated as OID and that the
amount and rate of accrual of such OID should be calculated by treating the
interest weighted security as a compound interest security. However, in the case
of interest weighted securities that are entitled to some payments
113
of principal and are REMIC regular interests, the IRS could assert that income
derived from the interest weighted security should be calculated as if the
security were a security purchased at a premium equal to the excess of the price
paid by the holder for the Security over its stated principal amount, if any.
Under this approach, a holder would be entitled to amortize such premium only if
it has in effect an election under section 171 of the Code with respect to all
taxable debt instruments held by such holder, as described below. Alternatively,
the IRS could assert that an interest weighted security should be taxable under
the rules governing bonds issued with contingent payments. This treatment may be
more likely in the case of interest weighted securities that are stripped
securities as described below. SEE "--Non-REMIC Certificates--B. Multiple
Classes of Senior CERTIFICATES--STRIPPED BONDS AND STRIPPED COUPONS" below.
VARIABLE RATE DEBT SECURITIES. In the opinion of tax counsel, in the case
of debt securities bearing interest at a rate that varies directly, according to
a fixed formula, with an objective index, it appears that the yield to maturity
of the debt securities and in the case of pay-through securities, the present
value of all payments remaining to be made on the debt securities, should be
calculated as if the interest index remained at its value as of the issue date
of the securities. Because the proper method of adjusting accruals of OID on a
variable rate debt security is uncertain, holders of variable rate debt
securities should consult their own tax advisers regarding the appropriate
treatment of such securities for federal income tax purposes.
MARKET DISCOUNT. In the opinion of tax counsel, a purchaser of a security
may be subject to the market discount rules of sections 1276 through 1278 of the
Code. A holder that acquires a debt security with more than a prescribed de
minimis amount of "market discount" (generally, the excess of the principal
amount of the debt security over the purchaser's purchase price) will be
required to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the debt
security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (or in the case of a
pass-through security, as set forth below, the loans underlying the
security) not originally issued with OID, stated interest payable in
the relevant period to total stated interest remaining to be paid at
the beginning of the period or (b) in the case of securities (or, in
the case of a pass-through security, as described below, the loans
underlying the security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the debt security (or, in the case of a pass-through security, the loans),
the excess of interest paid or accrued to purchase or carry the security (or, in
the case of a pass-through security, as described below, the underlying loans)
with market discount over interest received on the security is allowed as a
current deduction only to the extent such excess is greater than the market
discount
114
that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the security (or in the case of a
pass-through security, an underlying loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
PREMIUM. In the opinion of tax counsel, a holder who purchases a debt
security (other than an interest weighted security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the security at a premium, which it may
elect to amortize as an offset to interest income on the security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on comparable securities have been
issued, the legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that the
accrual of premium on a class of pay-through securities will be calculated using
the prepayment assumption used in pricing the class. If a holder makes an
election to amortize premium on a debt security, the election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by the holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
On December 30, 1997, the IRS issued final amortizable bond premium
regulations dealing with amortizable bond premium. The regulations specifically
do not apply to prepayable debt instruments subject to code section 1272(a)(6)
of the Code. Absent further guidance from the IRS, the trustee intends to
account for amortizable bond premium in the manner described above. Prospective
purchasers of the debt securities should consult their tax advisors regarding
the possible application of the amortizable bond premium regulations.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium
income as interest, based on a constant yield method for Debt securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a debt security with market discount, the holder of the debt security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the debt security acquires during the year of the election or
thereafter. Similarly, the holder of a debt security that makes this election
for a debt security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a debt security is irrevocable.
115
NON-REMIC CERTIFICATES
A. Single Class of Senior Certificates
CHARACTERIZATION. The trust fund may be created with one class of senior
certificates and one class of subordinated certificates. In this case, each
senior certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the trust fund represented by
that senior certificate and will be considered the equitable owner of a pro rata
undivided interest in each of the mortgage loans in the related mortgage pool.
Any amounts received by a senior certificateholder in lieu of amounts due with
respect to any mortgage loan because of a default or delinquency in payment will
be treated for federal income tax purposes as having the same character as the
payments they replace.
Each holder of a senior certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
mortgage loans in the trust fund represented by that senior certificate,
including interest, original issue discount, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the master servicer in accordance with the senior certificateholder's method
of accounting. Under section 162 or 212 of the Code, each senior
certificateholder will be entitled to deduct its pro rata share of servicing
fees, prepayment fees, assumption fees, any loss recognized upon an assumption
and late payment charges retained by the master servicer, provided that these
amounts are reasonable compensation for services rendered to the trust fund. A
senior certificateholder that is an individual, estate or trust will be entitled
to deduct its share of expenses only to the extent such expenses, plus all other
section 212 expenses, exceed 2% of that senior certificateholder's adjusted
gross income. A senior certificateholder using the cash method of accounting
must take into account its pro rata share of income and deductions as and when
collected by or paid to the master servicer. A senior certificateholder using an
accrual method of accounting must take into account its pro rata share of income
and deductions as they become due or are paid to the master servicer, whichever
is earlier. If the servicing fees paid to the master servicer were deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as a retained ownership interest by the master servicer, or any
person to whom the master servicer assigned for value all or a portion of the
servicing fees, in a portion of the interest payments on the mortgage loans. The
mortgage loans might then be subject to the "coupon stripping" rules of the Code
discussed below.
Unless otherwise specified in the related prospectus supplement, tax
counsel will deliver its opinion to the depositor with respect to each series of
certificates that:
o a senior certificate owned by a "domestic building and loan
association" within the meaning of section 7701(a)(19) of the Code
representing principal and interest payments on mortgage loans will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential property" within the meaning of
section 7701(a)(19)(C)(v) of the Code to the extent that the mortgage
loans represented by that senior certificate are of a type described
in the section;
o a senior certificate owned by a real estate investment trust
representing an interest in mortgage loans will be considered to
represent "real estate assets" within the meaning
116
of section 856(c)(4)(A) of the Code and interest income on the
mortgage loans will be considered "interest on obligations secured by
mortgages on real property" within the meaning of section 856(c)(3)(B)
of the Code to the extent that the mortgage loans represented by that
senior certificate are of a type described in the section; and
o a senior certificate owned by a REMIC will be an "obligation . . .
which is principally secured by an interest in real property" within
the meaning of section 860G(a)(3)(A) of the Code.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
section 593(d) of the Code to any taxable year beginning after December 31,
1995.
The assets constituting certain trust funds may include "buydown" mortgage
loans. The characterization of any investment in "buydown" mortgage loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such "buydown" mortgage loans are secured in part by a bank account
or other personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in "buydown" mortgage loans. Accordingly,
holders of senior certificates should consult their own tax advisors with
respect to characterization of investments in senior certificates representing
an interest in a trust fund that includes "buydown" mortgage loans.
PREMIUM. The price paid for a senior certificate by a holder will be
allocated to the holder's undivided interest in each mortgage loan based on each
mortgage loan's relative fair market value, so that the holder's undivided
interest in each mortgage loan will have its own tax basis. A senior
certificateholder that acquires an interest in mortgage loans at a premium may
elect to amortize the premium under a constant interest method, provided that
the mortgage loan was originated after September 27, 1985. Premium allocable to
a mortgage loan originated on or before September 27, 1985 should be allocated
among the principal payments on the mortgage loan and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on a senior certificate. The basis for a
senior certificate will be reduced to the extent that amortizable premium is
applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used
in computing amortization of premium allowable under section 171 of the Code. A
certificateholder that makes this election for a certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that the
certificateholder acquires during the year of the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a senior certificate acquired at a premium should
recognize a loss, if a mortgage loan prepays in full, equal to the difference
between the portion of the prepaid principal amount of the mortgage loan that is
allocable to the senior certificate and the portion of the adjusted basis of the
senior certificate that is allocable to the mortgage loan. If a reasonable
prepayment assumption is used to amortize the premium, it appears that a loss
would be available, if at all,
117
only if prepayments have occurred at a rate faster than the reasonable assumed
prepayment rate. It is not clear whether any other adjustments would be required
to reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
On December 30, 1997, the Internal Revenue Service issued final amortizable
bond premium regulations. These regulations, which generally are effective for
bonds issued or acquired on or after March 2, 1998 (or, for holders making an
election for the taxable year that included March 2, 1998 or any subsequent
taxable year, shall apply to bonds held on or after the first day of the taxable
year of the election). The amortizable bond premium regulations specifically do
not apply to prepayable debt instruments or any pool of debt instruments, such
as the trust fund, the yield on which may be affected by prepayments which are
subject to section 1272(a)(6) of the Code. Absent further guidance from the IRS
and unless otherwise specified in the related prospectus supplement, the trustee
will account for amortizable bond premium in the manner described above.
Prospective purchasers should consult their tax advisors regarding amortizable
bond premium and the amortizable bond premium regulations.
ORIGINAL ISSUE DISCOUNT. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
(currently sections 1271 through 1273 and section 1275) relating to original
issue discount (OID) will be applicable to a senior certificateholder's interest
in those mortgage loans meeting the conditions necessary for these sections to
apply. Accordingly, the following discussion is based in part on the Treasury's
OID Regulations issued on February 2, 1994 under sections 1271 through 1273 and
section 1275 of the Code. Certificateholders should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the certificates. Rules regarding periodic inclusion of OID
income are applicable to mortgages of corporations originated after May 27,
1969, mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2, 1984.
OID could arise by the financing of points or other charges by the originator of
the mortgages in an amount greater than a statutory DE MINIMIS exception to the
extent that the points are not currently deductible under applicable provisions
of the Code or are not for services provided by the lender. OID generally must
be reported as ordinary gross income as it accrues under a constant interest
method. SEE "--B. Multiple Classes of Senior Certificates--SENIOR CERTIFICATES
REPRESENTING INTERESTS IN LOANS OTHER THAN ARM LOANS--ACCRUAL OF ORIGINAL ISSUE
DISCOUNT" below.
MARKET DISCOUNT. A senior certificateholder that acquires an undivided
interest in mortgage loans may be subject to the market discount rules of
sections 1276 through 1278 to the extent an undivided interest in a mortgage
loan is considered to have been purchased at a "market discount". Generally, the
excess of the portion of the principal amount of a mortgage loan allocable to
the holder's undivided interest over the holder's tax basis in such interest.
Market discount with respect to a senior certificate will be considered to be
zero if the amount allocable to the senior certificate is less than 0.25% of the
senior certificate's stated redemption price at maturity multiplied by the
weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules
118
and the advisability of making any of the elections allowed under sections 1276
through 1278 of the Code.
The Code provides that any principal payment, whether a scheduled payment
or a prepayment, or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants to the Department of the Treasury authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Although the Treasury has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
senior certificate is issued with OID, the amount of market discount that
accrues during any accrual period is equal to the product of
o the total remaining market discount
TIMES
o a fraction, the numerator of which is the original issue discount
accruing during the period and the denominator of which is the total
remaining original issue discount at the beginning of the accrual
period.
For senior certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
o the total remaining market discount
TIMES
o a fraction, the numerator of which is the amount of stated interest
paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning
of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the senior certificates) which provide for
payments which may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of original issue discount will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a senior
certificate purchased at a discount or premium in the secondary market.
119
A holder who acquires a senior certificate at a market discount also may be
required to defer, until the maturity date of the senior certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of the
amount of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the senior certificate
in excess of the aggregate amount of interest (including OID) includible in such
holder's gross income for the taxable year with respect to the senior
certificate. The amount of such net interest expense deferred in a taxable year
may not exceed the amount of market discount accrued on the senior certificate
for the days during the taxable year on which the holder held the senior
certificate and, in general, would be deductible when such market discount is
includible in income. The amount of any remaining deferred deduction is to be
taken into account in the taxable year in which the senior certificate matures
or is disposed of in a taxable transaction. In the case of a disposition in
which gain or loss is not recognized in whole or in part, any remaining deferred
deduction will be allowed to the extent of gain recognized on the disposition.
This deferral rule does not apply if the senior certificateholder elects to
include such market discount in income currently as it accrues on all market
discount obligations acquired by the senior certificateholder in that taxable
year or thereafter.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a certificateholder to elect to accrue all interest, discount
(including DE MINIMIS market or original issue discount) and premium in income
as interest, based on a constant yield method for certificates acquired on or
after April 4, 1994. If such an election is made with respect to a mortgage loan
with market discount, the certificateholder will be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such certificateholder
acquires during the year of the election or thereafter. Similarly, a
certificateholder that makes this election for a certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
certificateholder owns or acquires. SEE "--Regular Certificates--ORIGINAL ISSUE
DISCOUNT AND PREMIUM" below. The election to accrue interest, discount and
premium on a constant yield method with respect to a certificate is irrevocable.
ANTI-ABUSE RULE. The IRS is permitted to apply or depart from the rules
contained in the OID Regulations as necessary or appropriate to achieve a
reasonable result where a principal purpose in structuring a mortgage asset,
mortgage loan or senior certificate, or the effect of applying the otherwise
applicable rules, is to achieve a result that is unreasonable in light of the
purposes of the applicable statutes (which generally are intended to achieve the
clear reflection of income for both issuers and holders of debt instruments).
B. Multiple Classes of Senior Certificates
STRIPPED BONDS AND STRIPPED COUPONS
GENERAL. Pursuant to section 1286 of the Code, the separation of ownership
of the right to receive some or all of the interest payments on an obligation
from ownership of the right to receive some or all of the principal payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For
120
purposes of sections 1271 through 1288 of the Code, section 1286 treats a
stripped bond or a stripped coupon as an obligation issued on the date that such
stripped interest is created. If a trust fund is created with two classes of
senior certificates, one class of senior certificates will represent the right
to principal and interest, or principal only, on all or a portion of the
mortgage loans ("stripped bond certificates"), while the second class of senior
certificates will represent the right to some or all of the interest on such
portion ("stripped coupon certificates").
Servicing fees in excess of reasonable servicing fees will be treated under
the stripped bond rules. If such excess servicing fee is less than 100 basis
points (I.E., 1% interest on the mortgage loan principal balance) or the
certificates are initially sold with a DE MINIMIS discount (assuming no
prepayment assumption is required), any non-DE MINIMIS discount arising from a
subsequent transfer of the certificates should be treated as market discount.
The IRS appears to require that reasonable servicing fees be calculated on a
mortgage loan by mortgage loan basis, which could result in some mortgage loans
being treated as having more than 100 basis points of interest stripped off.
Although not entirely clear, a stripped bond certificate generally should
be treated as a single debt instrument issued on the day it is purchased for
purposes of calculating any original issue discount. Generally, if the discount
on a stripped bond certificate is larger than a DE MINIMIS amount (as calculated
for purposes of the original issue discount rules), a purchaser of such a
certificate will be required to accrue the discount under the original issue
discount rules of the Code. SEE "--Single Class of Senior Certificates--ORIGINAL
ISSUE DISCOUNT" above. However, a purchaser of a stripped bond certificate will
be required to account for any discount on the certificate as market discount
rather than original issue discount if either
o the amount of OID with respect to the certificate was treated as zero
under the OID DE MINIMIS rule when the certificate was stripped, or
o no more than 100 basis points (including any amount of servicing in
excess of reasonable servicing) are stripped off the trust fund's
mortgage loans.
Pursuant to Revenue Procedure 91-49 issued on August 8, 1991, purchasers of
stripped bond certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
The precise tax treatment of stripped coupon certificates is substantially
uncertain. The Code could be read literally to require that original issue
discount computations be made on a mortgage loan by mortgagee loan basis.
However, based on recent IRS guidance, it appears that a stripped coupon
certificate should be treated as a single installment obligation subject to the
original issue discount rules of the Code. As a result, all payments on a
stripped coupon certificate would be included in the certificate's stated
redemption price at maturity for purposes of calculating income on such
certificate under the original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of mortgage
loans will give rise to a loss to the holder of a stripped bond certificate
purchased at a premium or a stripped coupon certificate. If a senior certificate
is treated as a single instrument (rather than an
121
interest in discrete mortgage loans) and the effect of prepayments is taken into
account in computing yield with respect to the senior certificate, it appears
that no loss may be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate. However, if
the senior certificate is treated as an interest in discrete mortgage loans or
if no prepayment assumption is used, then, when a mortgage loan is prepaid, the
holder of the certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the certificate that is allocable to the
mortgage loan.
Because of the complexity of these issues, we strongly suggest that holders
of stripped bond certificates and stripped coupon certificates consult with
their own tax advisors regarding the proper treatment of these certificates for
federal income tax purposes.
TREATMENT OF CERTAIN OWNERS. Several sections of the Code provide
beneficial treatment to certain taxpayers that invest in mortgage loans of the
type that make up the trust fund. With respect to these sections, no specific
legal authority exists regarding whether the character of the senior
certificates, for federal income tax purposes, will be the same as that of the
underlying mortgage loans. While section 1286 treats a stripped obligation as a
separate obligation for purposes of the provisions of the Code addressing
original issue discount, it is not clear whether such characterization would
apply with regard to these other sections. Although the issue is not free from
doubt, in the opinion of tax counsel, based on policy considerations, each class
of senior certificates should be considered to represent "real estate assets"
within the meaning of section 856(c)(4)(A) of the Code and "loans . . . secured
by, an interest in real property which is . . . residential real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code, and interest income
attributable to senior certificates should be considered to represent "interest
on obligations secured by mortgages on real property" within the meaning of
section 856(c)(3)(B) of the Code, provided that in each case the underlying
mortgage loans and interest on such mortgage loans qualify for such treatment.
Prospective purchasers to which such characterization of an investment in senior
certificates is material should consult their own tax advisors regarding the
characterization of the senior certificates and related income. Senior
certificates will be "obligations (including any participation or certificate of
beneficial ownership therein) which are principally secured by an interest in
real property" within the meaning of section 860G(a)(3)(A) of the Code.
SENIOR CERTIFICATES REPRESENTING INTERESTS IN LOANS OTHER THAN ARM LOANS
GENERAL. The OID rules of sections 1271 through 1275 of the Code will be
applicable to a senior certificateholder's interest in those mortgage loans as
to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, OID could arise by the charging of points by the originator of the
mortgage in an amount greater than the statutory DE MINIMIS exception, including
a payment of points that is currently deductible by the borrower under
applicable provisions of the Code, or, under certain circumstances, by the
presence of "teaser" rates on the mortgage loans. OID on each senior certificate
must be included in the owner's ordinary income for federal income tax purposes
as it accrues, in
122
accordance with a constant interest method that takes into account the
compounding of interest, in advance of receipt of the cash attributable to such
income. The amount of OID required to be included in an owner's income in any
taxable year with respect to a senior certificate representing an interest in
mortgage loans other than mortgage loans with interest rates that adjust
periodically (ARM loans) likely will be computed as described under "--ACCRUAL
OF ORIGINAL ISSUE DISCOUNT" below. The following discussion is based in part on
the OID Regulations and in part on the provisions of the Tax Reform Act of 1986,
as amended. The OID Regulations generally are effective for debt instruments
issued on or after April 4, 1994, but may be relied upon as authority with
respect to debt instruments such as the senior certificates issued after
December 21, 1992. Alternatively, proposed Treasury regulations issued December
21, 1992 may be treated as authority for debt instruments issued after December
21, 1992 and prior to April 4, 1994, and proposed Treasury regulations issued in
1986 and 1991 may be treated as authority for instruments issued before December
21, 1992. In applying these dates, the issue date of the mortgage loans should
be used or, in the case of stripped bond certificates or stripped coupon
certificates, the date when these certificates are acquired. The holder of a
senior certificate should be aware, however, that neither the proposed OID
Regulations nor the OID Regulations adequately address certain issues relevant
to prepayable securities.
Under the Code, the mortgage loans underlying each senior certificate will
be treated as having been issued on the date they were originated with an amount
of OID equal to the excess of such mortgage loan's stated redemption price at
maturity over its issue price. The issue price of a mortgage loan is generally
the amount lent to the mortgagee, which may be adjusted to take into account
certain loan origination fees. The stated redemption price at maturity of a
mortgage loan is the sum of all payments to be made on such mortgage loan other
than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described under "--ACCRUAL OF ORIGINAL ISSUE DISCOUNT"
below, will, unless otherwise specified in the related prospectus supplement,
utilize the original yield to maturity of the senior certificate calculated
based on a reasonable assumed prepayment rate for the mortgage loans underlying
the senior certificates and will take into account events that occur during the
calculation period. This prepayment assumption will be determined in the manner
prescribed by regulations that have not yet been issued. The legislative history
of the Tax Reform Act provides, however, that the regulations will require that
this prepayment assumption be the prepayment assumption that is used in
determining the offering price of the certificate. No representation is made
that any certificate will prepay at the prepayment assumption or at any other
rate. The prepayment assumption contained in the Code literally only applies to
debt instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in such debt instruments, such
as the certificates represent. However, no other legal authority provides
guidance with regard to the proper method for accruing OID on obligations that
are subject to prepayment, and, until further guidance is issued, the master
servicer intends to calculate and report OID under the method described below.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. Generally, the owner of a senior
certificate must include in gross income the sum of the "daily portions", as
defined below, of the OID on that senior certificate for each day on which it
owns the senior certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of
original issue discount with respect to each component generally will be
determined
123
as follows under the Amendments. A calculation will be made by the
master servicer or such other entity specified in the related prospectus
supplement of the portion of original issue discount that accrues during each
successive monthly accrual period (or shorter period from the date of original
issue) that ends on the day in the calendar year corresponding to each of the
distribution dates on the senior certificate (or the day prior to each such
date). This will be done, in the case of each full month accrual period, by
adding
o the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
respective component, under the Prepayment Assumption) of all
remaining payments to be received under the Prepayment Assumption on
the respective component, and
o any payments received during such accrual period (other than a payment
of qualified stated interest), and subtracting from that total the
"adjusted issue price" of the respective component at the beginning of
such accrual period.
The "adjusted issue price" of a senior certificate at the beginning of the first
accrual period is its issue price; the "adjusted issue price" of a senior
certificate at the beginning of a subsequent accrual period is the "adjusted
issue price" at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period reduced by the amount of any
payment (other than a payment of qualified stated interest) made at the end of
or during that accrual period. The OID during the accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
OID generally must be reported as ordinary gross income as it accrues under
a constant interest method that takes into account the compounding of interest
as it accrues rather than when received. However, the amount of OID includible
in the income of a holder of an obligation is reduced when the obligation is
acquired after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued OID, less prior payments of
principal. Accordingly, if mortgage loans acquired by a certificateholder are
purchased at a price equal to the then unpaid principal amount of such mortgage
loan, no original issue discount attributable to the difference between the
issue price and the original principal amount of such mortgage loan (I.E.,
points) will be includible by such holder. Other OID on the mortgage loans
(E.G., that arising from a "teaser" rate) would still need to be accrued.
SENIOR CERTIFICATES REPRESENTING INTERESTS IN ARM LOANS
The OID Regulations do not address the treatment of instruments, such as
the senior certificates (if the related trust fund includes ARM loans), which
represent interests in ARM loans. Additionally, the IRS has not issued guidance
under the coupon stripping rules of the Code with respect to these instruments.
In the absence of any authority, the master servicer will report OID on senior
certificates attributable to ARM loans ("stripped ARM obligations") to holders
in a manner it believes to be consistent with the rules described under the
heading "--SENIOR CERTIFICATES REPRESENTING INTERESTS IN LOANS OTHER THAN ARM
LOANS" above and with the
124
OID Regulations. In general, application of these rules may require inclusion of
income on a stripped ARM obligation in advance of the receipt of cash
attributable to such income. Further, the addition of deferred interest
resulting from negative amortization to the principal balance of an ARM loan may
require the inclusion of such amount in the income of the senior
certificateholder when the amount accrues. Furthermore, the addition of deferred
interest to the senior certificate's principal balance will result in additional
income (including possibly OID income) to the senior certificateholder over the
remaining life of the senior certificates.
Because the treatment of stripped ARM obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to these certificates.
C. Possible Application of Contingent Payment Regulations to Certain Non-REMIC
Certificates
Final regulations issued on June 11, 1996 with respect to OID under section
1275 include "contingent payment regulations" covering obligations that provide
for one or more contingent payments. Rights to interest payments on a mortgage
loan might be considered to be contingent within the meaning of the contingent
payment regulations if the interest would not be paid if the borrower exercised
its right to prepay the mortgage loan. However, in the case of an investor
having a right to shares of the interest and principal payments on a mortgage
loan when the share of interest is not substantially greater than the share of
principal, the possibility of prepayment should not be considered to
characterize otherwise noncontingent interest payments as contingent payments.
The absence of interest payments following a prepayment would be the normal
consequence of the return of the investor's capital in the form of a principal
payment. On the other hand, a right to interest on such a mortgage loan is more
likely to be regarded as contingent if held by an investor that does not also
hold a right to the related principal. Such an investor would not recover its
capital through receipt of a principal payment at the time of the prepayment of
the mortgage loan.
Applying these principles to the senior certificates, because the mortgage
loans are subject to prepayment at any time, payments on a class of senior
certificates representing a right to interest on the mortgage loans could be
considered to be contingent within the meaning of the contingent payment
regulations, at least if the senior certificate was issued at a premium. The
likelihood that such payments will be considered contingent increases the
greater the amount of such premium.
In the event that payments on a senior certificate in respect of interest
on the mortgage loans are considered contingent, then the holder would generally
report income or loss as described under the heading "--STRIPPED BONDS AND
STRIPPED COUPONS" above; PROVIDED, HOWEVER, that the yield that would be used in
calculating interest income would not be the actual yield but would instead
equal the "applicable Federal rate" (AFR), in effect at the time of purchase of
the senior certificate by the holder. The AFR generally is an average of current
yields on Treasury securities computed and published monthly by the IRS. In
addition, once the holder's adjusted basis in the senior certificate has been
reduced (by prior distributions or losses) to an amount equal to the aggregate
amount of the remaining noncontingent payments of the mortgage loans that are
allocable to the senior certificate (or to zero if the senior certificate does
125
not share in principal payments), then the holder would recognize income in each
subsequent month equal to the full amount of interest on the mortgage loans that
accrues in that month and is allocable to the senior certificate. It is
uncertain whether, under the contingent payment regulations, any other
adjustments would be made to take account of prepayments of the mortgage loans.
D. Sale or Exchange of a Senior Certificate
Sale or exchange of a senior certificate prior to its maturity will result
in gain or loss equal to the difference, if any, between the amount received and
the seller's adjusted basis in the senior certificate. Such adjusted basis
generally will equal the seller's purchase price for the senior certificate,
increased by the OID included in the seller's gross income with respect to the
senior certificate, and reduced by principal payments on the senior certificate
previously received by the seller. Such gain or loss will be capital gain or
loss to a seller for which a senior certificate is a "capital asset" within the
meaning of section 1221 of the Code, and will be long-term or short-term
depending on whether the senior certificate has been owned for the long-term
capital gain holding period (currently more than one year).
Non-corporate taxpayers are subject to reduced maximum rates on long-term
capital gains and are generally subject to tax at ordinary income rates on
short-term capital gains. The deductibility of capital losses is subject to
certain limitations. Prospective investors should consult their own tax advisors
concerning these tax law provisions.
It is possible that capital gain realized by holders of the senior
certificates could be considered gain realized upon the disposition of property
that was part of a "conversion transaction". A sale of a senior certificate will
be part of a conversion transaction if substantially all of the holder's
expected return is attributable to the time value of the holder's net
investment, and one of the following conditions is met:
o the holder entered the contract to sell the senior certificate
substantially contemporaneously with acquiring the senior certificate;
o the senior certificate is part of a straddle;
o the senior certificate is marketed or sold as producing capital gain;
or
o other transactions to be specified in Treasury regulations that have
not yet been issued occur.
If the sale or other disposition of a senior certificate is part of a conversion
transaction, all or any portion of the gain realized upon the sale or other
disposition would be treated as ordinary income instead of capital gain.
Senior certificates will be "evidences of indebtedness" within the meaning
of section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a senior certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
126
E. Non-U.S. Persons
Generally, to the extent that a senior certificate evidences ownership in
mortgage loans that are issued on or before July 18, 1984, interest or OID paid
by the person required to withhold tax under section 1441 or 1442 to (i) an
owner that is not a U.S. Person or (ii) a senior certificateholder holding on
behalf of an owner that is not a U.S. Person, will be subject to federal income
tax, collected by withholding, at a rate of 30% or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued OID recognized by the
owner on the sale or exchange of such a senior certificate also will be subject
to federal income tax at the same rate. Generally, such payments would not be
subject to withholding to the extent that a senior certificate evidences
ownership in mortgage loans issued after July 18, 1984, if
o the senior certificateholder does not actually or constructively own
10% or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as
the trust fund);
o the senior certificateholder is not a controlled foreign corporation
within the meaning of section 957 of the Code related to the issuer;
and
o the senior certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the senior
certificateholder under penalties of perjury, certifying that it is
not a U.S. Person and providing its name and address.
F. Information Reporting and Backup Withholding
The master servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each certificateholder at any time
during the year, such information as may be deemed necessary or desirable to
assist securityholders in preparing their federal income tax returns, or to
enable holders to make the information available to owners or other financial
intermediaries of holders that hold the certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, backup withholding may be
required with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against the recipient's
federal income tax liability.
G. New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations which
attempt to unify certification requirements and modify reliance standards
effective for payments made after December 31, 2000.
127
REMIC CERTIFICATES
A. General
The trust fund relating to a series of certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(SEE, however, "--Prohibited Transactions and Other Taxes") below, if a trust
fund with respect to which a REMIC election is made fails to comply with one or
more of the ongoing requirements of the Code for REMIC status during any taxable
year (including the implementation of restrictions on the purchase and transfer
of the residual interest in a REMIC as described under "--Residual Certificates"
below), the Code provides that a trust fund will not be treated as a REMIC for
such year and thereafter. In that event, such entity may be taxable as a
separate corporation, and the related REMIC certificates may not be accorded the
status or given the tax treatment described below. While the Code authorizes the
Treasury to issue regulations providing relief in the event of an inadvertent
termination of status as a REMIC, no such regulations have been issued.
Moreover, any relief may be accompanied by sanctions such as the imposition of a
corporate tax on all or a portion of the REMIC's income for the period in which
the requirements for such status are not satisfied. With respect to each trust
fund that elects REMIC status, in the opinion of tax counsel, assuming
compliance with all provisions of the related Agreement, the trust fund will
qualify as a REMIC and the related certificates will be considered to be regular
interests ("regular certificates") or residual interests ("residual
certificates") in the REMIC. The related prospectus supplement for each series
of certificates will indicate whether the trust fund will make a REMIC election
and whether a class of certificates will be treated as a regular or residual
interest in the REMIC.
In general, with respect to each series of certificates for which a REMIC
election is made,
o certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets described in
section 7701(a)(19)(C) of the Code;
o certificates held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A) of the
Code; and
o interest on certificates held by a real estate investment trust will
be considered "interest on obligations secured by mortgages on real
property" within the meaning of section 856(c)(3)(B) of the Code.
If less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing sections, the certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. In addition, payments on
mortgage loans held pending distribution on the REMIC certificates will be
considered to be qualifying assets under the foregoing sections.
In some instances, the mortgage loans may not be treated entirely as assets
described in the foregoing sections. SEE, in this regard, the discussion of
"buydown" mortgage loans contained in "--NON-REMIC CERTIFICATES--SINGLE CLASS OF
SENIOR CERTIFICATEs" above. REMIC certificates held by a real estate investment
trust will not constitute "Government Securities" within the meaning of section
856(c)(4)(A) of the Code and REMIC certificates held by a
128
regulated investment company will not constitute "Government Securities" within
the meaning of section 851(b)(4)(A)(ii) of the Code. REMIC certificates held by
certain financial institutions will constitute "evidences of indebtedness"
within the meaning of section 582(c)(1) of the Code.
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) which are
"single family residences" under section 25(e)(10) of the Code will qualify as
real property without regard to state law classifications. Under section
25(e)(10), a single family residence includes any manufactured home which has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and which is of a kind customarily used at a fixed location.
B. Tiered REMIC Structures
For certain series of certificates, two separate elections may be made to
treat designated portions of the related trust fund as REMICs (respectively, the
"subsidiary REMIC" and the "master REMIC") for federal income tax purposes. Upon
the issuance of any such series of certificates, tax counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related pooling and servicing agreement, the master REMIC as well as any
subsidiary REMIC will each qualify as a REMIC and the REMIC certificates issued
by the master REMIC and the subsidiary REMIC, respectively, will be considered
to evidence ownership of regular certificates or residual certificates in the
related REMIC within the meaning of the REMIC provisions.
Only REMIC certificates issued by the master REMIC will be offered under
this prospectus. The subsidiary REMIC and the master REMIC will be treated as
one REMIC solely for purposes of determining
o whether the REMIC certificates will be (i) "real estate assets" within
the meaning of section 856(c)(4)(A) of the Code or (ii) "loans secured
by an interest in real property" under section 7701(a)(19)(C) of the
Code; and
o whether the income on the certificates is interest described in
section 856(c)(3)(B) of the Code.
C. Regular Certificates
GENERAL. Except as otherwise stated in this discussion, regular
certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of regular certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
regular certificates under an accrual method.
129
ORIGINAL ISSUE DISCOUNT AND PREMIUM. The regular certificates may be issued
with OID within the meaning of section 1273(a) of the Code. Generally, the
amount of OID, if any, will equal the difference between the "stated redemption
price at maturity" of a regular certificate and its "issue price". Holders of
any class of certificates issued with OID will be required to include such OID
in gross income for federal income tax purposes as it accrues, in accordance
with a constant interest method based on the compounding of interest, in advance
of receipt of the cash attributable to such income. The following discussion is
based in part on the OID Regulations and in part on the provisions of the Tax
Reform Act. Holders of regular certificates should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities such as the regular certificates.
Rules governing OID are set forth in sections 1271 through 1273 and section
1275 of the Code. These rules require that the amount and rate of accrual of OID
be calculated based on a Prepayment Assumption and prescribe a method for
adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by regulations
which have not yet been issued. The Legislative History provides, however, that
Congress intended the regulations to require that the Prepayment Assumption be
the prepayment assumption that is used in determining the initial offering price
of the regular certificates. The prospectus supplement for each series of
regular certificates will specify the prepayment assumption to be used for the
purpose of determining the amount and rate of accrual of OID. No representation
is made that the regular certificates will prepay at the prepayment assumption
or at any other rate.
In general, each regular certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price". The issue price of
a regular certificate is the first price at which a substantial amount of
regular certificates of that class are sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). If less than a substantial amount
of a particular class of regular certificates is sold for cash on or prior to
the date of their initial issuance, the issue price for that class will be
treated as the fair market value of that class on the initial issue date. The
issue price of a regular certificate also includes the amount paid by an initial
regular certificateholder for accrued interest that relates to a period prior to
the initial issue date of the regular certificate. The stated redemption price
at maturity of a regular certificate includes the original principal amount of
the regular certificate, but generally will not include distributions of
interest if such distributions constitute "qualified stated interest". Qualified
stated interest generally means interest payable at a single fixed rate or
qualified variable rate (as described below) provided that the interest payments
are unconditionally payable at intervals of one year or less during the entire
term of the regular certificate. Interest is payable at a single fixed rate only
if the rate appropriately takes into account the length of the interval between
payments. Distributions of interest on regular certificates with respect to
which deferred interest will accrue will not constitute qualified stated
interest payments, in which case the stated redemption price at maturity of the
regular certificates includes all distributions of interest as well as principal
thereon.
130
Where the interval between the initial issue date and the first
distribution date on a regular certificate is longer than the interval between
subsequent distribution dates, the greater of any OID (disregarding the rate in
the first period) and any interest foregone during the first period is treated
as the amount by which the stated redemption price at maturity of the
certificate exceeds its issue price for purposes of the DE MINIMIS rule
described below. The OID Regulations suggest that all interest on a
long-first-period regular certificate that is issued with non-DE MINIMIS OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first distribution date on a regular certificate
is shorter than the interval between subsequent distribution dates, interest due
on the first Distribution Date in excess of the amount that accrued during the
first period would be added to the certificates stated redemption price at
maturity. Regular securityholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a regular
certificate.
Under the DE MINIMIS rule, OID on a regular certificate will be considered
to be zero if the amount of OID is less than 0.25% of the stated redemption
price at maturity of the regular certificate multiplied by the weighted average
maturity of the regular certificate. For this purpose, the weighted average
maturity of the regular certificate is computed as the sum of the amounts
determined by multiplying
o the number of full years (I.E., rounding down partial years) from the
issue date until each distribution in reduction of stated redemption
price at maturity is scheduled to be made
TIMES
o a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the regular
certificate and the denominator of which is the stated redemption
price at maturity of the regular certificate.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
mortgage loans and the anticipated reinvestment rate, if any, relating to the
regular certificates. This prepayment assumption with respect to a series of
regular certificates will be set forth in the related prospectus supplement.
Holders generally must report DE MINIMIS OID pro rata as principal payments are
received and such income will be capital gain if the regular certificate is held
as a capital asset. However, accrual method holders may elect to accrue all DE
MINIMIS OID as well as market discount under a constant interest method.
The prospectus supplement with respect to a trust fund may provide for
certain regular certificates to be issued as "super-premium" certificates at
prices significantly exceeding their principal amounts or based on notional
principal balances. The income tax treatment of these super-premium certificates
is not entirely certain. For information reporting purposes, the trust fund
intends to take the position that the stated redemption price at maturity of the
super-premium certificates is the sum of all payments to be made on these
certificates determined under the prepayment assumption set forth in the related
prospectus supplement, with the result
131
that the super-premium certificates would be treated as being issued with OID.
The calculation of income in this manner could result in negative OID (which
delays future accruals of OID rather than being immediately deductible) when
prepayments on the mortgage loans exceed those estimated under the prepayment
assumption. The IRS might contend, however, that the contingent payment
regulations should apply to the super-premium certificates.
Although the contingent payment regulations are not applicable to
instruments governed by section 1272(a)(6) of the Code, they represent the only
guidance regarding the current view of the IRS with respect to contingent
payment instruments. In the alternative, the IRS could assert that the stated
redemption price at maturity of such regular certificates should be limited to
their principal amount (subject to the discussion under "--ACCRUED INTEREST
CERTIFICATES" below), so that such regular certificates would be considered for
U.S. federal income tax purposes to be issued at a premium. If such position
were to prevail, the rules described under "--PREMIUM" below would apply. It is
unclear when a loss may be claimed for any unrecovered basis for a super-premium
certificate. It is possible that a holder of a super-premium certificate may
only claim a loss when its remaining basis exceeds the maximum amount of future
payments, assuming no further prepayments, or when the final payment is received
with respect to the super-premium certificate.
Under the REMIC Regulations, if the issue price of a regular certificate
(other than regular certificate based on a notional amount) does not exceed 125%
of its actual principal amount, the interest rate is not considered
disproportionately high. Accordingly, a regular certificate generally should not
be treated as a super-premium certificate and the rules described below under
"--PREMIUM" below should apply. However, it is possible that holders of regular
certificates issued at a premium, even if the premium is less than 25% of the
certificate's actual principal balance, will be required to amortize the premium
under an OID method or contingent interest method even though no election under
section 171 of the Code is made to amortize such premium.
Generally, a regular certificateholder must include in gross income the
"daily portions," as determined below, of the OID that accrues on a regular
certificate for each day the regular certificateholder holds the regular
certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a regular certificate, a calculation will be
made of the portion of the OID that accrues during each successive accrual
period that ends on the day in the calendar year corresponding to a distribution
date (or if distribution dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on the last day
of the immediately preceding month) and begins on the day after the end of the
immediately preceding accrual period (or on the issue date in the case of the
first accrual period). This will be done, in the case of each full accrual
period, by adding
o the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
regular certificates as calculated under the Prepayment Assumption) of
all remaining payments to be received on the regular certificate under
the Prepayment Assumption, and
132
o any payments included in the stated redemption price at maturity
received during the accrual period,
and subtracting from that total the "adjusted issue price" of the regular
certificates at the beginning of the accrual period.
The "adjusted issue price" of a regular certificate at the beginning of the
first accrual period is its issue price; the "adjusted issue price" of a regular
certificate at the beginning of a subsequent accrual period is the "adjusted
issue price" at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the accrual
period. The OID accrued during an accrual period will then be divided by the
number of days in the period to determine the daily portion of OID for each day
in the accrual period. The calculation of OID under the method described above
will cause the accrual of OID to either increase or decrease (but never below
zero) in a given accrual period to reflect the fact that prepayments are
occurring faster or slower than under the Prepayment Assumption. With respect to
an initial accrual period shorter than a full accrual period, the daily portions
of OID may be determined according to an appropriate allocation under any
reasonable method.
A subsequent purchaser of a regular certificate issued with OID who
purchases the regular certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that regular certificate. In computing
the daily portions of OID for such a purchaser (as well as an initial purchaser
that purchases at a price higher than the adjusted issue price but less than the
stated redemption price at maturity), however, the daily portion is reduced by
the amount that would be the daily portion for such day (computed in accordance
with the rules set forth above) multiplied by a fraction, the numerator of which
is the amount, if any, by which the price paid by such holder for that regular
certificate exceeds the following amount:
o the sum of the issue price plus the aggregate amount of OID that would
have been includible in the gross income of an original regular
certificateholder (who purchased the regular certificate at its issue
price),
LESS
o any prior payments included in the stated redemption price at
maturity,
and the denominator of which is the sum of the daily portions for that regular
certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as original issue.
VARIABLE RATE REGULAR CERTIFICATES. Regular certificates may provide for
interest based on a variable rate. Interest based on a variable rate will
constitute qualified stated interest and not contingent interest if, generally,
o the interest is unconditionally payable at least annually;
133
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments; and
o interest is based on a "qualified floating rate", an "objective rate",
a combination of a single fixed rate and one or more "qualified
floating rates", one "qualified inverse floating rate", or a
combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on
the regular certificate.
The amount of OID with respect to a regular certificate bearing a variable
rate of interest will accrue in the manner described under "--ORIGINAL ISSUE
DISCOUNT AND PREMIUM" above by assuming generally that the index used for the
variable rate will remain fixed throughout the term of the certificate.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the depositor intends to treat interest on a
regular certificate that is a weighted average of the net interest rates on
mortgage loans as qualified stated interest. In such case, the weighted average
rate used to compute the initial pass-through rate on the regular certificates
will be deemed to be the index in effect through the life of the regular
certificates. It is possible, however, that the IRS may treat some or all of the
interest on regular certificates with a weighted average rate as taxable under
the rules relating to obligations providing for contingent payments. Such
treatment may effect the timing of income accruals on regular certificates.
MARKET DISCOUNT. A purchaser of a regular certificate may be subject to the
market discount provisions of sections 1276 through 1278 of the Code. Under
these provisions and the OID Regulations, "market discount" equals the excess,
if any, of
o the regular certificate's stated principal amount or, in the case of a
regular certificate with OID, the adjusted issue price (determined for
this purpose as if the purchaser had purchased the regular certificate
from an original holder)
OVER
o the price for the regular certificate paid by the purchaser.
A holder who purchases a regular certificate at a market discount will recognize
income upon receipt of each distribution representing stated redemption price.
In particular, under section 1276 of the Code such a holder generally will be
required to allocate each principal distribution first to accrued market
discount not previously included in income and to recognize ordinary income to
that extent. A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
Regulations permit a certificateholder using the accrual method of accounting to
elect to accrue all interest, discount (including DE MINIMIS market or original
issue discount) and premium in income as interest, based on a constant yield
method. If such an election is made with respect to a regular certificate with
market discount, the certificateholder will be deemed to
134
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that the
certificateholder acquires during the year of the election or thereafter.
Similarly, a certificateholder that makes this election for a certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that the certificateholder owns or acquires. SEE "--ORIGINAL ISSUES
DISCOUNT AND PREMIUM" above. The election to accrue interest, discount and
premium on a constant yield method with respect to a certificate is irrevocable.
Market discount with respect to a regular certificate will be considered to
be zero if the amount allocable to the regular certificate is less than 0.25% of
the regular certificate's stated redemption price at maturity multiplied by the
regular certificate's weighted average maturity remaining after the date of
purchase. If market discount on a regular certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated to the
remaining principal payments on the regular certificate and gain equal to such
allocated amount will be recognized when the corresponding principal payment is
made. Treasury regulations implementing the market discount rules have not yet
been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code sections 1276 through 1278 of the Code.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Until such time
as regulations are issued by the Treasury, rules described in the legislative
history of the Tax Reform Act will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. For
regular certificates issued with OID, the amount of market discount that accrues
during a period is equal to the product of
o the total remaining market discount
MULTIPLIED BY
o a fraction, the numerator of which is the OID accruing during the
period and the denominator of which is the total remaining OID at the
beginning of the period.
For regular certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
o the total remaining market discount
135
MULTIPLIED BY
o a fraction, the numerator of which is the amount of stated interest
paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning
of the period.
For purposes of calculating market discount under any of the above methods
in the case of instruments (such as the regular certificates) which provide for
payments which may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply.
A holder of a regular certificate that acquires it at a market discount
also may be required to defer, until the maturity date of the regular
certificate or its earlier disposition in a taxable transaction, the deduction
of a portion of the amount of interest that the holder paid or accrued during
the taxable year on indebtedness incurred or maintained to purchase or carry the
regular certificate in excess of the aggregate amount of interest (including
OID) includible in the holder's gross income for the taxable year with respect
to the regular certificate. The amount of such net interest expense deferred in
a taxable year may not exceed the amount of market discount accrued on the
regular certificate for the days during the taxable year on which the holder
held the regular certificate and, in general, would be deductible when such
market discount is includible in income. The amount of any remaining deferred
deduction is to be taken into account in the taxable year in which the regular
certificate matures or is disposed of in a taxable transaction. In the case of a
disposition in which gain or loss is not recognized in whole or in part, any
remaining deferred deduction will be allowed to the extent of gain recognized on
the disposition. This deferral rule does not apply if the regular
certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by the regular
certificateholder in that taxable year or thereafter.
PREMIUM. A purchaser of a regular certificate who purchases the regular
certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the regular certificate at a premium and may elect to amortize
such premium under a constant yield method. A certificateholder that makes this
election for a certificate that is acquired at a premium will be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such certificateholder acquires during the
year of the election or thereafter. It is not clear whether the prepayment
assumption would be taken into account in determining the life of the regular
certificate for this purpose. However, the legislative history of the Tax Reform
Act states that the same rules that apply to accrual of market discount (which
rules require use of a prepayment assumption in accruing market discount with
respect to regular certificates without regard to whether the certificates have
OID) will also apply in amortizing bond premium under section 171 of the Code.
The Code provides that amortizable bond premium will be allocated among the
interest payments on the regular certificates and will be applied as an offset
against the interest payment.
On June 27, 1996, the IRS published in the Federal Register proposed
regulations on the amortization of bond premium. The foregoing discussion is
based in part on such proposed
136
regulations. On December 30, 1997, the IRS issued the amortizable bond premium
regulations which generally are effective for bonds acquired on or after March
2, 1998 or, for holders making an election to amortize bond premium as described
above, the taxable year that includes March 2, 1998 or any subsequent taxable
year, will apply to bonds held on or after the first day of taxable year in
which such election is made. Neither the proposed regulations nor the final
regulations, by their express terms, apply to prepayable securities described in
section 1272(a)(6) of the Code such as the regular certificates. Holders of
regular certificates should consult their tax advisors regarding the possibility
of making an election to amortize any such bond premium.
DEFERRED INTEREST. Certain classes of regular certificates will provide for
the accrual of interest when one or more ARM Loans are adding deferred interest
to their principal balance by reason of negative amortization. Any deferred
interest that accrues with respect to a class of regular certificates will
constitute income to the holders of such certificates prior to the time
distributions of cash with respect to deferred interest are made. It is unclear,
under the OID Regulations, whether any of the interest on such certificates will
constitute qualified stated interest or whether all or a portion of the interest
payable on the certificates must be included in the stated redemption price at
maturity of the certificates and accounted for as OID (which could accelerate
such inclusion). Interest on regular certificates must in any event be accounted
for under an accrual method by the holders of these certificates. Applying the
latter analysis therefore may result only in a slight difference in the timing
of the inclusion in income of interest on the regular certificates.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Certain series of certificates may
contain one or more classes of subordinated certificates and, in the event there
are defaults or delinquencies on the mortgage loans, amounts that would
otherwise be distributed on the subordinated certificates may instead be
distributed on the senior certificates. Holders of subordinated certificates
nevertheless will be required to report income with respect to these
certificates under an accrual method without giving effect to delays and
reductions in distributions on such subordinated certificates attributable to
defaults and delinquencies on the mortgage loans, except to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a holder of a subordinated certificate in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the subordinated certificate is reduced as a result of defaults
and delinquencies on the mortgage loans. However, the timing and character of
such losses or reductions in income are uncertain. Accordingly, holders of
subordinated certificates should consult their own tax advisors on this point.
SALE, EXCHANGE OR REDEMPTION. If a regular certificate is sold, exchanged,
redeemed or retired, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the regular certificate. The
adjusted basis generally will equal the cost of the regular certificate to the
seller, increased by any OID and market discount included in the seller's gross
income with respect to the regular certificate, and reduced (but not below zero)
by payments included in the stated redemption price at maturity previously
received by the seller and by any amortized premium. Similarly, a holder who
receives a payment which is part of the stated redemption price at
137
maturity of a regular certificate will recognize gain equal to the excess, if
any, of the amount of the payment over the holder's adjusted basis in the
regular certificate. The holder of a regular certificate that receives a final
payment which is less than the holder's adjusted basis in the regular
certificate will generally recognize a loss. Except as provided in the following
paragraph and as provided under "--MARKET DISCOUNT" above, any such gain or loss
will be capital gain or loss, provided that the regular certificate is held as a
"capital asset" (generally, property held for investment) within the meaning of
section 1221 of the Code.
Non-corporate taxpayers are subject to reduced maximum rates on long-term
capital gains and are generally subject to tax at ordinary income rates on
short-term capital gains. The deductibility of capital losses is subject to
certain limitations. Prospective investors should consult their own tax advisors
concerning these tax law provisions.
Gain from the sale or other disposition of a regular certificate that might
otherwise be capital gain will be treated as ordinary income to the extent that
such gain does not exceed the EXCESS, if any, of:
o the amount that would have been includible in such holder's income
with respect to the regular certificate had income accrued thereon at
a rate equal to 110% of the AFR as defined in section 1274(d) of the
Code determined as of the date of purchase of such regular
certificate,
OVER
o the amount actually includible in the holder's income.
Gain from the sale or other disposition of a regular certificate that might
otherwise be capital gain will be treated as ordinary income, (i) if the regular
certificate is held as part of a "conversion transaction" as defined in section
1258(c) of the Code, up to the amount of interest that would have accrued at the
applicable federal rate under section 1274(d) of the Code in effect at the time
the taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as part of such transaction, or (ii) if the regular certificate is held as part
of a straddle. Potential investors should consult their tax advisors with
respect to the tax consequences of ownership and disposition of an investment in
regular certificates in their particular circumstances.
Regular certificates will be "evidences of indebtedness" within the meaning
of section 582(c)(1) of the Code so that gain or loss recognized from the sale
of a regular certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The regular certificate information reports will include a statement of the
adjusted issue price of the regular certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
regular certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only
138
require information pertaining to the appropriate proportionate method of
accruing market discount.
ACCRUED INTEREST CERTIFICATES. Regular certificates that are "payment lag"
certificates may provide for payments of interest based on a period that
corresponds to the interval between distribution dates but that ends prior to
each distribution date. The period between the initial issue date of the payment
lag certificates and their first distribution date may or may not exceed such
interval. Purchasers of payment lag certificates for which the period between
the initial issue date and the first distribution date does not exceed such
interval could pay upon purchase of the regular certificates accrued interest in
excess of the accrued interest that would be paid if the interest paid on the
distribution date were interest accrued from distribution date to distribution
date. If a portion of the initial purchase price of a regular certificate is
allocable to interest that has accrued prior to the issue date ("pre-issuance
accrued interest"), and the regular certificate provides for a payment of stated
interest on the first payment date (and the first payment date, is within one
year of the issue date) that equals or exceeds the amount of the pre-issuance
accrued interest, then the regular certificate's issue price may be computed by
subtracting from the issue price the amount of pre-issuance accrued interest,
rather than as an amount payable on the regular certificate. However, it is
unclear under this method how the proposed OID Regulations treat interest on
payment lag certificates as described above. Therefore, in the case of a payment
lag certificate, the REMIC intends to include accrued interest in the issue
price and report interest payments made on the first distribution date as
interest only to the extent such payments represent interest for the number of
days that the certificateholder has held the payment lag certificate during the
first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of payment lag certificates.
NON-INTEREST EXPENSES OF THE REMIC. Under temporary Treasury regulations,
if the REMIC is considered to be a "single-class REMIC", a portion of the
REMIC's servicing, administrative and other noninterest expenses will be
allocated as a separate item to those regular securityholders that are
"pass-through interest holders". Generally, a single-class REMIC is defined as
(i) a REMIC that would be treated as a fixed investment trust under Treasury
regulations but for its qualification as a REMIC or (ii) a REMIC that is
substantially similar to an investment trust but is structured with the
principal purpose of avoiding this allocation requirement imposed by the
temporary regulations. Such a pass-through interest holder would be required to
add its allocable share, if any, of such expenses to its gross income and to
treat the same amount as an item of investment expense. An individual generally
would be allowed a deduction for such expenses only as a miscellaneous itemized
deduction subject to the limitations under section 67 of the Code. That section
allows such deductions only to the extent that in the aggregate such expenses
exceed 2% of the holder's adjusted gross income. In addition, section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a certain amount (the "applicable
amount") will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over the applicable amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income recognized by residual securityholders who
are subject to the limitations of either section 67 or
139
section 68 may be substantial. The REMIC is required to report to each
pass-through interest holder and to the IRS such holder's allocable share, if
any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities including regulated investment companies, but does
not include real estate investment trusts. Certificateholders that are
"pass-through interest holders" should consult their own tax advisors about the
impact of these rules on an investment in the regular certificates.
TREATMENT OF REALIZED LOSSES. Although not entirely clear, it appears that
holders of regular certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any regular certificates becoming wholly or partially worthless
and that, in general, holders of certificates that are not corporations should
be allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any regular certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of certificates
may be allowed a bad debt deduction at such time that the principal balance of
any regular certificate is reduced to reflect realized losses resulting from any
liquidated mortgage loans. The IRS, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect realized
losses only after all mortgage loans remaining in the related trust fund have
been liquidated or the certificates of the related series have been otherwise
retired. Prospective investors in and holders of the certificates are urged to
consult their own tax advisors regarding the appropriate timing, amount and
character of any loss sustained with respect to such certificates, including any
loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
certificates.
NON-U.S. PERSONS. Generally, payments of interest (including any payment
with respect to accrued OID) on the regular certificates to a regular
certificateholder who is a non-U.S. Person not engaged in a trade or business
within the United States will not be subject to federal withholding tax if
o the regular certificateholder does not actually or constructively own
10% or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as
the trust fund or the beneficial owners of the related residual
certificates);
o the regular certificateholder is not a controlled foreign corporation
(within the meaning of section 957 of the Code) related to the issuer;
and
o the regular certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the regular
certificateholder under penalties of perjury, certifying that it is a
foreign person and providing its name and address.
140
If a regular certificateholder is not exempt from withholding, distributions of
interest, including distributions in respect of accrued OID, the holder may be
subject to a 30% withholding tax, subject to reduction under any applicable tax
treaty.
Further, it appears that a regular certificate would not be included in the
estate of a nonresident alien individual and would not be subject to United
States estate taxes. However, securityholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
Regular securityholders who are non-U.S. Persons and persons related to
such holders should not acquire any residual certificates, and residual
securityholders and persons related to residual securityholders should not
acquire any regular certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each regular certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist regular
securityholders in preparing their federal income tax returns or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold regular certificates. If a holder, owner or
other recipient of a payment on behalf of an owner fails to supply a certified
taxpayer identification number or if the Secretary of the Treasury determines
that such person has not reported all interest and dividend income required to
be shown on its federal income tax return, backup withholding may be required
with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
NEW WITHHOLDING REGULATIONS. On October 6, 1997, the Treasury Department
issued the new regulations which attempt to unify certification requirements and
modify reliance standards effective for payments made after December 31, 2000.
D. Residual Certificates
ALLOCATION OF THE INCOME OF THE REMIC TO THE RESIDUAL CERTIFICATES. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. SEE "--Prohibited
Transactions and Other Taxes" below. Instead, each original holder of a residual
certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which such holder owns any residual certificates. The taxable income of
the REMIC for each day will be determined by allocating the taxable income of
the REMIC for each calendar quarter ratably to each day in the quarter. The
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding residual certificates that the holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the residual securityholders without regard to the
timing or amounts of cash distributions by the REMIC. Ordinary income derived
from residual certificates will be "portfolio income" for purposes of the
taxation of taxpayers subject to the limitations on the deductibility of
"passive losses". As residual interests, the residual certificates will be
subject to tax rules, described below, that differ from those that would apply
if the residual certificates
141
were treated for federal income tax purposes as direct ownership interests in
the certificates or as debt instruments issued by the REMIC.
A residual certificateholder may be required to include taxable income from
the residual certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(I.E., a fast-pay, slow-pay structure) may generate such a mismatching of income
and cash distributions (I.E., "phantom income"). This mismatching may be caused
by the use of certain required tax accounting methods by the REMIC, variations
in the prepayment rate of the underlying mortgage loans and certain other
factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
residual certificate to a residual certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a residual
certificate and the impact of such tax treatment on the after-tax yield of a
residual certificate.
A subsequent residual certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that the residual certificateholder owns the residual
certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original residual certificateholder,
as described above. The legislative history of the Tax Reform Act indicates that
certain adjustments may be appropriate to reduce (or increase) the income of a
subsequent holder of a residual certificate that purchased the residual
certificate at a price greater than (or less than) the adjusted basis the
residual certificate would have in the hands of an original residual
certificateholder. SEE "--SALE OR EXCHANGE OF RESIDUAL CERTIFICATES" below. It
is not clear, however, whether such adjustments will in fact be permitted or
required and, if so, how they would be made. The REMIC Regulations do not
provide for any such adjustments.
TAXABLE INCOME OF THE REMIC ATTRIBUTABLE TO RESIDUAL CERTIFICATES. The
taxable income of the REMIC will reflect a netting of the income from the
mortgage loans and the REMIC's other assets and the deductions allowed to the
REMIC for interest and OID on the regular certificates and, except as described
under "--NON-INTEREST EXPENSES OF THE REMIC" below, other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the regular and residual certificates (or, if a class of certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the mortgage loans and other assets of the REMIC in proportion
to their respective fair market values. A mortgage loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less or greater, respectively than its principal balance. Any such
discount (whether market discount or OID) will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing OID on
the regular certificates. The REMIC expects to elect under section 171 of the
Code to amortize any premium on the mortgage loans. Premium on any mortgage loan
to which the election applies would be amortized under a constant yield method.
It is likely that the yield of a mortgage loan would be calculated for this
purpose taking account of the prepayment assumption. However, the election would
not apply to any mortgage loan originated on or before
142
September 27, 1985. Instead, premium on such a mortgage loan would be allocated
among the principal payments thereon and would be deductible by the REMIC as
those payments become due.
The REMIC will be allowed a deduction for interest and OID on the regular
certificates. The amount and method of accrual of OID will be calculated for
this purpose in the same manner as described above with respect to regular
certificates except that the 0.25% per annum DE MINIMIS rule and adjustments for
subsequent holders described therein will not apply.
A residual certificateholder will not be permitted to amortize the cost of
the residual certificate as an offset to its share of the REMIC's taxable
income. However, such taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the residual certificates will be added to the issue
price of the regular certificates in determining the REMIC's initial basis in
its assets. SEE "--SALE OR EXCHANGE OF RESIDUAL CERTIFICATES" below. For a
discussion of possible adjustments to income of a subsequent holder of a
residual certificate to reflect any difference between the actual cost of the
residual certificate to such holder and the adjusted basis the residual
certificate would have in the hands of an original residual certificateholder,
SEE "--ALLOCATION OF THE INCOME OF THE REMIC TO THE RESIDUAL CERTIFICATES"
above.
ADDITIONAL TAXABLE INCOME OF RESIDUAL INTERESTS. Any payment received by a
holder of a residual certificate in connection with the acquisition of the
residual certificate will be taken into account in determining the income of
such holder for federal income tax purposes. Although it appears likely that any
such payment would be includible in income immediately upon its receipt or
accrual as ordinary income, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or according
to some other method. Because of the uncertainty concerning the treatment of
such payments, holders of residual certificates should consult their tax
advisors concerning the treatment of such payments for income tax purposes.
NET LOSSES OF THE REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. The net loss would be
allocated among the residual securityholders in the same manner as the REMIC's
taxable income. The net loss allocable to any residual certificate will not be
deductible by the holder to the extent that such net loss exceeds such holder's
adjusted basis in the residual certificate. Any net loss that is not currently
deductible by reason of this limitation may only be used by the residual
certificateholder to offset its share of the REMIC's taxable income in future
periods (but not otherwise). The ability of residual securityholders that are
individuals or closely held corporations to deduct net losses may be subject to
additional limitations under the Code.
MARK-TO-MARKET REGULATIONS. Prospective purchasers of a residual
certificate should be aware that the IRS finalized mark-to-market regulations
which provide that a residual certificate acquired after January 3, 1995 cannot
be marked to market. The mark-to-market regulations replaced the temporary
regulations which allowed a residual certificate to be marked to market provided
that it was not a "negative value" residual interest.
143
NON-INTEREST EXPENSES OF THE REMIC. The REMIC's taxable income will be
determined in the same manner as if the REMIC were an individual. However, all
or a portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to residual securityholders that
are "pass-through interest holders". Such a holder would be required to add an
amount equal to its allocable share, if any, of such expenses to its gross
income and to treat the same amount as an item of investment expense.
Individuals are generally allowed a deduction for such an investment expense
only as a miscellaneous itemized deduction subject to the limitations under
section 67 of the Code which allows such deduction only to the extent that, in
the aggregate, all such expenses exceed 2% of an individual's adjusted gross
income. In addition, the personal exemptions and itemized deductions of
individuals with adjusted gross incomes above particular levels are subject to
certain limitations which reduce or eliminate the benefit of such items. The
REMIC is required to report to each pass-through interest holder and to the IRS
the holder's allocable share, if any, of the REMIC's non-interest expenses. The
term "pass-through interest holder" generally refers to individuals, entities
taxed as individuals and certain pass-through entities, but does not include
real estate investment trusts. Residual securityholders that are "pass-through
interest holders" should consult their own tax advisors about the impact of
these rules on an investment in the residual certificates. SEE "--Regular
Certificates--NON-INTEREST EXPENSES OF THE REMIC" above.
EXCESS INCLUSIONS. A portion of the income on a residual certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion
o may not, except as described below, be offset by any unrelated losses,
deductions or loss carryovers of a residual certificateholder;
o will be treated as "unrelated business taxable income" within the
meaning of section 512 of the Code if the residual certificateholder
is a pension fund or any other organization that is subject to tax
only on its unrelated business taxable income (SEE "Tax-Exempt
Investors" below); and
o is not eligible for any reduction in the rate of withholding tax in
the case of a residual certificateholder that is a foreign investor.
SEE "--NON-U.S. PERSONS" below. The exception for thrift institutions is
available only to the institution holding the residual certificate and not to
any affiliate of the institution, unless the affiliate is a subsidiary all the
stock of which, and substantially all the indebtedness of which, is held by the
institution, and which is organized and operated exclusively in connection with
the organization and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any
residual certificateholder, the excess inclusions for any calendar quarter is
the EXCESS, if any, of
o the income of the residual certificateholder for that calendar quarter
from its residual certificate
144
OVER
o the sum of the "daily accruals" for all days during the calendar
quarter on which the residual certificateholder holds the residual
certificate.
For this purpose, the daily accruals with respect to a residual certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" of the residual certificate at the
beginning of the calendar quarter and 120% of the "Federal long-term rate" in
effect at the time the residual certificate is issued. For this purpose, the
"adjusted issue price" of a residual certificate at the beginning of any
calendar quarter equals the issue price of the residual certificate, increased
by the amount of daily accruals for all prior quarters, and decreased (but not
below zero) by the aggregate amount of payments made on the residual certificate
before the beginning of such quarter. The "Federal long-term rate" is an average
of current yields on Treasury securities with a remaining term of greater than
nine years, computed and published monthly by the IRS.
In the case of any residual certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to such residual
certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of section 857(b)(2) of the Code, excluding
any net capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by the shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
residual certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds and certain cooperatives are subject to
similar rules.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995 except with respect to residual certificates continuously held
by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act provides three rules for
determining the effect of excess inclusions on the alternative minimum taxable
income of a residual certificateholder. First, the alternative minimum taxable
income for the residual certificateholder is determined without regard to the
special rule that taxable income cannot be less than excess inclusion. Second,
the amount of any alternative minimum tax net operating loss deductions must be
computed without regard to any excess inclusions. Third, the residual
certificateholder's alternative minimum taxable income for a tax year cannot be
less than excess inclusions for the year. The effect of this last statutory
amendment is to prevent the use of nonrefundable tax credits to reduce a
taxpayer's income tax below its tentative minimum tax computed only on excess
inclusions. These rules are effective for tax years beginning after December 31,
1996, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
PAYMENTS. Any distribution made on a residual certificate to a residual
certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the residual
145
certificateholder's adjusted basis in the residual certificate. To the extent a
distribution exceeds such adjusted basis, it will be treated as gain from the
sale of the residual certificate.
PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
residual certificates. In the case of a "single class REMIC", however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the holders of the regular certificates
and the holders of the residual certificates on a daily basis in proportion to
the relative amounts of income accruing to each certificateholder on that day.
In the case of individuals (or trusts, estates or other persons who compute
their income in the same manner as individuals) who own an interest in a regular
certificate directly or through a pass-through entity which is required to pass
miscellaneous itemized deductions through to its owners or beneficiaries (E.G.,
a partnership, an S corporation or a grantor trust), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. The reduction or disallowance of this deduction coupled with the
allocation of additional income may have a significant impact on the yield of
the regular certificate to such a holder. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. In general terms, a single class REMIC is one that
either (i) would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax purposes) or
(ii) is similar to such a trust and is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise stated in the applicable
prospectus supplement, the expenses of the REMIC will be allocated to holders of
the related residual certificates in their entirety and not to holders of the
related regular certificates.
SALE OR EXCHANGE OF RESIDUAL CERTIFICATES. If a residual certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the residual certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a residual certificate generally equals the cost of the residual certificate
to the residual certificateholder, increased by the taxable income of the REMIC
that was included in the income of the residual certificateholder with respect
to the residual certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to the residual certificateholder
with respect to the residual certificate and by the distributions received
thereon by the residual certificateholder. In general, any such gain or loss
will be capital gain or loss provided the residual certificate is held as a
capital asset. However, residual certificates will be "evidences of
indebtedness" within the meaning of section 582(c)(1) of the Code, so that gain
or loss recognized from sale of a residual certificate by a bank or thrift
institution to which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a residual certificate reacquires the residual certificate or acquires any
other residual certificate, any residual interest in another REMIC or similar
interest in a "taxable mortgage pool" (as defined in section 7701(i)) of the
Code during the period beginning six months before, and ending six
146
months after, the date of such sale, such sale will be subject to the "wash
sale" rules of section 1091 of the Code. In that event, any loss realized by the
residual certificateholder on the sale will not be deductible, but instead will
increase the residual certificateholder's adjusted basis in the newly acquired
asset.
Non-corporate taxpayers are subject to reduced maximum rates on long-term
capital gains and are generally subject to tax at ordinary income rates on
short-term capital gains. The deductibility of capital losses is subject to
certain limitations. Prospective investors should consult their own tax advisors
concerning these tax law provisions.
E. Prohibited Transactions and Other Taxes
The REMIC is subject to a tax at a rate equal to 100% of the net income
derived from "prohibited transactions". In general, a prohibited transaction
means the disposition of a mortgage loan other than pursuant to certain
specified exceptions, the receipt of investment income from a source other than
a mortgage loan or certain other permitted investments or the disposition of an
asset representing a temporary investment of payments on the mortgage loans
pending payment on the residual certificates or regular certificates. In
addition, the assumption of a mortgage loan by a subsequent purchaser could
cause the REMIC to recognize gain which would also be subject to the 100% tax on
prohibited transactions.
In addition, certain contributions to a REMIC made after the initial issue
date of the certificates could result in the imposition of a tax on the REMIC
equal to 100% of the value of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related prospectus supplement, such tax would be
borne first by the residual securityholders, to the extent of amounts
distributable to them, and then by the master servicer.
F. Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the meaning of
section 860F(a)(4)(A)(i) of the Code, which may be accomplished by designating
in the REMIC's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC will not be subject to any prohibited
transaction tax, provided that the REMIC credits or distributes in liquidation
all of the sale proceeds plus its cash (other than the amounts retained to meet
claims) to holders of regular and residual certificates within the 90-day
period.
The REMIC will terminate shortly following the retirement of the regular
certificates. If a residual certificateholder's adjusted basis in the residual
certificate exceeds the amount of cash distributed to the residual
certificateholder in final liquidation of its interest, it would appear that the
residual certificateholder would be entitled to a loss equal to the amount of
such excess. It is unclear whether such a loss, if allowed, will be a capital
loss or an ordinary loss.
147
G. Administrative Matters
Solely for the purpose of the administrative provisions of the Code, the
REMIC will be treated as a partnership and the residual securityholders will be
treated as the partners. Under temporary regulations, however, if there is at no
time during the taxable year more than one residual certificateholder, a REMIC
shall not be subject to the rules of subchapter C of chapter 63 of the Code
relating to the treatment of partnership items for a taxable year. Accordingly,
the REMIC will file an annual tax return on Form 1066, U.S. Real Estate Mortgage
Investment Conduit Income Tax Return. In addition, certain other information
will be furnished quarterly to each residual certificateholder who held the
residual certificate on any day in the previous calendar quarter.
Each residual certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the residual
certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC level. The REMIC does not intend to register as a tax
shelter pursuant to section 6111 of the Code because it is not anticipated that
the REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a residual certificate as a nominee for another
person may be required to furnish the REMIC, in a manner to be provided in
Treasury regulations, with the name and address of such person and other
information.
H. Tax-Exempt Investors
Any residual certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of section 512 of the Code will be subject to such
tax on that portion of the distributions received on a residual certificate that
is considered an "excess inclusion." SEE "--Residual Certificates--EXCESS
INCLUSIONS" above.
I. Non-U.S. Persons
Amounts paid to residual securityholders who are not U.S. Persons (see
"--Regular Certificates--Non-U.S. Persons" above) are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Amounts distributed to residual securityholders should qualify as "portfolio
interest", subject to the conditions described in "--Regular Certificates"
above, but only to the extent that the mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a residual
certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. SEE "--Residual Certificates--Excess
Inclusions" above. If the portfolio interest exemption is unavailable, such
amount will be subject to United States withholding tax when paid or otherwise
distributed (or when the residual certificate is disposed of) under rules
similar to those for withholding upon disposition of debt instruments that have
OID. The Code, however, grants the Treasury authority to issue regulations
requiring that those amounts be taken into account earlier than otherwise
provided where necessary to prevent avoidance of tax (e.g., where the residual
certificates do not have significant value). SEE "--Residual
Certificates--Excess
148
Inclusions" above. If the amountS paid to residual securityholders that are not
U.S. Persons are effectively connected with their conduct of a trade or business
within the United States, the 30% (or lower treaty rate) withholding tax will
not apply. Instead, the amounts paid to such non-U.S. Person will be subject to
U. S. federal income taxation at regular graduated rates. For special
restrictions on the transfer of residual certificates, SEE "--Tax-Related
Restrictions on Transfers of Residual Certificates" below.
Regular securityholders and persons related to such holders should not
acquire any residual certificates, and residual securityholders and persons
related to residual securityholders should not acquire any regular certificates
without consulting their tax advisors as to the possible adverse tax
consequences of such acquisition.
J. Tax-Related Restrictions on Transfers of Residual Certificates
DISQUALIFIED ORGANIZATIONS. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations". Further, a tax is
imposed on the transfer of a residual interest in a REMIC to a disqualified
organization. The amount of the tax equals the product of
o an amount (as determined under the REMIC Regulations) equal to the
present value of the total anticipated "excess inclusions" with
respect to such interest for periods after the transfer
MULTIPLIED BY
o the highest marginal federal income tax rate applicable to
corporations.
The tax is imposed on the transferor unless the transfer is through an agent
(including a broker or other middlemen) for a disqualified organization, in
which event the tax is imposed on the agent. The person otherwise liable for the
tax shall be relieved of liability for the tax if the transferee furnished to
such person an affidavit that the transferee is not a disqualified organization
and, at the time of the transfer, such person does not have actual knowledge
that the affidavit is false. A "disqualified organization" means
o the United States, any state, possession, or political subdivision
thereof, any foreign government, any international organization, or
any agency or instrumentality of any of the foregoing (provided that
such term does not include an instrumentality if all its activities
are subject to tax and, except for Freddie Mac, a majority of its
board of directors is not selected by any such governmental agency),
o any organization (other than certain farmers' cooperatives) generally
exempt from federal income taxes unless such organization is subject
to the tax on "unrelated business taxable income",
o a rural electric or telephone cooperative, and
o electing large partnerships.
149
A tax is imposed on a "pass-through entity" holding a residual interest in
a REMIC if at any time during the taxable year of the pass-through entity a
disqualified organization is the record holder of an interest in such entity.
The amount of the tax is equal to the product of
o the amount of excess inclusions for the taxable year allocable to the
interest held by the disqualified organization, and
o the highest marginal federal income tax rate applicable to
corporations.
The pass-through entity otherwise liable for the tax, for any period during
which the disqualified organization is the record holder of an interest in such
entity, will be relieved of liability for the tax if such record holder
furnishes to such entity an affidavit that such record holder is not a
disqualified organization and, for such period, the pass-through entity does not
have actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means
o a regulated investment company, real estate investment trust or common
trust fund,
o a partnership, trust or estate, and
o certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will, with
respect to such interest, be treated as a pass-through entity. The tax on
pass-through entities is generally effective for periods after March 31, 1988,
except that in the case of regulated investment companies, real estate
investment trusts, common trust funds and publicly-traded partnerships the tax
shall apply only to taxable years of such entities beginning after December 31,
1988.
In order to comply with these rules, the pooling and servicing agreement
will provide that no record or beneficial ownership interest in a residual
certificate may be, directly or indirectly, purchased, transferred or sold
without the express written consent of the master servicer. The master servicer
will grant such consent to a proposed transfer only if it receives the
following: (i) an affidavit from the proposed transferee to the effect that it
is not a disqualified organization and is not acquiring the residual certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the residual
certificate.
NON-ECONOMIC RESIDUAL CERTIFICATES. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a non-economic residual certificate
to a U.S. Person, unless no significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A "non-economic
residual certificate" is any residual certificate (including a residual
certificate with a positive value at issuance) unless at the time of transfer,
taking into account the prepayment assumption and any required or permitted
clean up calls or required liquidation provided for in the REMIC's
organizational documents,
o the present value of the expected future distributions on the residual
certificate at least equals the product of the present value of the
anticipated excess inclusions and the
150
highest corporate income tax rate in effect for the year in which the
transfer occurs, and
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes
accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
A significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A transferor is presumed not to have such
knowledge if
o the transferor conducted a reasonable investigation of the
transferee's financial condition and found that the transferee had
historically paid its debts as they come due and found no evidence to
indicate that the transferee would not continue to pay its debts in
the future; and
o the transferee acknowledges to the transferor that the residual
interest may generate tax liabilities in excess of the cash flow and
the transferee represents that it intends to pay such taxes associated
with the residual interest as they become due.
Final Treasury regulations issued on July 18, 2002 (the "New REMIC
Regulations"), provide that transfers of non-economic residual interests must
meet two additional requirements to qualify for the safe harbor:
o the transferee must represent that it will not cause income from the
non-economic residual interest to be attributable to a foreign
permanent establishment or fixed base (within the meaning of an
applicable income tax treaty, hereafter a "foreign branch") of the
transferee or another U.S. taxpayer; and
o the transfer must satisfy either an "asset test" or a "formula test"
provided under the REMIC Regulations.
A transfer to an "eligible corporation," generally a domestic corporation,
will satisfy the asset test if:
o at the time of the transfer, and at the close of each of the
transferee's two fiscal years preceding the transferee's fiscal year
of transfer, the transferee's gross and net assets for financial
reporting purposes exceed $100 million and $10 million, respectively,
in each case, exclusive of any obligations of certain related persons;
o the transferee agrees in writing that any subsequent transfer of the
interest will be to another eligible corporation in a transaction that
satisfies the asset test, and the transferor does not know or have
reason to know that the transferee will not honor these restrictions
on subsequent transfers, and
151
o a reasonable person would not conclude, based on the facts and
circumstances known to the transferor on or before the date of the
transfer (specifically including the amount of consideration paid in
connection with the transfer of the non-economic residual interest),
that the taxes associated with the residual interest will not be paid.
In addition, the direct or indirect transfer of the residual interest to a
foreign branch of a domestic corporation is not treated as a transfer to an
eligible corporation under the asset test.
The formula test provides that the transfer of a non-economic residual
interest will not qualify under the formula test unless the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of
o any consideration given to the transferee to acquire the interest (the
inducement payment),
o future distributions on the interest, and
o any anticipated tax savings associated with holding the interest as
the REMIC generates losses.
For purposes of this calculation, the present value is calculated using a
discount rate equal to the lesser of the applicable federal rate and the
transferee's cost of borrowing.
If the transferee has been subject to the alternative minimum tax in the
preceding two years and will compute its taxable income in the current taxable
year using the alternative minimum tax rate, then it may use the alternative
minimum tax rate in lieu of the corporate tax rate. In addition, the direct or
indirect transfer of the residual interest to a foreign branch of a domestic
corporation is not treated as a transfer to an eligible corporation under the
formula test.
The New REMIC Regulations generally apply to transfers of non-economic
residual interests occurring on or after February 4, 2000. The requirement of a
representation that a transfer of a non-economic residual interest is not made
to a foreign branch of a domestic corporation and the requirement of using the
short term applicable federal rate for purposes of the formula test apply to
transfers occurring on or after August 19, 2002.
If a transfer of a non-economic residual certificate is disregarded, the
transferor would continue to be treated as the owner of the residual certificate
and would continue to be subject to tax on its allocable portion of the net
income of the REMIC.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
residual certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person, unless such transferee's income in
respect of the residual certificate is effectively connected with the conduct of
a United States trade or business. A residual certificate is deemed to have a
tax avoidance potential unless, at the time of transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee amounts that
will equal at least 30% of each excess inclusion and that such amounts will be
distributed at or after the time the excess inclusion
152
accrues and not later than the end of the calendar year following the year of
accrual. If the non-U.S. Person transfers the residual certificate to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner, if the transfer has the effect of allowing
the transferor to avoid tax on accrued excess inclusions. The provisions in the
REMIC Regulations regarding transfers to foreign persons of residual
certificates that have tax avoidance potential are effective for all transfers
after June 30, 1992. The pooling and servicing agreement will provide that no
record or beneficial ownership interest in a residual certificate may be,
directly or indirectly, transferred to a non-U.S. Person unless such person
provides the trustee with a duly completed IRS Form W-8ECI and the trustee
consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in residual certificates are advised to consult their own
tax advisors with respect to transfers of the residual certificates and, in
addition, passthrough entities are advised to consult their own tax advisors
with respect to any tax which may be imposed on a pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in this
prospectus under "Material Federal Income Tax Considerations" above, potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the certificates. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various tax consequences of investments in
the certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code,
which apply only to securities of a series that are not divided into subclasses.
If securities are divided into subclasses, the related prospectus supplement
will contain information concerning considerations relating to ERISA and the
Code that are applicable to those subclasses.
ERISA imposes requirements on certain employee benefit plans (and the Code
imposes requirements on certain other retirement plans and arrangements,
including individual retirement accounts and annuities and Keogh plans) as well
as on collective investment funds and separate accounts in which these plans,
accounts or arrangements are invested and on persons who bear specified
relationships to these types of plans or arrangements ("Parties in Interest") or
are fiduciaries with respect to these types of plans and arrangements. In this
prospectus we refer to these types of plans and arrangements as "Plans."
Generally, ERISA applies to investments made by Plans. Among other things, ERISA
requires that the assets of a Plan be held in trust and that the trustee, or
other duly authorized fiduciary, have exclusive authority and discretion to
manage and control the assets of the Plan. ERISA also imposes certain duties on
persons who are fiduciaries of Plans, such as the duty to invest prudently, to
diversify investments unless it is prudent not to do so, and to invest in
accordance with the documents governing the Plan. Under
153
ERISA, any person who exercises any authority or control respecting the
management or disposition of the assets of a Plan is considered to be a
fiduciary of that Plan (subject to certain exceptions not here relevant).
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to ERISA's requirements. Accordingly, assets of such plans may be
invested in securities without regard to the ERISA considerations described
above and below, subject to the provisions of applicable federal or state law.
However, any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code is subject to the prohibited transaction
rules set forth in Section 503 of the Code.
The DOL issued regulations concerning the definition of what constitutes
the assets of a Plan (Labor Reg. Section 2510.3-101). Under this Plan Assets
Regulation, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity" investment
could be deemed, for purposes of ERISA, to be assets of the investing Plan in
certain circumstances.
The Plan Assets Regulation provides that, generally, the assets of an
entity in which a Plan invests will not be deemed to be assets of the Plan for
purposes of ERISA if the equity interest acquired by the investing Plan is a
"publicly-offered security", or if equity participation by "benefit plan
investors" is not "significant". In general, a publicly-offered security, as
defined in the Plan Assets Regulation, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934. Equity
participation in an entity by "benefit plan investors" is not significant if,
after the most recent acquisition of an equity interest in the entity, less than
25% of the value of each class of equity interest in the entity is held by
benefit plan investors, which include benefit plans described in ERISA or under
Section 4975 of the Code, whether or not they are subject to ERISA, as well as
entities whose underlying assets include assets of a Plan by reason of a Plan's
investment in the entity.
If no exception under the Plan Assets Regulation applies and if a Plan (or
a person investing assets of a Plan, such as an insurance company general
account) acquires an equity interest in the trust, then the assets of the trust
could be considered to be assets of the Plan. In that event, the master servicer
and other persons exercising management or discretionary control over the assets
of the issuer or providing services with respect to the issuer's assets could be
deemed to be Parties in Interest with respect to investing Plans; this would
subject the master servicer and such other persons to the fiduciary
responsibility provisions of Title I of ERISA to the extent that they exercised
discretionary control of Plan assets, and to the prohibited transaction
provisions of Section 406 of ERISA and Section 4975 of the Code with respect to
transactions involving the issuer's assets. Because the loans held by the trust
may be deemed assets of each Plan that purchases an equity interest, an
investment in an equity interest issued by the trust to a Plan might be a
prohibited transaction under ERISA and subject to an excise tax under Section
4975 of the Code, and may cause transactions undertaken in the course of
operating the trust to constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies.
154
INSURANCE COMPANY GENERAL ACCOUNTS
On January 5, 2000, the United States Department of Labor (DOL) published
final regulations under Section 401(c) of ERISA describing a safe harbor for
insurers that, on or before December 31, 1998, issued certain non-guaranteed
policies supported by their general accounts to Plans (Labor Reg. Section
2550.401c-1). Under this regulation, an insurer will not be considered an ERISA
fiduciary with respect to its general account by virtue of a Plan's investment
in such a policy. In general, to meet the safe harbor, an insurer must
o disclose certain specified information to investing Plan fiduciaries
initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days' notice to
the insurer, and to elect, without penalty, either a lump-sum payment
or annual installment payments over a ten-year period, with interest;
and
o give Plans written notice of "insurer-initiated amendments" 60 days
before the amendments take effect.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and Section 4975 of the Code prohibit a
broad range of transactions involving Plan assets and Parties in Interest, and
impose additional prohibitions where Parties in Interest are fiduciaries with
respect to a Plan. Certain Parties in Interest that participate in a prohibited
transaction may be subject to excise taxes imposed pursuant to Section 4975 of
the Code, or penalties imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available.
PROHIBITED TRANSACTION CLASS EXEMPTION ("PTCE") 83-1
Any fiduciary or other Plan asset investor that proposes to purchase
securities on behalf of a Plan or with Plan assets should consult with its
counsel on the potential applicability of ERISA and the Code to that investment
and the availability of any prohibited transaction class exemption in connection
therewith. In particular, in connection with a contemplated purchase of
securities representing a beneficial ownership interest in a pool of
single-family residential mortgages, the fiduciary should consider the
availability of PTCE 83-1 for various transactions involving mortgage pool
investment trusts. PTCE 83-1 permits, subject to certain conditions,
transactions that might otherwise be prohibited between Plans and Parties in
Interest with respect to those plans related to the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by first or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in those mortgage pools by Plans. However, PTCE 83-1
does not provide exemptive relief with respect to securities evidencing
interests in trusts which include mortgage loans secured by third or more junior
liens, revolving credit loans, loans on unimproved land, contracts, cooperative
loans, multifamily or mixed-use mortgage loans or some types of private
securities, or which contain a swap or a pre-funding arrangement. In addition,
PTCE 83-1 does not provide exemptive relief for transactions involving
subordinated
155
securities. The prospectus supplement may indicate whether it is expected that
PTCE 83-1 will apply to securities offered by that prospectus supplement.
UNDERWRITER EXEMPTION
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc. an
underwriter exemption (PTE 90-59, Application No. D-8374, 55 Fed. Reg. 36724
(1990)) (the "Exemption") from certain of the prohibited transaction rules of
ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, holding and subsequent resale by Plans of
"securities" that are obligations of an issuer containing certain receivables,
loans and other obligations, with respect to which Greenwich Capital Markets,
Inc. is the underwriter, manager or co-manager of an underwriting syndicate. The
Exemption, which was amended and expanded by PTE 97-34, Applications No. D-10245
and D-10246, 62 Fed. Reg. 39021 (1997) PTE 2000-58, Application No. D-10829, 65
Fed. Reg. 67765 (2000) and PTE 2002-41, Application No. A-11077 67 Fed. Reg.
54487 (2002), provides relief which is generally similar to that provided by PTE
83-1, but is broader in several respects.
The Exemption contains a number of requirements. It does not apply to any
investment pool unless, among other things, the investment pool satisfies the
following conditions:
o the investment pool consists only of assets of a type which have been
included in other investment pools;
o securities evidencing interests in such other investment pools have
been purchased by investors other than Plans for at least one year
prior to the Plan's acquisition of securities pursuant to the
exemption; and
o securities in such other investment pools have been rated in one of
the three (or four, if the investment pool contains certain types of
assets) highest generic rating categories by one of the credit rating
agencies noted below.
The Exemption sets forth general conditions which must be satisfied for a
transaction to be eligible for exemptive relief thereunder. Generally, the
Exemption holds that the acquisition of the securities by a Plan must be on
terms (including the price for the securities) that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party. The Exemption requires that the rights and interests evidenced by the
securities not be "subordinated" to the rights and interests evidenced by other
securities of the same trust, except when the trust holds certain types of
assets. The Exemption requires that securities acquired by a Plan have received
a rating at the time of their acquisition that is in one of the three (or four,
if the trust holds certain types of assets) highest generic rating categories of
Standard & Poor's Ratings Services, Moody's Investors Service, Inc. or Fitch
Ratings, Inc. The Exemption specifies that the pool trustee must not be an
affiliate of any other member of the "Restricted Group" (defined below), other
than the underwriter. The Exemption stipulates that any Plan investing in the
securities must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the SEC under the Securities Act of 1933, as amended. Finally,
the Exemption requires that, depending on the type of issuer, the documents
establishing the issuer and governing the
156
transaction contain certain provisions to protect the assets of the issuer, and
that the issuer receive certain legal opinions.
If an issuer holds obligations that have high loan-to-value ratios, the
Exemption may apply to the issuer's non-subordinated securities rated in one of
the two highest generic rating categories by at least one of the rating agencies
named in the Exemption if both of the following conditions are met:
o the obligations are residential or home equity loans, and
o the fair market value of the real property collateral securing the
loan on the closing date is at least 80% of the sum of the outstanding
principal balance of the loan held in the investment pool and the
outstanding principal balance of any other loan of higher lien
priority secured by the same real property collateral.
Moreover, the Exemption generally provides relief from certain self-dealing
and conflict of interest prohibited transactions that may occur when the Plan
fiduciary causes a Plan to acquire securities of an issuer holding receivables
as to which the fiduciary (or its affiliate) is an obligor, provided that, among
other requirements:
o in the case of an acquisition in connection with the initial issuance
of securities, at least 50% of each class of securities in which Plans
have invested and at least 50% of the aggregate interest in the issuer
is acquired by persons independent of the Restricted Group;
o the fiduciary (or its affiliate) is an obligor with respect to not
more than 5% of the fair market value of the obligations contained in
the issuer;
o the Plans' investment in securities of any class does not exceed 25%
of all of the securities of that class outstanding at the time of the
acquisition; and
o immediately after the acquisition, no more than 25% of the assets of
any Plan with respect to which the person is a fiduciary is invested
in securities representing an interest in one or more issuers
containing assets sold or serviced by the same entity.
The Exemption provides only limited relief to Plans sponsored by the
"Restricted Group", which consists of the seller, the underwriter, the trustee,
the master servicer, any servicer, any counterparty of a permitted swap or
notional principal contract or any insurer with respect to the mortgage loans,
any obligor with respect to mortgage loans included in the investment pool
constituting more than 5% of the aggregate principal balance of the assets in
the investment pool, or any affiliate of those parties.
If pre-funding is anticipated, the Exemption extends exemptive relief to
securities issued in transactions using pre-funding accounts, whereby a portion
of the loans backing the securities are transferred to the trust fund within a
specified period following the closing date (the "DOL Pre-Funding Period").
157
o First, the ratio of the amount allocated to the pre-funding account to the
total principal amount of the Securities being offered ("Pre-Funding
Limit") must not exceed twenty-five percent (25%).
o Second, all loans transferred after the closing date (the "Additional
Loans") must meet the same terms and conditions for eligibility as the
original loans used to create the trust fund, which terms and conditions
have been approved by the Exemption rating agency.
o Third, the transfer of such Additional Loans to the trust fund during the
DOL Pre-Funding Period must not result in the securities receiving a lower
credit rating from the Exemption rating agency upon termination of the DOL
Pre-Funding Period than the rating that was obtained at the time of the
initial issuance of the securities by the trust.
o Fourth, solely as a result of the use of the pre-funding, the weighted
average annual percentage interest rate (the "Average Interest Rate") for
all of the loans in the trust fund at the end of the DOL Pre-Funding Period
must not be more than 100 basis points lower than the Average Interest Rate
for the loans which were transferred to the trust fund on the closing date.
o Fifth, either: (i) the characteristics of the additional loans must be
monitored by an insurer or other credit support provider which is
independent of the depositor; or (ii) an independent accountant retained by
the depositor must provide the depositor with a letter (with copies
provided to the Exemption rating agency, the underwriter and the trustee)
stating whether or not the characteristics of the additional loans conform
to the characteristics described in the prospectus or related prospectus
supplement or agreement.
o Sixth, the DOL Pre-Funding Period must generally end no later than three
months or 90 days after the closing date.
o Seventh, amounts transferred to any Pre-Funding Account used in connection
with the pre-funding may be invested only in investments which are
permitted by the Exemption rating agency and (i) are 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); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Exemption
rating agency.
o Eighth, certain disclosure requirements must be met.
The Exemption, as amended, extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions involving trusts that
contain an interest rate swap, provided the swap satisfies certain requirements
and the other requirements of the Exemption are met. Among other requirements,
the counterparty to the swap must maintain ratings at certain levels from
Exemption rating agencies, and the documentation for the swap must provide for
certain remedies if the rating declines. The swap must be an interest rate swap
denominated in U.S. dollars, may not be leveraged, and must satisfy several
other criteria. Securities of any class
158
affected by the swap may be sold to Plan investors only if they are "qualified
plan investors" that satisfy several requirements relating to their ability to
understand the terms of the swap and the effects of the swap on the risks
associated with an investment in the security.
The rating of a security may change. If a class of securities no longer
satisfies the applicable rating requirement of the underwriter exemption,
securities of that class will no longer be eligible for relief under the
underwriter exemption, and consequently may not be purchased by or sold to a
Plan (although a Plan that had purchased the security when it had an appropriate
rating would not be required by the underwriter exemption to dispose of it).
The prospectus supplement for each series of securities will indicate the
classes of securities, if any, offered thereby as to which it is expected that
the exemption will apply.
In the case of certain types of securities, transfer of the securities will
not be registered unless the transferee represents that it is not, and is not
purchasing on behalf of, a plan, account or other retirement arrangement or
provides an opinion of counsel or a certification, which opinion of counsel or
certification will not be at the expense of the trustee or depositor,
satisfactory to the trustee and the depositor that the purchase of the
securities by or on behalf of a plan, account or other retirement arrangement is
permissible under applicable law, will not give rise to a non-exempt prohibited
transaction and will not subject the trustee, the master servicer or the
depositor to any obligation or liability in addition to those undertaken in the
operative agreements.
Any Plan fiduciary which proposes to cause a Plan to purchase securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of the Exemption or any other available exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
The prospectus supplement for each series of certificates will specify
which, if any, of those classes of certificates constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended (SMMEA). Classes of certificates that qualify as "mortgage
related securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of these entities with respect to "mortgage related
securities," certificates will constitute legal investments for entities subject
to the legislation only to the extent provided therein. Approximately twenty-one
states adopted the
159
legislation prior to the October 4, 1991 deadline. SMMEA provides, however, that
in no event will the enactment of any such legislation affect the validity of
any contractual commitment to purchase, hold or invest in certificates, or
require the sale or other disposition of certificates, so long as such
contractual commitment was made or such certificates were acquired prior to the
enactment of the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration (NCUA) Letter to Credit Unions No. 96,
as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities, and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by federal
credit unions in mortgage related securities.
All depository institutions considering an investment in the certificates
(whether or not the class of certificates under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators),
setting forth, in relevant part, certain securities trading and sales practices
deemed unsuitable for an institution's investment portfolio, and guidelines for
(and restrictions on) investing in mortgage derivative products, including
"mortgage related securities", which are "high-risk mortgage securities" as
defined in the Policy Statement. According to the Policy Statement, "high-risk
mortgage securities" include securities such as certificates not entitled to
distributions allocated to principal or interest, or subordinated certificates.
Under the Policy Statement, it is the responsibility of each depository
institution to determine, prior to purchase (and at stated intervals
thereafter), whether a particular mortgage derivative product is a "high-risk
mortgage security", and whether the purchase (or retention) of such a product
would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
The Office of Thrift Supervision, or OTS, has issued Thrift Bulletin 73a,
entitled "Investing in Complex Securities" ("TB 73a"), which applies to savings
associations regulated by the OTS, and Thrift Bulletin 13a, entitled "Management
of Interest Rate Risk, Investment Securities, and Derivatives Activities" ("TB
13a"), which applies to thrift institutions regulated by the OTS.
160
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 analyses, 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 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 the due diligence
requirements of the OTS for investing in all securities and warns that if a
sayings 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 any 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 purpose of each of TB 73a and TB
13a, the term "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 (I.E., securities that
are part of a single class of securities in the related pool that are
non-callable and do not have any special features). Accordingly, all Classes of
the Offered Certificates would likely be viewed as "complex securities." With
respect to quality and suitability factors, TB 73a warns (i) that a savings
association's sole reliance on outside ratings for material purchases of complex
securities is an unsafe and unsound practice, (ii) that a savings association
should only use ratings and analyses from nationally recognized rating agencies
in conjunction with, and in validation of, its own underwriting processes, and
(iii) that it should not use ratings as a substitute for its own thorough
underwriting analyses. With respect the interest rate risk factor, TB 73a
recommends that savings associations should follow the guidance set forth in TB
13a. With respect to collateralized loan or bond obligations, TB 73a also
requires that the savings associations meet similar requirements with respect to
the underlying collateral, and warns that investments that are not fully rated
as to both principal and interest do not meet OTS regulatory requirements.
One of the primary purposes of TB 13a is to require thrift institutions,
prior to taking any investment position, to (i) conduct a pre-purchase portfolio
sensitivity analysis for any "significant transaction" involving securities or
financial derivatives, and (ii) conduct a pre-purchase price sensitivity
analysis of any "complex security" or financial derivative. The OTS recommends
that a thrift institution should conduct its own in-house pre acquisition
analysis, although it may rely on an analysis conducted by an independent
third-party as long as management understands the analysis and its key
assumptions. Further, TB 13a recommends that the use of "complex securities with
high price sensitivity" be limited to transactions and strategies that lower a
thrift institution's portfolio interest rate risk. TB 13a warns that investment
in complex securities by thrift institutions that do not have adequate risk
measurement, monitoring and control systems may be viewed by OTS examiners as an
unsafe and unsound practice.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase certificates or to
purchase certificates representing more than a
161
specified percentage of the investor's assets. Investors should consult their
own legal advisors in determining whether and to what extent the certificates
constitute legal investments for them.
METHOD OF DISTRIBUTION
The certificates offered by this prospectus and by the related prospectus
supplement will be offered in series. The distribution of the certificates may
be effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related prospectus supplement and subject to the receipt of any
required approvals from the Board of Governors of the Federal Reserve System,
the certificates will be distributed in a firm commitment underwriting, subject
to the terms and conditions of the underwriting agreement, by Greenwich Capital
Markets, Inc. (GCM) acting as underwriter with other underwriters, if any, named
in the prospectus supplement. In such event, the related prospectus supplement
may also specify that the underwriters will not be obligated to pay for any
certificates agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the depositor. In connection with the sale of the
certificates, underwriters may receive compensation from the depositor or from
purchasers of the certificates in the form of discounts, concessions or
commissions. The related prospectus supplement will describe any compensation
paid by the depositor.
Alternatively, the related prospectus supplement may specify that the
certificates will be distributed by GCM acting as agent or in some cases as
principal with respect to certificates that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of certificates, GCM will
receive a selling commission with respect to each series of certificates,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related mortgage assets as of the cut-off date. The
exact percentage for each series of certificates will be disclosed in the
related prospectus supplement. To the extent that GCM elects to purchase
certificates as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The prospectus
supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the depositor and purchasers of
certificates of that series.
The depositor will indemnify GCM and any underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments GCM and any underwriters may be required to make in
respect of those liabilities.
In the ordinary course of business, GCM and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of the mortgage loans or interests in the loans, including the certificates.
The depositor anticipates that the certificates will be sold primarily to
institutional investors. Purchasers of certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the
162
Securities Act of 1933, in connection with reoffers and sales of certificates by
them. Holders of certificates should consult with their legal advisors in this
regard prior to any such reoffer or sale.
LEGAL MATTERS
The legality of the certificates of each series, including certain material
federal income tax consequences with respect to the certificates, will be passed
upon for the depositor by Sidley Austin Brown & Wood LLP, 787 Seventh Avenue,
New York, New York 10019, or by Thacher Proffitt & Wood, 11 West 42nd Street,
New York, New York 10036, as specified in the related prospectus supplement.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of certificates
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of certificates.
Accordingly, no financial statements with respect to any trust fund will be
included in this Prospectus or in the related prospectus supplement.
AVAILABLE INFORMATION
The depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the certificates. This
prospectus, which forms a part of the Registration Statement, and the prospectus
supplement relating to each series of certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the Registration Statement and the exhibits thereto. The Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the SEC at its Public Reference
Section, 450 Fifth Street, N. W., Washington, D.C. 20549. In addition, the SEC
maintains a website at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the depositor, that file electronically with the SEC.
RATINGS
It is a condition to the issuance of the certificates of each series
offered by this prospectus and the accompanying prospectus supplement that they
shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
related prospectus supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might
163
differ from those originally anticipated. As a result, securityholders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
pass-through certificates in certain cases might fail to recoup their underlying
investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
164
GLOSSARY OF TERMS
AGENCY SECURITIES: Mortgage pass-through securities issued or guaranteed by
Ginnie Mae, Fannie Mae or Freddie Mac.
HOME EQUITY LOANS: Closed end and/or revolving home equity loans generally
secured by junior liens on one- to four-family residential properties.
HOME IMPROVEMENT CONTRACTS: Home improvement installment sales contracts
and loan agreements that are either unsecured or secured by senior or junior
liens on one- to four-family residential or mixed-use properties or by purchase
money security interests in the related home improvements.
INSURANCE PROCEEDS: All proceeds of the related hazard insurance policies
and any primary mortgage insurance policies to the extent the proceeds are not
applied to property restoration or released to mortgagors in accordance with the
master servicer's normal servicing procedures, net of insured expenses including
unreimbursed payments of property taxes, insurance premiums and other items
incurred by any related sub-servicer and net of reimbursed advances made by the
sub-servicer.
LIQUIDATION PROCEEDS: All cash amounts (other than Insurance Proceeds)
received and retained in connection with the liquidation of defaulted mortgage
loans, by foreclosure or otherwise, net of unreimbursed liquidation and
foreclosure expenses incurred by any related sub-servicer and net of
unreimbursed advances made by the sub-servicer.
MANUFACTURED HOUSING CONTRACTS: Conditional sales contracts and installment
sales or loan agreements secured by manufactured housing.
MULTIFAMILY LOANS: First lien mortgage loans, or participation interests in
the loans, secured by residential properties consisting of five or more
residential units, including cooperative apartment buildings.
PRIVATE LABEL SECURITIES: Mortgage-backed or asset-backed securities that
are not Agency Securities.
REMIC REGULATIONS: Regulations promulgated by the Department of the
Treasury on December 23, 1992 and generally effective for REMICs with start-up
dates on or after November 12, 1991.
SINGLE FAMILY LOANS: First lien mortgage loans, or participation interests
in the loans, secured by one- to four-family residential properties.
U.S. PERSON: Any of the following:
o a citizen or resident of the United States;
165
o a corporation or a partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes)
organized in or under the laws of the United States, or any State
thereof or the District of Columbia (unless in the case of a
partnership Treasury regulations are adopted that provide otherwise);
o an estate whose income from sources outside the United States is
includible in gross income for federal income tax purposes regardless
of its connection with the conduct of a trade or business within the
United States; or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more
U.S. Persons have the authority to control all substantial decisions
of the trust.
In addition, certain trusts which would not qualify as U.S. Persons under the
above definition but which are eligible to and make an election to be treated as
U.S. Persons will also be treated as U.S. Persons.
166
[This page intentionally left blank]
[This page intentionally left blank]
================================================================================
$867,902,000 (APPROXIMATE)
FIRST FRANKLIN MORTGAGE LOAN TRUST 2003-FF2
FINANCIAL ASSET SECURITIES CORP.
Depositor
CHASE MANHATTAN MORTGAGE CORPORATION
Servicer
ASSET-BACKED CERTIFICATES, SERIES 2003-FF2
_______________________
PROSPECTUS SUPPLEMENT
_______________________
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Asset-Backed Certificates, Series 2003-FF2 in any state
where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Asset-Backed Certificates, Series 2003-FF2 and with respect
to their unsold allotments or subscriptions. In addition, all dealers selling
the Asset-Backed Certificates, Series 2003-FF2 will be required to deliver a
prospectus supplement and prospectus for ninety days following the date of this
prospectus supplement.
[GRAPHIC OMITTED]
June 23, 2003
================================================================================